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  • Emerging Markets Debt Daily

    Russia Eyes Deeper Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 10, 2019

    Russia is eyeing deeper rate cuts, as inflation risks failed to materialize. Maturity extension remains the preferred debt issue solution for Argentina’s new administration.

    Russia is another emerging economy that stands ready to deepen its rate-cutting cycle. Even though the central bank shifted to a neutral policy stance back in September, Governor Elvira Nabiullina indicated that inflation was lower than expected and many inflation risks failed to materialize, creating additional room for easing. The global environment also remains supportive, with major central banks going back to quantitative easing and rate cuts. (Today’s below-consensus inflation print in the U.S. supports expectations of the U.S. Federal Reserve’s rate cut in October.)

    The first round of Argentina’s presidential elections is rapidly approaching and debt sustainability issues are on everybody’s mind. The presidential front-runner, Alberto Fernández, reiterated that Uruguay’s 2003 debt restructuring remains his preferred model, giving the market a boost in the morning trade. One of Mr. Fernández’s economic advisors, Matías Kulfas, noted that the new administration would like to move fast on this issue, with maturity extension as the first option. The haircut remains a possibility, but this will depend on negotiations with debt holders.

    Mexico’s central bank minutes had the usual references to a prudent policy stance amid uncertainty. However, some members indicated that Mexico’s policy stance is very restrictive and this would warrant additional rate cuts—especially against the backdrop of slowing domestic activity. Sticky core inflation, however, remains an issue—suggesting that the next rate cut might still be a moderate 25bps.

    À propos: The best thing about going on emerging markets research trips is visiting local central banks ... which often have museums ... which have a lot of interesting stuff in them—like China’s ancient printed paper money (see picture below). Apparently, the first recorded banknotes were made in China during the Western Han Dynasty (206-24 BCE). They were made of deerskin. “Proper” paper money first appeared during the Tang Dynasty (618-907 CE). The Chinese paper money printing block in the picture shows twelve acts of filial piety.

    Chinese Paper Money Printing Block

    Chinese Paper Money Printing Block

    Source: Natalia Gurushina


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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