Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 16, 2020
China’s activity indicators for February looked very weak, but high-frequency indicators point to nascent recovery. The IMF says it is ready to mobilize a USD1T lending facility, as the Federal Reserve’s policy bazooka disappoints the market.
China’s February activity data offered a glimpse into the not-so-distant future for countries which are only now moving into the epicenter of the coronavirus crisis. The numbers looked abysmal, with industrial production falling by 13.5% year-to-date, retail sales by 20.5% year-to-date, fixed investments by 24.5% year-to-date, and infrastructure investments by 30.3% year-to-date. These declines might have surprised the consensus, but they appear to be in line with anecdotal evidence about city shutdowns, traffic disruptions, coal consumption, etc. High-frequency indicators show that green shoots are back, albeit they are still below normal levels for March. Plus, many Chinese companies are now facing weakening global demand due to the cascading effect of the coronavirus. As a result, China’s stimulus will continue, with a blanket cut in the 1-year benchmark deposit rate and 1-year medium-lending facility rate looking increasingly likely.
The market reaction to the U.S. Federal Reserve’s (Fed’s) policy bazooka (100bps rate cut, USD700B of asset purchases, swap lines with major central banks and zero reserve requirements for banks) was negative. First, many market participants were taken aback by Fed Chairman Jerome Powell’s assertion that corporate bonds will not be included into its asset purchase program. Second, even though the Fed’s actions on Sunday were part of a coordinated effort by six major central banks, emerging markets were excluded (no new swap lines). Finally, it is not clear how (or rather when) these measures will help to kick-start domestic activity at the time of social distancing, quarantines and closures. Implementing fiscal and structural measures would be just as important.
Headlines that the International Monetary Fund (IMF) stands ready to mobilize a USD1T lending capacity attracted a lot of attention this morning. The news appeared in the IMF’s official blog, so it is legitimate. There are many questions about the nuts and bolts, but it looks like the number includes USD200B in already existing commitments and USD50B in the rapid-disburse emergency funds. The remainder is a mystery (for now).
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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