By Natalia Gurushina, Economist, Emerging Markets Fixed Income, VanEck Global
Mexico’s inflation continued to moderate in April, and this leaves more room for monetary easing. Brazil’s post-COVID recovery plan raised a lot of questions, including governance.
Mexico’s bi-weekly inflation confirmed that there is more room for monetary easing. Yearly headline inflation moderated more than expected to 2.08%, and core inflation eased to 3.4% (see chart below). The market continues to price in 115bps of rate cuts in the next three months—but this will still leave the real policy rate comfortably positive. Mexico’s policy defense mechanisms also include its famous oil hedging scheme, which proved useful during the oil price rout—a few days ago Portfolio Manager Eric Fine gave a talk on Bloomberg radio about a general impact of oil prices on emerging markets, in which he argued that differentiation among emerging markets (EM) is key. Eric’s differentiation argument got a nod of support from the market yesterday, as Mexico’s USD6B bond placement was 4.75x oversubscribed.
Brazil’s post-COVID recovery plan attracted a lot of attention yesterday—but for the wrong reasons. A lack of details was one obvious issue. More importantly, the absence of Minister of Economy Paulo Guedes during the announcement raised concerns about political infighting. The currency’s afternoon trading showed that the market cares about these risks, especially against the backdrop of further rate cuts—which are both priced in (108bps in the next three months) and seemingly telegraphed by the central bank’s top officials.
The mood in Argentina is more somber after the government announced that it will not pay coupons on foreign-law bonds (Bonar 2021, 2026 and 2046), which means that Argentina entered a 30-day grace period. This was fully expected and within the parameters of the exchange offer, but many investors are now pricing in a risk of extended litigation and a higher risk of a hard default.
Chart at a Glance: Mexico Slowing Inflation – More rate Cuts in the Pipeline
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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