There was a sense of unease in Mexico this morning despite the fact that the country posted a very large trade surplus in December (USD1.836B vs. expected deficit of USD0.9B). The reason is that the unexpected improvement was due to weaker imports – both petroleum and non-oil (see chart below). The latter may be interpreted as a sign of weakening domestic demand, which means extra headache for the central bank and an extra reason for the market to start pricing in at least one policy rate cut (37bps) on a one-year horizon.
Soft domestic demand and a large output gap are the main reasons why Brazil continues to run very small current account deficits (USD815M in December, and estimated 0.8% of gross domestic product in 2018). Meanwhile, foreign direct investments (FDI)1 remain large (USD8.95B in December), which translates into big positive basic balances (a sum of current account2 and FDI) and solid fundamental support for the currency. A major policy challenge for Brazil is to make sure that external balance improvements reflect more than just cyclical changes. Structural shifts (such as pension reform and fiscal adjustment) would make such improvements more sustainable and longer-lasting.
The Turkish lira is under pressure again this morning (113bps weaker against U.S. dollar as of 10 a.m. ET, according to Bloomberg LP). The market is readying for the release of the central bank’s quarterly inflation report on Wednesday, which will be followed by January’s inflation print next Monday. The consensus believes that the central bank will lower its inflation forecasts, which underpins the market expectations of substantial policy easing (975bps) in the next 12 months.
Chart at a Glance
Source: VanEck; Bloomberg LP
1 Foreign direct investment (FDI) is an investment made by a firm or individual in one country into business interests located in another country.
2 Current account is a record of a country’s transactions with the rest of the world, based on its net trade in goods and services, net earnings on cross-border investments, and net transfer payments.
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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