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  • Emerging Markets Debt Daily

    Brazil – Rising Rate Hike Expectations

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 15, 2021

    The market keep bringing forward the rate hike expectations for Brazil. Turkey’s inflation expectations are down, but President Erdogan adds to uncertainty about the policy U-turn.

    Please note: Emerging Markets Debt Daily will not be published on January 18. We look forward to resuming our daily updates on January 19.

    Brazil’s growth momentum eased a bit (check today’s retail sales), but the market expectation that the central bank will start its tightening cycle earlier is on the rise. The interest rate swap curve now prices in the first full rate hike (25bps) in March―quite a change compared to even two weeks ago. One development that might act as a catalyst is a possible truck drivers’ strike. Back in 2018, the strike’s impact lasted for several months; headline inflation rose from 2.86% year-on-year in May to 4.39% in June and stayed above 4% until November. Headline inflation is higher right now―4.52% year-on-year in December―so the optics would be worse if the strike happens.

    It looks like Turkey’s recent rate hikes are having the desired impact on inflation expectations―they were lower in December (10.53% vs. 10.84% in November). However, morning headlines reminded us that the policy U-turn ultimately depends on the will and the views of just one person―President Recep Erdogan. President Erdogan noted that he was against high rates “whether they listen or not”, and that it was important to cut inflation “by cutting rates”. This is nothing new, really, but both the currency and Turkish equities were down this morning.

    Digital currencies issued by central banks are―strictly speaking―not an emerging markets (EM) topic (at least not yet), but the issue keeps resurfacing at various macro forums that I am attending (including this week’s virtual European conferences). The IMF just released an interesting survey―which covers 170+ central banks―asking whether digital currencies are really money and whether central banks’ mandates allow for issuance. Turns out that most central banks can only issue physical cash right now (see chart below). Another big issue is allowing private citizens’ accounts at central banks. This would be “a tectonic shift” and “would require significant legal changes. Only 10 central banks in our sample would currently be allowed to do so.” Have a great weekend!

    Charts at a Glance: Can Central Banks Issue Digital Currencies Under Current Mandates?


    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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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