Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 10, 2020
China’s credit momentum is steady, but details point to uneven domestic recovery. Global inflation releases showed no signs of price pressures.
China’s overall credit momentum remained steady in May, but details show that (1) recovery is uneven (not just the pace, but the structure), and (2) the government is there to help. Regarding the first point, China’s total social financing accelerated slightly in May to CNY3.2T, and it was mostly driven by a big increase in government bond issuance to support infrastructure development. Household lending and corporate bond issuance were more subdued, which is understandable given the COVID’s hit on confidence. This brings us to point #2 – the National People’s Congress gave the green light to more stimulus. The question is how much policy room authorities have. China’s approach so far has been more cautious and targeted compared to the previous crises. As a result, China’s credit impulse is still significantly below the earlier highs, which – in our opinion – points to sufficient policy space.
Today’s global inflation data dump showed no sign of price pressures in most countries, including the US. One relevant question is whether traditional inflation baskets are directly comparable to “COVID” inflation baskets – the evidence shows that prices in the latter rose much faster – but this is a topic for a separate discussion. What is important right now is that lower inflation gives many central banks in EM an opportunity to ease more without creating additional macroeconomic imbalances. This is especially the case in countries like China where disinflation pushed real interest rates sharply higher (see chart below), reducing the positive impact of earlier policy responses.
Is Mexico’s private pension system in danger? Yesterday’s comments from President Lopez Obrador – calling private pension accounts “harmful” – raised quite a few eyebrows. The president said that he would propose legislation to roll back pension reform. Mexico would not be the first emerging market to do so (unfortunately), and it is not yet clear how far-reaching the bill would be. However, we suspect that eliminating the private pillar will not be well received by the market.
Chart at a Glance: China – Lower Inflation, Higher Real Rates
Source: UBS; VanEck Research; 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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