Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 22, 2020
Turkey surprised the market by keeping its benchmark rate on hold. Mexico’s inflation accelerated more than expected, reducing policy space for the central bank.
“Holy missed expectations!” – said Portfolio Manager Eric Fine when he learned that the Turkish central bank kept its policy rate on hold at 10.25%. The consensus saw a 175bps hike today - no doubt encouraged by last month’s surprising 200bps hike and a noticeable increase in the average cost of funding since July. But apparently the central bank thought that the financial conditions tightened enough (and that keeping their jobs was more important). To be fair, the central bank did some “backdoor” tightening. It adjusted (asymmetrically) its interest rate corridor – raising the Late Liquidity Window’s overnight lending rate by 150bps to 14.75% (see chart below). The market felt “cheated on”. As of 9:30am ET, the currency was trading 184bps weaker vs. U.S. Dollar, the Borsa Istanbul 100 Index1was down by 106bps, and both local and sovereign bonds selling off.
Mexico’s upside inflation surprises are – sadly – no longer surprising. We’ve got another one today. Bi-weekly headline inflation accelerated to 4.09% year-on-year, breaking above the target band yet again. Bi-weekly core inflation also edged higher – to 4% year-on-year. This will definitely be on the central bank’s mind during the next rate-setting meeting. The market expectation is that there will be no additional rate cuts in the next 3-6 months, and this can put more pressure on the government to act if the second wave of the virus weighs on growth.
Local reports suggest that China will reanimate the Qualified Domestic Institutional Investor (QDII) scheme to encourage more capital outflows. The outbound annual quota can be increased by 10%, and other outbound schemes can also be expanded. The actual increase is small, so it will probably not slow down the renminbi’s appreciation on its own. However, this is a signal that authorities have enough tools to make sure that the currency market is not a one-way street.
Chart at a Glance: Turkey – No Rate Hikes, More “Backdoor” Tightening
Source: Bloomberg LP
1Bora Istanbul 100 Index – a free float market capitalization-weighted index composed of BIST Stars Market Segment companies.
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.
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