Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 27, 2020
The U.S. Fed signals that it can tolerate inflation overshoots, but this is not an option for most EMs. The main goal of Argentina’s request to start formal talks with the IMF is to postpone payments under the 2018 deal.
So, the U.S. Federal Reserve (Fed) is ready to tolerate inflation overshoots (this is what “seeking inflation that averages 2% over time” effectively means). What about emerging markets (EM)? We suspect that they cannot afford such “luxury”—which brings us to (by now) routine screening of EM inflation risks. Today we look at food prices,1which comprise a large portion of an average EM inflation basket. The chart below shows that the yearly growth is still negative, but food prices are recovering fast. This represents a potential upside risk when combined with other supply shocks—which is an extra reason why EM central banks will be increasingly taking a pause in their easing cycles.
Argentina’s government sent a letter to the IMF requesting formal talks on a new deal that would replace the 2018 agreement. This could be a sign of confidence that talks with private creditors will soon be a thing of the past—so near-term positive. Going forward, it’s hard to see how the IMF would add more financing to the hefty amount it had already disbursed. Argentina’s main goal appears to be postponing principal payments under the 2018 stand-by agreement that are due starting next year.
Belarus’s post-election political standoff continued this week, with more mass protests, crackdowns and a risk of sanctions. A comment by Russia’s President Vladimir Putin that he might send a law-enforcement contingent to Belarus reignited concerns about another proxy war in Europe. The market reaction had been fairly muted so far (pricing in a non-violent resolution perhaps?): the ruble and Russian bonds are up (as of 10:30am ET, according to Bloomberg LP), Russian equities are weaker but still within the past week’s range.
Chart at a Glance: EM Inflation – Food Prices Recovering Fast
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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