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  • Emerging Markets Debt Daily

    China “Green Shoots” Getting Stronger

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    December 02, 2019

    China’s Caixin manufacturing PMI stayed in expansion zone for the fourth consecutive month. Brazil and Argentina got dragged into the trade war, following the imposition of U.S. tariffs on steel and aluminum shipments.

    China’s stimulus is working—this is the main takeaway from November’s activity gauges. Both the official and the Caixin PMIs (Purchasing Managers' Indices) were stronger than expected, with the former driven by new domestic orders (mostly infrastructure). The official PMIs’ “stratospheric rise” looked almost too good, raising suspicions about freak seasonality—so we would not be surprised to see a pullback next month. However, the dynamics of the Caixin manufacturing PMI—which focuses more on privately-owned smaller companies—looked more realistic. The improvement in November was modest (51.8), but it was the fourth consecutive month of expansion (see chart below) and, as such, a more viable signal that the “drip” stimulus is helping to offset the negative impact of trade uncertainty on domestic activity—without opening the credit floodgates.

    Argentina and Brazil got dragged into the trade war over the weekend, following President Donald Trump’s decision to reinstate tariffs on steel and aluminum from these countries. The reason is “a massive devaluation of their currencies.” The market reaction has been limited so far, as the actual impact would be rather small. The question on everybody’s mind, however, is whether tariffs will be expanded to agricultural products as well, which could be a completely different ballgame. An additional consideration for Argentina is the incoming administration’s relations with the U.S.—it is important to avoid extra complications in talks with the IMF (International Monetary Fund) and debt holders.

    Turkey’s economic activity continued to gain momentum in Q3. The real GDP (gross domestic product) growth accelerated to 0.95% year-on-year—mostly on the back of stronger government spending. High-frequency indicators for Q4 (activity gauges, consumer confidence) signal that the economy will continue to grow in Q4. However, the pace of expansion is still very subdued and the quality of growth is sub-optimal (weak investments, exports). Authorities will try to use every opportunity to provide additional stimulus, albeit the expected jump in headline inflation (due to a less supportive base effect) can affect the sequencing of future rate cuts.

    Chart at a Glance: China Manufacturing Gauge—Improvement Are Real

    China Caixin Manufacturing PMI

    Source: Bloomberg LP


    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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