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Emerging Markets Debt Daily
Inflation Drumbeat – Mostly Distant in EMNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJanuary 07, 2021
EM inflation drumbeat is not yet very strong, despite local risks and the louder chatter in DM. Brazil’s industrial production is recovering, but the pace of the emergency aid withdrawal will be key in many respects.
Inflation is one of today’s big stories, supported by renewed hopes for the U.S. stimulus (especially after the weak labor report), rising market-based inflation expectations in Developed Markets (DM) (see chart below), and the chatter about higher oil prices. In our part of the world (Emerging Markets [EM]), the inflation landscape is still very mixed. Some countries are clearly “re-heating” – Russia, Turkey, Chile, and the Philippines. However, lower headline inflation in Poland and Mexico re-opened conversations about rate cuts. Poland’s rate-setting meeting is next week, and it will be closely watched. One argument against a rate cut is the fact that the policy rate is already very low (0.1%), so the central bank might opt for dovish guidance and another round of FX interventions instead.
Brazil’s industrial production looked nice and comfy, with another positive annual growth rate in November (2.8%). A big question on everybody’s mind right now is how the government will handle the withdrawal of the emergency aid. This will have material implications both for domestic activity and the sovereign credit metric. Uncertainty on fiscal issues (including the spending cap rule) spooked the bond market on more than one occasion in 2020 – and this explains why the market pays so much attention to the election of the new Lower House Speaker.
Mexico’s administrative reform – especially the proposed elimination of autonomous bodies – is back in headlines. While the new is not actually “new”, this reinforces the market concerns about the quality of Mexico’s institutions. Some commentators actually suggest that these risks can force the central bank to reject rate cuts, despite a slightly more benign inflation backdrop.
Chart at a Glance: DM Market-Based Inflation Expectations on the Move
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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