What Has Changed in EM

  • Philippine central bank sounded a cautious note
  • Moody’s has given South Africa a reprieve
  • Argentina central bank said it won’t allow the LELIQ rate to drop below 62.5% this month
  • Chile central bank cut its 2019 growth and inflation forecasts

In the EM equity space as measured by MSCI, Egypt (+6.9%), Turkey (+6.3%), and Mexico (+4.5%) have outperformed this week, while the Philippines (-1.0%), Qatar (-0.8%), and UAE (-0.5%) have underperformed. To put this in better context, MSCI EM rose 2.5% this week while MSCI DM rose 2.0%.

In the EM local currency bond space, Turkey (10-year yield -59 bp), South Africa (-10 bp), and Brazil (-8 bp) have outperformed this week, while Argentina (10-year yield +169 bp), the Philippines (+26 bp), and Israel (+19 bp) have underperformed. To put this in better context, the 10-year UST yield rose 10 bp to 2.50%.

In the EM FX space, ZAR (+3.2% vs. USD), CLP (+2.3% vs. USD), and COP (+2.0% vs. USD) have outperformed this week, while TRY (-0.8% vs. USD), THB (-0.5% vs. USD), and PKR (-0.5% vs. USD) have underperformed. To put this in better context, MSCI EM FX rose 0.4% this week.

Philippine central bank sounded a cautious note. New central bank Governor Diakno said that the bank will cut only when inflation nears the target. March inflation was just reported at 3.3% y/y vs. 3.5% expected and 3.8% in February. This was the lowest reading since December 2017 and moves it further within the 2-4% target range. Next policy meeting is May 9. April CPI will come out May 8, and an even lower print would provide an opportunity to cut the next day.

Moody’s has given South Africa a reprieve. Rather than cutting its Baa3 rating last Friday as many feared, the agency instead deferred its scheduled review of South Africa. Moody’s said that the ratings weren’t updated, and that the next rating assessment is scheduled for November 1.  It has typically been the most generous with South Africa, maintaining an investment grade rating even as S&P and Fitch went sub-investment grade.

Argentina central bank said it won’t allow the LELIQ rate to drop below 62.5% this month. This comes on top of the central bank’s pledge to freeze the amount of money in circulation until year-end. Both measures are meant to stabilize the peso and limit inflation. This is similar to what the bank did last year, which worked for a while until it started easing too soon and too quickly.

Chile central bank cut its 2019 growth and inflation forecasts in its quarterly monetary policy report. The bank now expects GDP growth between 3-4% this year, down from its previous forecast of 3.25-4.25%. Inflation is seen at 2.6% this year, down from 2.9% previously. The report supports the notion that the central bank is on hold for the time being.