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    Mexico Central Bank – Dovish but Prudent

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 26, 2020

    Mexico’s central bank delivered a 50bps rate cut but remained prudent. Mexico’s trade deficit ballooned in May as manufacturing exports collapsed.

    Mexico’s central bank stayed on the “dovish” side of the EM monetary policy divide, cutting its benchmark rate by 50bps. The decision was unanimous, and the tone remained dovish as the growth outlook remains bleak (the economy contracted by 20% year-on-year in April). Still, the recent upside inflation surprises point to the need to remain prudent and maintain a gradual pace of rate cuts. Yesterday’s cut notwithstanding, Mexico’s real policy rate is high (above 2%), leaving plenty of room for the steady easing cycle to continue.

    It’s our second bullet point and we are still in Mexico, because the country had a major “oops” with its latest foreign trade balance. The trade deficit unexpectedly ballooned to USD3.52B in May against the expectation of a sizable surplus. The reason is the collapse of Mexico’s manufacturing exports (down by 58.7% year-on-year!). The sharp drop was most likely due to the global supply chain disruptions and the on-going weakness of global demand. The Mexican peso was not particularly happy about the release. Today’s numbers point to perhaps stronger than expected global headwinds, and a smaller than expected external safety cushion for the currency.

    It is the end of the week and almost the end of the month. The global recovery drumbeat is getting a bit stronger. So, how EM indices are doing in the current environment? The chart below shows that similar to major global indices, EM indices did not sell off as much during the COVID crisis as they did in 2008-09. We strongly suspect that the large-scale and timely global policy response has something to do with it. Further, it looks like EM retraction has room to continue – provided the global recovery gains momentum. Have a great weekend!

    Chart at a Glance: Global Indices1– More Room for Retraction?

    Chart at a Glance: Global Indices1 – More Room for Retraction?

    Source: VanEck Research; Bloomberg LP

    1Chart Index Definitions:

    US HY: The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below.

    CEMBI: Corporate Emerging Markets Bond Index (CEMBI) is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities.

    MSCI EM: The MSCI Emerging Markets Index captures large- and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

    S&P 500: S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples.


    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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