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  • Emerging Markets Debt Daily

    China Activity Gauges Puzzle

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    January 31, 2020

    China’s official activity gauges showed no signs of an early impact from the coronavirus. Headwinds to South Africa’s growth remain strong as power blackouts may intensify in the coming months.

    China’s official activity gauges for January (Purchasing Managers’ Indices or PMIs) looked counter-intuitive—there were no signs of an early impact from the coronavirus. A modest decline in the manufacturing PMI most likely reflected the timing of the Lunar New Year celebrations and was fully expected. The services PMI actually strengthened to 54.1 against the consensus expectation of a decline. The manufacturing new orders and employment PMIs were also stronger. There is, of course, a possibility that the past stimulus is having a stronger impact—especially in the public sector. Another possibility, however, is that the numbers were affected by statistical sampling and will show a bigger drop in February, which will be followed by a concerted policy effort to help the economy to regain its footing.  

    More headwinds for South Africa’s growth? The chief executive officer of the state-owned utility Eskom warned that the probability of blackouts has increased and that the grid will remain vulnerable in the next year and a half. The growth assumptions for the next budget will, therefore, be closely watched— albeit we think that there is room for maneuver on the public wage bill side that can help to mitigate the negative impact, potentially providing upside for local bonds. For a more general discussion about investment opportunities in emerging markets debt, I would highly recommend you listen to Portfolio Manager Eric Fine’s quarterly webinar (Emerging Markets Debt: Opportunity Amid Euphoria) and check out Portfolio Manager Fran Rodilosso’s blog Where to Find Value in High Yield Bonds, in which he argues that emerging markets high yield corporate bonds’ valuations look attractive compared to U.S. high yield. 

    The positive side effects of Brazil’s disinflation and fiscal drives are increasingly showing in the monthly budget statistics. The general government’s primary and headline deficits narrowed to 0.85% of GDP and 5.91% of GDP respectively in December. Annual interest payments are now down to 5.91% of GDP and the number is expected to decline further as inflation and the neutral policy rate get anchored at low levels. Further structural reforms are key, but at least there is a light at the end of the proverbial tunnel. 


    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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