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    Turkey Disinflation – Markets Hungry for More Rate Cuts

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 04, 2019

    Turkey’s disinflation looks very impressive—from 15% to an 8% handle in just two months—and this fuels equally aggressive rate cuts expectations of 400bps in the next 12 months. Both core and headline inflation indeed gapped lower in October (see chart below), reflecting weak domestic demand, a stable exchange rate, lower producer prices (oil), and a high base effect. The market seized upon the central bank’s comment that further rate cuts should not be ruled out, as long as inflation continues to trend down. But this means that additional easing might need to wait until early 2020, as the base effect will be less supportive in the next few months.

    South Africa opened stronger this morning, following Moody’s decision to lower the sovereign’s outlook to negative but keep the investment grade rating (Baa3). The next important milestone is the 2020 budget announcement in February—Moody’s apparently believes that the government can fix its finances until then (the next rating review is in March). The main concern is that a lack of market pressures (a downgrade to “junk” is not inevitable, even with negative outlook; “trade talks optimism” helps the rand as well) might encourage “more of the same” approach, which will further weaken the country’s fiscal profile and debt trajectory.

    Europe, the Middle East and Africa (EMEA) activity gauges are finally catching up with its “developed” European neighbors. Poland’s manufacturing PMI (Purchasing Managers Index) collapsed to 45.6 in October (a big surprise), while the Czech PMI remained frozen well below the contraction/expansion boundary (at 45.0). It is hardly surprising that the mood at local central banks is decidedly more dovish there days—despite an occasional upside inflation surprise.

    Chart at a Glance: Turkey Disinflation Fuels Appetite for More Rate Cuts

    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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