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    Turkey Stuns With Bold Rate Cut

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 24, 2019

    The Turkish central bank delivered another dovish surprise with its 250bps policy rate cut. Mexico’s moderating inflation and weak domestic activity validate the rate cut expectations.

    The Turkish central bank seized the moment and delivered a much larger than expected policy rate cut this morning. The Syrian deal with Russia boosted the market sentiment (if only temporarily), providing a window of opportunity to bring the benchmark rate down to 14% vs. expected 15.5%. As regards macroeconomic factors, yearly headline inflation dropped below 10% in September prompting the central bank to cut its year-end forecast (“notably”, as per the statement). The forthcoming inflation report should give more color on the central bank’s thinking, but this morning’s consensus is that room for additional rate cuts might be limited.

    Mexico’s lower than expected bi-weekly inflation and another bout of weakness in domestic activity (see chart below) validate the market expectation of 67bps of rate cuts in the next three months. Domestic activity contracted by 0.85% year-on-year in August, undershooting consensus. It is hardly surprising that inflation pressures in the economy are subsiding as well—especially as regards closely-watched core inflation. The latter moderated to 3.7% year-on-year in the middle of October, giving the central bank extra reassurance about additional rate cuts.

    We are happy to report that Brazil’s pension reform saga ended up on a high note. We are even happier that the government keeps on working on its post-pension reform economic agenda. Brazil’s inflows story also looks very encouraging. The current account deficit surprised to the downside in September (USD3.49B), while foreign direct investments (FDI) surged to USD6.31B, which means that the country’s basic balance (current account + FDI) stayed well in the black. There are also expectations of significant inflows associated with the transfer of rights pre-salt oil deal, which was approved by the federal audits court earlier this month.

    Chart at a Glance: Mexico Domestic Activity – Failure to Lift Off

    Mexico Domestic Activity – Failure to Lift Off

    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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