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  • Emerging Markets Debt Daily

    South Africa: Inflation Cools Rate Expectations

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    September 18, 2019

    A spike in South Africa’s inflation reduces the probability of a rate cut tomorrow. Signs of moderation in Poland’s labor market can mitigate the inflationary impact of an 80% minimum wage increase.

    South Africa’s inflation spike should cool the market expectations about monetary policy easing in the coming months. Both core and headline inflation surprised to the upside in August (at 4.3% year-on-year each), reflecting higher utility and food prices. Even though inflation remains well within the target range (3-6%) and domestic activity is weak, the central bank might want take a pause. This is not only because of today’s release, but also because it makes sense to wait for the outcome of Moody’s rating review, as well as check the content of the medium-term budget policy statement and the revamped plan for the restructuring of the state-owned utility Eskom, all of which should be due by November 1st.

    Poland’s pre-election proposal to raise the minimum wage by 80% in the next five years is a bold move. Our gut reaction was to worry about potential inflationary impact - especially against the backdrop of earlier fiscal initiatives. However, today’s national wage growth numbers suggests that the labor market started to show signs of moderation, and this should mitigate the impact of the higher minimum wage.

    The rate-setting meeting of the U.S. Federal Reserve (Fed) is the event of the day. In the meantime, the Fed’s attempts to deal with a mega liquidity squeeze keep the market entertained. We do not see 10% overnight repo rates in the U.S. too often these days - and it looks like the Fed’s liquidity injection on Tuesday was only partially successful, and the Fed has to step in again (with USD75B) this morning. This squeeze might be technical, but it nevertheless generated numerous comments about deep structural problems that might turn ugly in future risk-off episodes as primary dealers might not be able to support the market with their balance sheets.


    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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