Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 14, 2020
China continued to rebound in July, but the pace of the recovery remains uneven. A lack of sequential improvement in Turkey’s current account raises concerns about the state-driven recovery’s side effects.
China’s growth rebound continued in July, and today’s activity releases gave a nice boost to the benchmark Shanghai Composite Index (119bps) despite slower than expected monthly increases. With the fact of the recovery confirmed, the focus is increasingly shifting from headline numbers to the drivers/structure of growth and their sustainability, and ensuing policy implications. There are two obvious gaps—consumption (proxied by retail sales) is lagging industrial production (see chart below), and private investments are lagging public investments. There is nothing inherently wrong with growth being driven by state-owned enterprises for the time being, but these gaps point to some issues with the monetary transmission mechanism, in addition to concerns about the virus’s second wave. This suggests that authorities might step up fiscal support going forward (while keeping monetary “drip” stimulus in place).
Turkey’s industrial production delivered a major upside surprise this morning, jumping by 17.6% month-on-month in June. However, a lack of sequential improvement in the current account deficit (it narrowed only marginally to USD2.93B in June) added to concerns about “side-effects” of the recovery that is driven by the state-sponsored credit surge and accompanied by large-scale currency interventions. The central bank’s upcoming rate-setting meeting (next week) will therefore be closely watched—the recent comments from President Recep Erdogan about interest rates suggest that monetary authorities’ hands might be tied.
Mexico’s central bank cut its policy rate by 50bps yesterday as expected. Still, the decision was not unanimous, and the tone of the statement suggests that the pace of easing might slow down from now on. The main reason is inflation. The latest inflation prints were higher than expected, and there is a lot of uncertainty about how to measure inflation during the COVID crisis. The market continues to price in 80bps of rate cuts in the next 12 months, but the central bank’s communication suggests that the cuts might be less frontloaded than the market expects.
Chart at a Glance: Consensus Continues to See Sizable Fiscal Gaps in 2021
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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