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    Turkey Inflation Dips Lower – More Rate Cuts?

    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?

    Chart at a Glance: Mexico’s Remittances – The Last Hurrah?

    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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