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  • Emerging Markets Debt Daily

    Turkey – Finally A Hawkish Surprise

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    June 25, 2020

    Turkey keeps its policy rate on hold due to higher core inflation, giving some boost to credibility. Brazil’s inflation outlook remains benign, opening door for one more rate cut.

    Turkey’s decision to keep its policy rate on hold at 8.25% took the market by surprise this morning. The main reason was “covlation” (not my invention, but I like the term) – a COVID-related increase in unit costs that boosted core price pressures. The central bank believes that disinflation will return in H2 – we keep an eye on money velocity which is currently down because of wide-spread lockdowns. The state-sponsored credit surge is another obvious risk. Still, today’s move is a welcome change of pace, even though it will take more to fully restore the central bank’s credibility.

    Brazil’s mid-month inflation was a touch higher than expected, but it remained below the target range (1.92% year-on-year), giving the central bank an option to deliver another rate cut. This morning’s Q2 inflation report also painted a fairly benign picture. The central bank made a big cut in its 2020 growth forecast (-6.4%) – a major factor that will help to keep inflation below the target until 2022. The market currently attaches a 50% (or so) probability of a 25bps rate cut in early August, thinking that this will complete the current easing cycle.

    EM central banks are increasingly switching to a “holding” mode (see chart below) – even though there are some notable exceptions like the Philippines, which unexpectedly cut its benchmark rate by 50bps to 2.25% today due to concerns about weak growth and a strong currency. The Philippine central bank sees room for more easing – which is in line with the market expectation for EM as a whole for the next three months (see chart below).

    Chart at a Glance: EM Rate-Cutting Cycle Is Nearly Over

    Chart at a Glance: EM Rate-Cutting Cycle Is Nearly Over

    Source: VanEck Research; Bloomberg LP


    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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