Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
September 15, 2020
China’s recovery looks more broad-based with retail sales finally gaining pace. Indonesia’s large trade surplus was overshadowed by policy concerns.
The main take-away from China’s latest activity data is that household consumption is gaining pace, making the recovery more broad-based. The yearly retail sales growth finally turned positive in August (0.5%, see chart below), surprising to the upside. Another encouraging development is that private investments are contracting at a slower pace. But ultimately, industry—and especially state-owned enterprises (SOEs)—remains in the driver’s seat. This is not the end of the world per se—SOEs can be useful conduits for government policies/funds at the time of a crisis—but it would be great to see the stimulus having a stronger impact on smaller and privately-owned companies. Still, we’ve got a solid set of data in China today, and this should lead to further upside revisions of 2020 GDP growth.
Indonesia posted another above-consensus trade surplus in August (USD2.33B), but investors’ moods are more cautious these days. The recent decision to re-impose large-scale social restrictions in Jakarta introduced additional downside growth risks (which can cause further deterioration in government finances). There are also legitimate concerns about the central bank’s independence and changes in the central bank’s act, which cast a shadow on Indonesia’s fundamental story despite the improving external balance.
Emerging markets (EM) overseas remittances are doing much better than initially feared (World Bank initially saw a 20% decline in 2020). Today’s big upside surprise in the Philippines—which comes on the heels of similarly encouraging numbers in several other countries—is a good example. Remittances’ growth accelerated to 7.8% year-on-year in July vs. the expectation of 5.4% year-on-year decline, and the continuation of this trend will provide a nice marginal support for growth and the external balance.
Chart at a Glance:China – Industry Still Leads, But Consumption Is Gaining Pace
Source: Bloomberg LP
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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