The U.S. Federal Reserve’s (Fed’s) dovishness paves the way for additional policy easing in emerging markets. Brazil, however, requires more reassurance on the pension reform front before even considering a change in its current stance.
Risky assets responded very well to the Fed’s dovish surprise yesterday. Many central banks now feel emboldened to resume easing. Indonesia’s monetary authorities sent a very clear signal yesterday that they are now ready to support growth, provided the current account stabilizes and there are no obvious risks to the currency. The same applies to the Philippines, where the central bank lowered its inflation forecast for 2019 and now sees downside inflation risks in 2020.
The Fed’s dovish capitulation made life much easier for the new governor of Brazil’s central bank, who presided over his first policy meeting yesterday. The key rate was kept on hold, and even though there were no additional dovish signals in the statement, the balance of risks was changed to “symmetric”. Domestically, the speedy approval of social security reform remains key, and we are happy to report that the government finalized its proposal for military pensions yesterday.
There are some exceptions to the “dovish rule” though. Poland—with its strong activity flow—is one of them. Today’s data installments included the above-consensus construction growth (up 15.1% year-on-year in February) and solid yearly retail sales (up 6.5% in February), both of which come on the heels of a core inflation print that was the highest in five years. Add to this the likely impact of the recent fiscal package, and the case for rate cuts pretty much disappears.
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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