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  • Emerging Markets Debt Daily

    IMF Meetings – Real Growth or Inflation?

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    April 08, 2021

    The U.S. economy, China’s policy normalization and the impact of ultra-loose policies on global growth are at the center stage at the IMF Spring Meetings. Mexico’s huge upside inflation surprise means there is no space for rate cuts.

    We are at the virtual IMF Spring Meetings this week, and the U.S. economy and bond market remain at center stage. Overall, economists and traders are inclined to see the U.S. economic recovery as supportive of risky assets, including higher-yielding bonds. Two key future uncertainties are entering the radar though—an infrastructure bill in the U.S. (uncertain prospects may cap U.S. bond yields) and record net supply of U.S. Treasuries to the market (=concern over their digestion). Another big theme is the powerful impact of ultra-loose monetary and fiscal policy on global growth in conjunction with full reopening of economies due to vaccination rollouts. The most frequently expressed concern was over how much of the growth would be real and how much would just be inflation. Some noted secular deflationary trends, but one respected economist estimated average inflation rates of 7% over the following decade!

    Many participants also noted that China is following a very different path from other major economies—it has already started to tighten. This policy divergence between the two motors of the global economy—U.S. and China—creates a big uncertainty, especially in the commodity space. As regards other emerging markets (EM)-specific discussions, Brazil confirmed that more rate hikes are coming. Peru’s Central Reserve Bank governor Julio Velarde gave a very reassuring presentation to investors ahead of this weekend’s election, highlighting a record trade surplus and strong growth outlook. Inflation is well anchored at 2%, making local Peruvian debt offer attractive real yields. Chile’s central bank sounded hopeful on the economy, but was much more dovish than market pricing. A lot of the “fiscal” response was via early pension withdrawals, not fiscal transfers, and low debt gives Chile a lot of time to focus on long-term growth. Finally, it looks like South Africa is having a “good” problem of benign inflation as the world reflates.

    “Good” inflation, unfortunately, is not one of Mexico’s problems. Quite the opposite. The latest bi-weekly headline inflation print looked disastrous—accelerating to 5.22% year-on-year and way above the target range (see chart below). Bi-weekly core inflation looked a bit less scary, but it also moved further away from the target. The main—and only—takeaway is that rate cuts are out of the question now.

    Charts at a Glance: Mexico Inflation – Don’t Stop Me Now?

    Charts at a Glance: Mexico Inflation – Don’t Stop Me Now?

    Source: 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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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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