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Emerging Markets Debt Daily
China Disinflation – On A Roll?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyNovember 10, 2020
China’s on-going disinflation improves the fundamental backdrop for local fixed income products. The market is still waiting for concrete signs of a policy U-turn in Turkey following major personnel changes.
The most important market implication of China’s on-going disinflation is that it makes local Fixed Income products look more attractive―the fact that this is happening as China’s bonds are being included in major global indices is an added “bonus”. What about policy consequences? Annual headline inflation eased more than expected in October (to 0.5%) and core inflation remained stable at a very low level (see chart below). Some disinflation drivers might be temporary―food/pork prices―but they can push headline inflation below zero in the coming months. At the same time, core prices can start trending up, reflecting a more balanced (=demand-led) GDP growth. If this is indeed the case, the central bank might opt to look through this and maintain its current policy stance.
There is no policy U-turn in Turkey yet―despite major personnel changes in the central bank and the ministry of finance. Both the new Minister of Finance and new Governor of the central bank have decent track records―the question is whether they are allowed to call the shots. President Erdogan’s negative remarks about policy rate hikes suggest that the answer is still “no”, which is not what the market wants to hear. Turkey has fewer buffers these days (lower international reserves, negative real deposit rates), so the cost of policy inaction can be high. The next important milestone is the rate-setting meeting on November 19.
The second attempt of the Peruvian congress to impeach President Martín Vizcarra was successful―much to the market’s surprise. The president accepted this fate, the line of succession is clear, and there are no reasons to expect that the next presidential election (April 2021) will be delayed. However, the congress’s populist bias poses some near-term policy risks―and this fact was reflected in today’s price action.
Chart at a Glance: China Disinflation Gains Traction
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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