Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    Turkey Disinflation Keeps Market on Its Toes

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

    The consensus believes that February’s disinflation surprise in Turkey will not result in a premature policy rate cut. S&P changed Mexico’s outlook to negative over reform and growth concerns.

    Another meaningful downside inflation surprise in Turkey raises a question whether a policy rate cut is imminent
    . Headline inflation moderated to 19.67% year-on-year in February and yearly core inflation eased to 18.12% (see chart below) on the back of weak domestic demand and a more stable currency. The problem, however, is that lower inflation was also due to transitory factors such as temporary tax cuts. Going for a rate cut under these circumstances might affect the central bank’s credibility, especially if market volatility increases in the run up to the local elections. The consensus believes that the central bank will err on the cautious side later this week, keeping its policy rate unchanged at 24%.

    Mexico’s policy transgressions finally broke S&P’s patience. The rating agency cut the country’s outlook to negative, with a 1-in-3 chance of a rating downgrade in the next 1-1.5 years. S&P was particularly concerned about the use of public consultations as a policy tool and the impact of energy reform’s rollback on growth, stressing that these factors can undermine investor confidence and worsen the country’s financial profile. With an outlook like this, it is a bit surprising that the market continues to price in nearly two full policy rate cuts in Mexico over the next 12 months.

    The U.S. dollar is feeling rebellious this morning, advancing by 39bps vs. the euro (as of 10:04 am EDT, according to Bloomberg LP) despite President Donald Trump’s weekend lamentations (the U.S. dollar is too strong, the Federal Reserve Bank rate is too high) and fairly miserable growth nowcasts for the U.S. The Atlanta Federal Reserve Bank’s real gross domestic product (GDP) growth projection has now dropped to a mere 0.343% and the New York Federal Reserve Bank’s to 0.88%. One possible explanation for such price action is the market’s belief that the European Central Bank (ECB) will announce further delays in policy normalization on Thursday.

    Chart at a Glance

    Turkey Consumer Price Index Year-on-Year - %

    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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.