Emerging Markets Rate Cuts – First Dissenter Appears
Natalia Gurushina, Economist, Emerging Markets Fixed Income
February 06, 2020
The Czech Republic shocked with an unexpected rate hike. China cut tariffs on USD75B of U.S. goods to mitigate the virus’s impact on the economy.
Just as we thought we had settled into a comfy “policy easing” routine this morning, the Czech National Bank shocked the market with an unexpected 25bps rate hike. One of my Twitter pen pals dryly noted that this is because of the Czech equivalent of hyperinflation (a “whopping” 3.2% year-on-year in December), but, on a more serious note, monetary authorities are keeping their eyes on what they should (above-target inflation) and ignoring transitory (hopefully) external shocks to domestic activity. The market’s reaction was predictable—bonds down, the currency up.
Meanwhile, elsewhere in emerging markets—yep, it’s more policy easing. But with caveats. We’ve got “stealth easing” in India (rates on hold, but keeping accommodative stance), a 25bps cut in Brazil (a hawkish one though—the central bank signaled the end of the easing cycle) and the Philippines potentially making a policy miscalculation by cutting its key rate while inflation pressures are building up. Brazil’s policy rate is now down to 4.25%. Just take a minute and let it sink in—4.25%! It was well into double digits in 2015/2016, but a concerted disinflation drive supported by structural changes made it possible to slash it by 1000bps. Brazil’s policy rate is now 300bps lower than Mexico’s (see chart below). Incredible.
The market got an extra “vitamin shot” this morning following reports that China will be cutting tariffs on USD75B of U.S. goods by half. The move is a part of the authorities’ effort to minimize the coronavirus’s impact on the economy. As regards additional liquidity injections, the central bank (Peoples’ Bank of China or PBoC) stayed put in the past two days, after releasing a total of RMB1.7T earlier this week. However, it is now widely expected that the PBoC will cut both 1-year and 5-year Loan Prime Rates later this month.
Chart at a Glance: Brazil Rates – Reaping the Benefits of Concerted Disinflation Drive
Source: Bloomberg LP
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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