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Emerging Markets Debt Daily
Mexico Inflation – Turning the Corner?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 24, 2020
Mexico’s disinflation might yet prove transitory. Turkey makes another policy tweak, but the market still demands more proof that policy normalization is here to stay.
Mexico’s inflation had been stuck above the target range for several months, limiting room for rate cuts. This is the reason why today’s downside surprise attracted so much attention. Headline inflation dropped from 4.09% to 3.43% year-on-year in the first half of November (see chart below), and some developments looked promising—such as fewer supply disruptions/COVID-related pressures. Other factors, however, were transitory (longer year-end sales with deeper price discounts). We are therefore not sure that the central bank will deliver an additional rate cut before year-end, even if disinflation continues in the second half of November.
Turkey made another move towards policy normalization this morning, removing the asset-ratio rule for local banks. The rule was a key factor behind the credit surge, and its repeal is expected to improve the monetary transmission mechanism and pave the way for faster external adjustment (smaller current account deficits). This is a welcome development, but the price action this morning suggests that the market—and locals—need more convincing about the policy U-turn. In particular, local banks deposit rates might need to go higher to encourage de-dollarization and reduce financial risks.
Brazil’s inflation keeps grinding higher, reaching 4.22% year-on-year in mid-November. The prevailing view is that the labor market slack and large output gap will keep a lid on overall inflation pressures, despite a recent increase in food and industrial prices. However, the diffusion index is grinding up as well (68.2%—the highest since 2016), a signal that price pressures are no longer localized and may become more widespread as the economy recovers. Against this backdrop, the government’s fiscal agenda is gaining importance—both for the central bank and the bond market.
Chart at a Glance: Mexico Disinflation—False Start or For Real?
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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