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By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
Brazil maintained the same pace of rate hikes (75bps) and guidance. Turkey remained on hold with a seemingly hawkish statement – but is it just lip service?
“More of the same” – The Brazilian central bank continued to frontload rate hikes, maintaining the same pace (75bps), same guidance (75bps), and the same reasoning (“partial normalization”). A less uncertain fiscal backdrop eased pressure on the central bank to act more aggressively in the near term. However, the real policy rate remains deeply negative (see chart below) – not the best setup against the backdrop of rising inflation. The emerging narrative is that Brazil is on the road to redemption policy-wise – the central bank’s measured tightening would fit right in.
By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
China’s activity gauges slowed further in February, but this weakness is likely to be temporary. Activity gauges across EM showed a lot of divergence.
China’s activity gauges undershot expectations in February (see chart below),
but there are good reasons to believe that
the weakness is temporary. First, China’s manufacturing typically moderates during the Lunar New Year due to factory closures. But this year’s celebrations also coincided with the new COVID restrictions, exacerbating the seasonal pattern. Second, many high-frequency indicators (including energy production by six major power stations) already show improvements compared to January. Third, production and business expectations held on extremely well despite the second wave of the movement restrictions. Finally, the global trade is rebounding – as witnessed for example by increasing container supply from China – which is a
By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
Brazil’s key near-term risk is that the emergency aid bill will be approved without compensatory measures. Mexico’s electricity bill raises further concerns about reforms’ rollback.
The approval of the emergency aid bill is the most important near-term driver for Brazil’s assets. Investors are realists, and they understand that the bill will most likely be watered down. What
worries them much more is that the bill might be split into two parts―emergency spending and compensatory measures―which will be voted on separately. If the bill is approved without the compensatory measures,