Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 20, 2020
China keeps the loan prime rates on hold, defying consensus, as domestic activity bottoms out. Russia also stays on hold due to concerns that the currency’s weakness can feed into inflation.
China’s central bank (PBoC) refused to cut its loan prime rates today, defying consensus. This is a gutsy move, for sure. The question is whether this was done in order to keep the remaining powder dry or because there is more certainty about the activity rebound. I think it is a combination of both. Domestic activity is definitely picking up. China’s emerging industries Purchasing Managers Index (EPMI) surged from 29.9 in Feb to 55.3 in Mar. Yes, the base is low. Yes, there are concerns about weak growth elsewhere. But the direction is clear. Whatever the reason, China is one of the very few countries in the world that can afford to pursue independent policies now, rather than being forced to follow the easing crowd.
Russia’s central bank is also a “stubborn” one. It stayed on hold today (at 6%), albeit this time in line with expectations. The reason is simple—the Russian ruble was badly hit by global turbulence, generating concerns that the currency’s weakness can feed into inflation. The central bank doing its (proper) job? What a novel idea... By the way, Russia’s international reserves are up again, reaching USD581B—only $17B less that the all-time high in 2008. This is one of the factors that helps to explain why Russia is not willing to submit to Saudi Arabia’s “oil blackmail”.
Was it Poland’s “last hurrah” before the coronavirus crisis? February’s retail sales accelerated much more than expected (9.6% year-on-year vs. 6.3% consensus), but the central bank and the government are already looking through this strength. The stimulus package approved several days ago was very comprehensive, and included a rate cut, a quantitative easing program and a bunch of fiscal measures.
À propos: Today’s story is an interesting twist on social distancing...in the 17th century. It is about a student who was sent home when Cambridge University was shut down in 1665 during an outbreak of bubonic plague. While at home, the student did extremely well without his professors’ “interference”. He discovered calculus and experimented with optics. And there was an apple tree outside his house. The student’s name was Isaac Newton, and he later described this time as the year of wonders and “the prime of my age of innovation...more than at any time since”. Our one and only Arian Neiron from VanEck Australia drew my attention to this very cool fact.
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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