Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
March 24, 2020
EM central banks are actively adopting unconventional policy tools to minimize the virus’s impact on growth and financial stability. China’s activity is turning the corner, but the external slump remains a major risk.
Unconventional monetary policy tools are increasingly becoming mainstream in emerging markets (EM). We just learned that the Czech National Bank will be buying government bonds, while the central bank in Colombia stands ready to purchase private debt from financial entities (to the tune of COP10T, or ~USD2.5B). This is not to say that traditional instruments are a thing of the past—the Philippines announced that it will lower the reserve requirements for banks by 200bps, and we expect to see more policy rate cuts across EM in the coming weeks. EM governments also actively utilize fiscal channels to complement monetary easing. In Brazil, President Jair Bolsonaro announced an equivalent of USD17.5B to support municipalities and states, while in South Korea the government approved a USD8B emergency package to support businesses affected by the virus.
We’ve got some good news regarding Mexico’s inflation this morning. Both headline and core bi-weekly inflation moderated in the first half of March to 3.71% and 3.6% respectively, year-on-year. Looking forward, the recent currency weakness (the Mexican peso dropped by nearly 35% since late February) is a concern as regards the second-round inflationary impact. However, the pass-through should be capped by expectations of much weaker growth and, possibly, higher unemployment. Policy-wise, today’s reading leaves plenty of room for another rate cut.
China is clearly turning the corner in this crisis, showing improvements in daily coal consumption and the container throughput of major ports. However, a worsening external slump is becoming a major risk, as the rest of the world is several weeks behind China in terms of the virus’s spread. Today’s flash activity gauges in Europe—which hit record lows and moved deep into contraction territory in March—highlight this point. Long-term relations between European PMIs and GDP growth signal a double-digit real output contraction, albeit we caution that there is a large degree of uncertainty about traditional econometric models’ output in times like these.
Chart at a Glance: Activity Gauges in Europe and US Hit New Lows
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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