Latin America Sees Boost as US Inflation Fails to Meet Expectations

Latin American markets got a welcome boost after the latest US inflation reading came in lower than expected. The Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve's preferred gauge of inflation, rose 0.3% over the month and 3.4% over 12 months.

This was below the 3.7% economists were expecting, according to a Reuters poll. As a result, traders marked down the implied odds of an October rate hike from the Fed to about 35%, based on CME Group's FedWatch Tool. The dollar eased, and regional assets got a lift.

The MSCI Latin American equity index rose about 1%, while its Latin American currency index climbed 0.6%. This snapped a short losing streak and kept it on track for a seventh straight quarter of gains, according to LSEG data. Country factors still mattered at the margin, but the common driver was fewer near-term Fed-hike fears.

This tends to loosen financial conditions for emerging markets. When investors see less risk of a near-term Fed hike, dollar funding becomes less expensive, making it easier to justify 'carry' trades. This can lead to bigger moves in exchange rates and other assets priced off them, such as local bonds and equities with dollar debt.