Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 15, 2020
EM remittances continue to defy “doom and gloom” expectations. South Africa’s inflation leaves more room for rate cuts.
Earlier in the COVID crisis, the World Bank warned about a major drop in emerging markets (EM) overseas remittances and the negative impact this might have on external balances and domestic consumption. Interestingly enough, we are seeing the opposite in many cases. Overseas remittances in Mexico and Guatemala were often above the seasonal ranges (so far in the crisis). The Philippines reported its April’s remittances today—and lo and behold, the print looked quite OK, just a tad below the seasonal range for the month (see chart below). There are suggestions that this reflects reverse migration to home countries (=people bringing money with them). Our take is different—in many of these countries family is key, and should be taken care of (even more so in calamity).
It’s nice to have a change of “inflation” scenery in EM after a series of upside surprises. South Africa’s core and headline inflation eased more than expected in May (to 3.1% and 2.1% year-on-year respectively). We continue to emphasize that COVID inflation releases should be treated with utmost caution: (1) there are frequent disruptions in data collection, and (2) COVID inflation baskets could be very different from pre-COVID ones. The latter means that we might not be comparing apples to apples and that just a few components (fuel, food) can have an outsize impact on overall inflation. Still, South Africa’s inflation optics is supportive of more rate cuts. Headline inflation is about 3 standard deviations lower than the 3-year average, and it is now outside the target band (3-6%).
China-related geopolitical noise is spiking again. U.S. President Trump signed an executive order to end preferential treatment of Hong Kong, which is not a good sign as regards Hong Kong’s status as an international financial center. The Chinese renminbi seems to be unfazed by these developments though, trading stronger than the daily fix. One possible reason is that the market expects a fairly strong set of domestic activity indicators tomorrow, confirming that China’s rebound is indeed gaining pace.
Chart at a Glance: EM Remittances – No Sign of Collapse in Philippines
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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