Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 10, 2020
China’s inflation eased in February despite surging food prices. Mexico’s credible currency interventions calmed the currency.
It’s “Coronavirus 1 : Hogs 0” in China’s great inflation game. Yearly headline inflation eased to 5.2% in February, despite surging food prices (mostly pigs), as domestic activity came to a standstill. Core price inflation decelerated sharply to 1% year-on-year and the producer price growth moved deeper into negative territory. I am not going to speak “Economic” after today’s release—comments about lower price pressures leaving room for stimulus are completely irrelevant in this particular case. China will do whatever it takes to dig itself out of a coronavirus growth hole. And this includes targeted and blanket monetary accommodation. Inflation will probably be the last thing on the central bank’s mind until there is stronger evidence of a growth rebound.
A surprising jump in Mexico’s inflation provides extra justification for the central bank’s decision to scale up its currency interventions. The size of the program was expanded from USD20B to US30B. Concerns about the negative impact on the international reserves are limited, as interventions are conducted in a smart way—via foreign currency swaps. The peso strengthened after the announcement and for the right reasons.
Today’s key development in Russia is a parliamentary discussion about an unlimited presidential term. This constitutional amendment would be a big deal, if approved. President Vladimir Putin is expected to address the parliament later in the afternoon. We will keep you posted. In the meantime, the Ministry of Finance and the central bank are using the budgetary rule to conduct some pre-emptive currency sales (USD1B a month) in order to reduce the ruble’s volatility that was caused by a sharp drop in the price of oil.
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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