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  • Emerging Markets Debt Daily

    China Recovery – Case for Optimism

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 15, 2020

    China’s recovery continues, but an uneven pace. Mexico’s expected 50bps rate cut was perceived as hawkish by some market participants.

    China’s post-COVID recovery remains bumpy, but there are reasons for optimism as the stimulus is clearly working. This is especially the case in industry, which bounced more than expected and yearly growth moved back in positive territory. The outlook for consumption is less certain, as witnessed by softer than expected retail sales (see chart below). We have no doubt that authorities will continue to provide additional policy support (we should learn more at the forthcoming National People’s Congress), but the recent geopolitical flare-ups raise concerns about external headwinds. U.S. President Donald Trump’s remark about cutting off “the whole relationship”, and the extension of the Huawei ban until May 2021 did not go unnoticed this morning, as did China’s announcement about the activation of the “unreliable entity list”. 

    Mexico’s 50bps policy rate cut was completely expected, but it was nevertheless perceived as hawkish. There were no dovish dissenters and only conditional assurances about additional easing. The statement emphasized data-dependency and drew attention to potential upside inflation risks, such as the currency’s impact and supply chain disruptions. Governor Diaz de Leon also called on the government to do its part on the fiscal front – and this is the space we are watching very closely, especially the fiscal pact with governors.

    The past day brought more evidence of moderating inflation pressures in emerging markets. Turkey’s inflation expectations moderated from 9.7% in April to 9.2% in May. Argentina’s April inflation surprised significantly to the downside, easing to 45.6% year-on-year. In general, this is a positive development that opens up room for additional policy support. However, it also becomes increasingly clear that the latest inflation prints might not be fully representative, as entire sectors of the economy were closed and statistical authorities had to use a large number of proxies.

    Chart at a Glance: China Is Bouncing - But Pace Differs Depending on Sector

    Chart at a Glance: China Is Bouncing - But Pace Differs Depending on Sector

    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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