Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 13, 2020
China goes for an emergency cut in banks’ reserve requirements. Argentina’s inflation surprises to the downside.
Today was China’s turn to make an emergency policy easing move. The central bank (PBoC) lowered the reserve requirements for some banks by 0.5-1%, effective from March 16. What we really liked about the move is that it widened the ranks of banks that meet the SME (small and medium-sized enterprises) lending criteria. Smaller companies were disproportionately hit by the shadow deleveraging drive and are now facing higher funding costs—so the cut should help at the margin. Today’s move was targeted, but the consensus now believes that the PBoC would follow up with blanket cuts in the 1-year benchmark deposit rate and 1-year medium-lending facility rate.
Argentina’s inflation is behaving better these days, helped by “frozen” prices, weak domestic activity, and a relatively stable currency. February’s headline inflation surprised to the downside, moderating to 50.3% year-on-year, but it remains to be seen whether the government can keep monthly price increases below 2% without straining the budget too much. Still, for those looking for asset prices that are less correlated with the coronavirus scare, Argentina might be an interesting space. Portfolio Manager Eric Fine visited the country recently and just published a trip report, which I highly recommend (Argentina: The Turbulent Tango)
A big upside surprise in Poland’s February CPI fully justifies the central bank’s decision not to go with the flow and keep its policy rate unchanged. Yearly headline inflation accelerated to 4.7% (see chart below), which is above the central bank’s target range and the highest since 2011. Isn’t it amazing that in this day and time, some central banks still find courage to do what they supposed to—targeting inflation instead of asset prices? Just a sarcastic remark at the end of a crazy week on Friday the 13th...
Chart at a Glance: Poland - Inflation’s Stratospheric Rise
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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