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  • Emerging Markets Debt Daily

    Brazil Recovery – A Step Back?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    December 02, 2020

    Brazil’s industrial production disappointed, raising concerns about the pace of recovery once the stimulus ends. Global food prices might be topping out, but risks remain.

    Brazil’s industrial production disappointed in October. Annual growth decelerated sharply and unexpectedly to 0.3% (from 3.7% in September)―and the deceleration was widespread. Brazil’s latest manufacturing survey looked fine (well in expansion territory) and industrial confidence is still strong. Further, Brazil’s interest rates remain very low, and their positive lagged effect will continue well into 2021. Still, today’s release raises more questions about the pace of recovery once the stimulus ends and (very ambitious) fiscal adjustment begins.

    The “rule of law” standoff between the EU and Poland/Hungary continues, but the latest headlines suggest that these two countries might have overestimated their ability to veto the EU recovery fund. The EU indicated that it can “prioritize” spending in the 2021 temporary budget in a way that significantly reduces payouts to these two countries. Given that Poland and Hungary are among the largest recipients of the EU structural funds, this might not be an empty threat. 

    Changes in regulated prices and tariffs are posing potential upside risks for emerging markets (EM) inflation. What about another major inflation driver―food prices? The deflationary impact of normalizing food prices is already quite visible in some countries (China), and the chart below suggests that global food prices might be topping out. Fewer COVID-related supply chain disruptions support the idea of normalizing food prices. But we keep an eye on weather conditions in the next several months―especially a moderate to strong La Niña forecast.

    Chart at a Glance: EM Inflation Risks – Food Prices Topping Out?

    Chart at a Glance: EM Inflation Risks – Food Prices Topping Out?

    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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