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  • Emerging Markets Debt Daily

    Turkey’s Big Rate Surprise

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    September 24, 2020

    Turkey’s unexpected and sizable 200bps policy rate hike is a strong contender for the “surprise of the year”. The currency rallied by nearly 2% after the announcement, but then retraced nearly half of it. Why? The central bank’s move is definitely a welcome change in the reaction function. However, the real policy rate is still negative (when adjusted by trailing inflation, and nearly zero when adjusted by expected inflation). So, the policy “cushion” is just not there, and authorities need to do more if they want to restore credibility and sustain a positive momentum.

    We’ve got another upside inflation surprise in Mexico, which makes today’s rate-setting meeting of the central bank much more interesting. Yearly headline inflation stayed above the target in the first half of September (4.1%). Core inflation did not show much improvement either (3.99% year-on-year). It also looks like services inflation is no longer falling. The consensus expects a 25bps rate cut this afternoon, but it might well be followed by a pause

    Argentina hit an unfortunate “milestone” this morning. The gap between the official and “market” exchange rates exceeded 100% (see chart below). In a related development, Argentina’s international reserves are once again moving in the wrong direction – down by USD1.16B in August-September. An approximately 3% drop might not be a problem for most emerging markets, but this is clearly not the case in Argentina.

    Chart at a Glance: Argentina Exchange Rate – Under Pressure


    Source: VanEck Research; 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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