Natalia Gurushina, Economist, Emerging Markets Fixed Income
February 18, 2020
China’s policy response to the crisis is not your typical “whatever it takes” (yet). The first post-virus activity gauges support the U.S. outperformance story.
Yep, you guessed correctly—today is a “slow data flow day”. So, it is an opportune time to talk about structural shifts, which have long-lasting repercussions for the economies in question. China’s decision to quarantine cash and sanitize old banknotes could well be one of them. The current plan is to return the notes to circulation in 14 days. But frankly, we do not know whether the notes are coming back (some reports suggest that the old notes are being destroyed) and whether authorities would not use this moment to push forward digitalization of the economy. India’s demonetization drive a few years ago certainly comes to mind. So, we’ll keep our eyes open.
China’s policy response to the virus also raised some eyebrows lately. I think the best way to describe it is “whatever it takes with a twist”. The twist is that authorities seem to show a certain degree of restraint, including: (1) not rushing to ease property-loan quotas; (2) strong hints that fiscal stimulus will be limited and targeted; and (3) conducting net liquidity withdrawals via open market operations in the past few days. Point (3) could well be due to a lack of demand. As regards points (1) and (2), the situation might change depending on the severity of a Q1 2020 output decline. Plus, some commentators allude to a big fight among top party officials on whether to go all in to prop up the economy or miss the growth target but cap macro imbalances.
Germany’s first post-coronavirus’s ZEW Survey1 was really weak, and this is likely to reinforce the U.S. outperformance story—at least until we get a new batch of Markit’s activity gauges on Friday. The U.S. dollar is one of the main beneficiaries here (trading below 1.08 vs. the Euro this morning), while many emerging markets assets remain under the weather.
1The ZEW Financial Market Survey is an aggregation of the sentiments of approximately 350 economists and analysts on the economic future of Germany in the medium-term.
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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