Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 12, 2020
Brazil’s fiscal policy setback was poorly received by the market. India’s downside inflation surprise opens the door for an inter-meeting rate cut.
The Brazilian congress went off the fiscal rails yesterday, overruling President Jair Bolsonaro’s veto on widening access to a benefit for disabled and elderly called BPC (Continuous Cash Benefit). The démarche can boost annual spending by as much as BRL20B—enough to miss fiscal targets, breach the spending cap, and cut pension reform’s projected savings by one-quarter over the next ten years. Brazilian assets reacted very negatively to the development, with the currency falling to another low.
India’s headline inflation moderated more than expected in February (to 6.58% year-on-year), providing much-needed policy space for the central bank. Headline inflation is still above the upper limit, but moderating food prices and a higher base effect should push it further down in the coming months (provided the currency weakness can be contained). Today’s downside surprise paves the way for an inter-meeting rate cut, because India’s central bank does not meet every month and the global situation might require an immediate action.
It’s brutal out there, and major central banks and governments are not always thinking creatively (UK is one of the few exceptions). In the U.S., President Trump’s plan failed to impress yesterday. Many analysts found the ECB’s decision not to cut rates today and focus on smaller targeted measures surprising. Against this backdrop, the only development in the Eurozone that looks encouraging growth-wise is headlines that Germany might finally abandon its “black zero” principle of balancing the government’s budget and provide additional fiscal stimulus.
IMPORTANT DEFINITIONS & DISCLOSURES
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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