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  • Emerging Markets Debt Daily

    EM Growth – Uneven Progress

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    August 03, 2020

    EM activity gauges show a positive momentum, but progress is still uneven. Indonesia’s inflation remained below the central bank’s target range, opening room for another rate cut.

    The latest activity gauges show that the policy support in EM is bringing fruit. However, the progress remains uneven – both in terms of drivers and country breakdowns. China is still the trailblazer, with the Caixin Purchasing Manufacturing Index (PMI) beating expectations and rising to 52.8 in July (see chart below). But the biggest positive surprise came from Brazil, which saw the manufacturing PMI surging to 58.2. There are more signs of divergence in emerging Europe and Asia. Central Europe is clearly gaining momentum (and EU funds can give an extra boost), whereas South Africa and “frugal” Russia are lagging behind. In Asia, China, Indonesia, South Korea, and Thailand look stronger, while India, Malaysia, and the Philippines might be losing steam and require extra support. This morning’s better than expected US ISM manufacturing PMI suggests that global headwinds are subsiding – an encouraging development if sustained.

    GDP growth is not the only area where we see a lot of divergence among EM. Inflation readings also point in different directions. Mexico and Central Europe keep generating upside surprises, but Indonesia’s core and headline CPI moderated more than expected in July. Indonesia’s headline inflation remained below the central bank’s target range for the second month in a row, opening room for another policy rate cut. Turkey is reporting July’s inflation tomorrow, and it will be closely watched by the market. 

    We are waiting for Argentina’s confirmation that it will extend the debt exchange offer, and local headlines remain noisy. There are suggestions that the government might ask for a temporary pause in debt payments (standstill) and start new talks with the IMF. Minister of Economy Guzman stated again over the weekend that the offer cannot be improved further. We can only reiterate that the gap between the two sides is not too big, but we have to wait for the official announcement.

    Chart at a Glance: China Caixin PMI – Still Going Strong

    Chart at a Glance: China Caixin PMI – Still Going Strong

    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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