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  • Emerging Markets Debt Daily

    The Aftershocks of Mexico’s Political Quake

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

    The market continues to digest the unexpected resignation of Mexico’s Minister of Finance. China’s is facing producer price deflation (again), and this should keep the central bank in the accommodative mode.

    The unexpected resignation of Mexico’s Minister of Finance Carlos Urzúa hit Mexican assets yesterday afternoon. According to President Andrés Manuel Lopez Obrador (AMLO), this was due to disagreements over “development plans for Mexico”. One immediate concern is that these policy disagreements (as well as the quality of fiscal spending) might finally get noticed by rating agencies. Another risk is that if the currency does not bounce back, the weakness can add to inflation pressures making it more difficult for the central bank to lower the policy rate. Importantly, there is a big issue about state-owned oil giant Pemex’s business plan and how Urzúa’s replacement, Arturo Herrera, would handle it. Finally, the biggest concern is about AMLO’s true disposition—is he orthodox on economics or not? Urzúa’s resignation and criticism support the thesis that he is not. But on the other hand, new Minister of Finance Herrera has the right background and is respected by the market, which should address at least some concerns about the fiscal regime risk. We keep our eyes open…

    “Food, glorious food” was the main driven of China’s inflation in June. Food prices rose by 8.3% year-on-year, compensating for the calming effect of softer domestic activity and keeping yearly headline inflation unchanged at 2.7% (see chart below). Unless there is a dramatic change in pork prices, headline inflation is likely to creep higher in the coming months, but we do not think that this will cause the central bank to tighten its policy stance. The economy—especially manufacturing—is facing major headwinds, and today’s below-consensus producer price growth (0% year-on-year) signals that the situation remains challenging.

    The outlook is dim. The door for rate cuts is open. This was the gist of U.S. Federal Reserve (Fed) Chairman Powell’s congressional testimony this morning. The markets squealed in delight, sending the U.S. Dollar weaker and many risky assets stronger—except for the Mexican peso which is going through another apoplectic episode (see first paragraph). The consensus looks very comfortable pricing in two consecutive rate cuts in the US—one in July and another in September.

    Chart at a Glance

    China CPI YoY

    Source: Bloomberg LP


    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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