Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
May 04, 2020
Turkey’s inflation moderated further in April, leaving more room for rate cuts. Mexico’s remittances were surprisingly strong, but the World Bank expects a 20% decline in global remittances in 2020.
The Turkish lira weakened peacefully after today’s inflation release. Both headline and core inflation moderated further in April—headline inflation a bit less than expected (to 10.94% year-on-year), and core a bit more than expected (sliding below 10% year-on-year). Weaker domestic activity and lower oil prices helped to offset the impact of the currency’s depreciation on consumer prices (albeit it remains to be seen what will happen to inflation expectations). The release can embolden the central bank to ease more—albeit the market currently does not price in meaningful rate cuts in the next three months. In the words of Darth Vader, “we find your lack of faith disturbing”. (Happy May the 4th!)
April’s activity gauges in emerging markets (EM) showed a very sharp deterioration across the board. The Purchasing Managers Indices (PMIs) hit historic lows pretty much everywhere, reflecting lockdowns and travel restrictions—no surprises here. There were some outliers, however. First, Hungary’s manufacturing PMI edged higher. It is still deep in contraction territory, but it’s good to see no further deterioration. Second, South Africa’s headline PMI looked unbelievably good, falling only to 46.6 in April. Details show a completely different picture though. Remember last week’s dark humor that—unlike oil prices—PMIs cannot be negative? Well, South Africa’s business activity index dropped very close to zero (5.1), underscoring significant policy challenges in the coming months.
Mexico’s remittances defied expectations, soaring to USD4B+ in March (up 36% year-on-year—see chart below). One possible explanation is the frontloading of transfers from the U.S. to Mexico in the anticipation of lockdowns. The outlook for remittances is weak—and not just in Mexico. The World Bank currently expects a 20% decline in global remittances in 2020. This is a major headwind for many emerging markets (India, Philippines, Egypt, Pakistan, Nigeria, to name just a few), where remittances account for a large share of GDP, supporting both external accounts and domestic consumption.
Chart at a Glance: Mexico’s Remittances – The Last Hurrah?
Source: Bloomberg LP
IMPORTANT DEFINITIONS & DISCLOSURES
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.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Associates Corporation 666 Third Avenue New York, NY 10017800.826.2333