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Emerging Markets Debt Daily
Mexico Rates – Hawks Take FlightNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 13, 2020
Mexico’s central bank unexpectedly decided to stay on hold, addressing persistent inflation pressures. Brazil’s recovery is stronger than expected, but fiscal concerns refuse to go away.
Mexico’s central bank kept its benchmark rate on hold yesterday, surprising the market which saw a 25bps rate cut. The hawkish signal was quite strong―only one board member voted for a cut. The reason is that inflation remains “sticky” and above the target band (2-4%). Some of the recent inflation developments were encouraging, but this was clearly not enough to convince most board members that additional easing would be justified at this stage.
Brazil’s economic activity proxy for September looked solid―up by 1.29% month-on-month and above consensus. Brazil’s growth story looks undeniably better these days, but fiscal concerns refuse to go away. Top officials (including Minister of Economy Paulo Guedes) confirmed that the second wave of the coronavirus will lead to more spending, which means that the 2021 spending cap might be breached. The central bank is watching these developments rather intently, as fiscal consolidation is one of the factors that affects its forward guidance. The recent history shows that the bond market is watching the fiscal developments very closely, as well.
In our comments we often talk about structural reforms and their importance for emerging markets (EM) as an asset class. If you ever asked whether reforms actually matter, the chart below might provide some answers. Have a great weekend!
Chart at a Glance: Choose Your Reforms Wisely – They Have Real Consequences!
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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