ETFs

Policy Twists and Turns

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy

The central bank governor appointment is front and center in Mexico against the backdrop of rising inflation and a prospect of earlier rate hikes in the U.S. China introduced additional targeted measures to support small businesses.

No, we are not talking about Turkey - our focus is on Mexico this morning. Reason #1: We’ve got yet another upside inflation surprise, which pushed both headline and core inflation further away from the target band (see chart below). Reason #2: President Lopez Obrador withdrew Arturo Herrera’s nomination for the central bank’s governorsubmitting Victoria Rodriguez’s candidacy instead. The market sees two problems with Rodriguez’s nomination. First, she is the president’s loyalist, and this raises concerns about the central bank’s independence. Second, she lacks the relevant monetary policy experience, which might be a disadvantage once the U.S. Federal Reserve starts raising rates (which is now expected in June-July 2022). As a result, the Mexican peso underperformed peers, sliding by 114bps against U.S. Dollar (at 10:00am ET, according to Bloomberg LP), and the local yield curve bear-steepened.

Another noteworthy policy turn took place in China, where authorities announced additional targeted measures to support small and medium size enterprises – such as assistance with cloud/digital services, lower power tariffs (via local governments), better funding support from banks, lower taxes and fees. Would the economy need more support going forward? China’s Q4 GDP consensus forecast had been cut again – to mere 3.13% - but the next batch of domestic activity gauges (out on November 29) should provide more color as to what expect in the near term.

No conversation about policy twists and turns would be complete without Turkey - and what a difference one headline makes! Newswires mentioned a cooperation deal between Turkey and Abu Dhabi, which might be worth USD10-20bn (2.5-3.5% of Turkey’s GDP), and the currency rallied by about 5%. Well, the absence of additional “policy” statements from the presidential palace might also have helped. Anyway, the next big milestone is the inflation print for November – another upside surprise will reinvigorate the debate about FX, policy rates, macroeconomic adjustments, and competitiveness (authorities’ latest obsession). Stay tuned!

Chart at a Glance: Mexico Inflation – No Respite in Sight

Chart at a Glance: Mexico Inflation – No Respite in Sight

Source: Bloomberg LP

Originally published by VanEck on November 24, 2021.

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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