Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 09, 2020
I am at a very cool China conference this morning, where we expect to be enlightened about the economy's prospects for 2020. The most immediate implication is that there will be no chart in my comment today. But I promise to report on the most salient points tomorrow. Meanwhile in the real world, China's headline inflation stabilized at 4.5% year-on-year in December. This was a nice downside surprise, albeit it might reverse in January as the price of pork has started to pick up again. Our sense is that authorities will continue to look at the current inflation spike as transitory, so policy implications should be limited. One development that really sent hearts racing this morning is that producer deflation eased (a lot) in December (to -0.5% year-on-year). Even though this was mostly due to an uptick in oil and a low base, firmer domestic activity should provide more support going forward.
The prize for disappointment of the day goes to Brazil, where industrial output contracted unexpectedly by 1.7% year-on-year in November, denting the nascent recovery narrative. The weakness was widespread, making it the worst print since March 2019. December’s activity gauges also moderated, pointing to stronger cyclical headwinds going forward. We do not think that Brazil’s growth story is dead yet. However, today’s releases emphasize the need for additional structural reforms that would lift the growth trajectory in a more sustainable way.
Mexico’s December inflation (CPI) surprised to the upside and this adds credence to the central bank's cautious bias. The jump in headline prices in the second half of the month was particularly sizable (from 2.63% to 3.02% year-on-year). It is comforting, however, that core inflation continues to ease (albeit very gradually, to 3.59% year-on-year in December), leaving room for measured (25bps) rate cuts in the coming months (the market expects 100bps or so this year).
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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