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  • Emerging Markets Debt Daily

    Turkey Inflation Favors Policy Patience

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

    Turkey core inflation and expectations eased in January, but overall price dynamics argue against premature rate cuts. The election of Brazilian President Jair Bolsonaro’s ally as the speaker of the senate is a positive sign for Brazil’s pension reform.

    Turkey’s January inflation was in line with consensus, giving hope that the central bank would be able to cut rates at some point in 2019, but clearly signaling that doing it too soon would be a policy mistake. Even though core inflation and inflation expectations eased in January (see chart below), both remain very high. Headline inflation – broadly unchanged at 20.35% year-on-year – is elevated as well. Near-term optics also argues against premature easing, as the base effect should be pushing inflation higher until May. Risks associated with a fiscal push in the run up to the local elections are also likely to keep the central bank on its toes.

    Politics took center stage in Latin America over the weekend. Brazil’s newsflow was encouraging. The election of President Bolsonaro’s ally, Davi Alcolumbre, as the new speaker of the senate is considered a big victory for the ruling coalition and a positive signal as regards the pension reform outlook. Venezuela saw more massive protests, while the U.S. administration expanded the new harsh sanctions on sovereign bonds (which means that their sales are now limited to non-U.S. persons).

    Today’s activity releases in emerging markets looked a bit more promising (compared to last week’s disappointments). Russia’s 2018 real gross domestic product growth surprised meaningfully to the upside, rebounding to 2.3% from 1.6% in 2017. China’s Caixin non-manufacturing Purchasing Managers’ Index (PMI) moderated less than expected in January (to a very solid 53.6), signaling that services activity is well supported. Together with weaker-than-expected activity prints in the U.S. (November factory orders, final durable and capital goods orders), this provides an extra boost to the view that the emerging markets-developed markets growth differential may be bottoming out.


    Chart at a Glance

    Turkey Inflation

    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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