Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 13, 2020
India’s first post-COVID inflation release surprised to the upside, but should be treated with caution. Turkey’s current account deficit remained wide in May.
India’s (much) higher than expected headline inflation added to the emerging markets (EM) upside surprises tally. Headline inflation rose by 6.09% year-on-year in June—most likely due to pent-up demand as the economy is re-opening. Higher taxes on some products contributed as well. Post-COVID inflation releases should generally be treated with caution because of disruptions in data collection (India stopped publishing the data after March). Decent harvest prospects and the COVID-related output gap may well push India’s inflation down in the fall.
Turkey‘s current account deficit narrowed slightly in May (as expected), but the country is not yet out of the woods on this metric. The deficit remains stuck at the local maximum (see chart below), and today’s better than expected industrial production (IP) print points a possible reason—the state-sponsored credit surge. What makes Turkey’s situation worse is the central bank’s decision to waste a lot of international reserves on currency interventions. This kept the Turkish lira’s exchange rate artificially strong compared to peers (both in real and nominal terms), preventing a faster adjustment of the current account deficit.
China’s central bank (PBoC) continues to send prudent policy signals. The PBoC’s latest press conference suggests that authorities are not too keen to continue the “emergency” support, and would rather go back to the “drip” stimulus that targets specific areas. The latter includes guiding interest rates down (especially for small and privately-owned companies), but not too low in order to avoid the misallocation of resources. The emphasis on real lending rates (which popped higher lately) and the overall financing costs (=Loan Prime Rate reform) is worth noting in this regard.
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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