Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 11, 2020
China’s latest credit numbers looked less extreme than headline prints suggest. Brazil can still cut rates despite an upside inflation surprise.
China’s latest credit numbers looked less extreme than headline prints suggest (total social financing was nearly six times lower than in January). New loans moderated big time, but February’s sequential change was well within the multi-year range for the month (see chart below). There was a massive drop in shadow financing (-CNY485.7B), but we’ve seen bigger declines before. Government bond issuance eased a lot, but it came on the heels of January’s frontloading. Actually, one can argue that the monthly new loans looked mildly expansionary against the backdrop of very weak domestic activity. Still, February’s credit aggregates indicate that authorities might be relying more on fiscal channels to drag the economy out of the virus-induced growth slump. Check CEO Jan van Eck’s latest blog Investment Outlook: China First to Face Wave of Uncertainty, in which he discusses the recent developments in China, as well as his investment ideas. One of Jan’s observations is that ETFs in emerging markets debt are trading at discounts, so it might be a good time to consider getting exposure.
Brazil’s headline inflation moderated in February (to 4.01% year-on-year), albeit not as fast as expected. This is one of the reasons why the central bank continues to intervene on the spot market in order to minimize the negative pass-through from the currency’s depreciation to prices. Going forward, Brazil’s inflation should benefit from lower oil prices, which is why the market continues to believe that there is room for another 35bps policy rate cut in the next three months.
The title song from a James Bond movie, Diamonds Are Forever, has been haunting me since yesterday. There is a Russian connection here─the country’s parliament is debating a constitutional amendment limiting the number of presidential terms. It looks like the limit will remain part of the constitution, but ─and this is where things get a bit weird─the April referendum can give the constitutional court a right to lift this limit for a specific person and claim that this is still in line with the constitution (yes, you read it correctly). A simpler way to put it? “Putin Is Forever”...
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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