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  • Emerging Markets Debt Daily

    Turkey Leans Toward Rate Cuts

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 03, 2019

    A bigger than expected drop in Turkey’s headline inflation paves the way for policy rate cuts. The risk of delays to Brazil’s pension bill vote is up again.

    Turkish local rates staged a rally following the release of lower than expected inflation prints
    . Yearly headline inflation dropped to 15.72% from 18.71% in May, mainly on the back of a very high base effect. Core inflation also moderated in June, albeit less than expected (to 14.86% year-on-year). The base effect (see chart below) should continue pushing inflation lower in the coming months, leaving room for policy rate cuts (barring unexpected events, such as geopolitical twists). The market currently prices in 146bps of cuts for the next three months, which does not look too excessive under the circumstances.

    Brazil’s pension reform approval process is shaping up to be a real “nail-biter”. The speaker of the lower house still wants to have the bill passed before the summer recess, but the latest developments indicate that the risk of another delay is higher now. The edited document was released only last night, leaving little time for deputies to go through the text in order to have it voted in the special committee this week. If the vote in the committee is pushed to next week, it would be very difficult (albeit not entirely impossible) to have the floor deliberations before July 18.

    Poland’s inflation is grinding up, domestic activity remains very robust, but the central bank (NBP) is not in any hurry to change its policy stance. The benchmark rate was kept on hold at 1.5% (again) earlier today, despite higher growth and inflation projections for 2019 and 2020. The new forecasts notwithstanding, weaker domestic activity in the eurozone (Poland’s main trade partner) and the European Central Bank's dovish pivot give the central bank some room for maneuver. The market shares the NBP’s sentiment, seeing no change in Poland’s benchmark rate for the next two years.

    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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