Emerging Markets Debt Daily
Brazil Central Bank BlinksNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyFebruary 10, 2021
Brazil resumed FX interventions. China’s inflation trends reflect the supply-side led recovery.
The Brazilian central bank is usually a “hands-off” institution when it comes to the exchange rate, but it has had enough of the real’s volatility/weakness and intervened on the FX market yesterday. What surprised us is that just a few hours earlier, Governor Campos Neto was talking about “fiscal premium” in the exchange rate, which (in our humble opinion) can only be temporarily swiped under the carpet by interventions, but not eliminated. The latter is the responsibility of the government and the legislative―and there is still a lot of noise and uncertainty here. Brazil’s “saving grace” is that its intervention mechanism is considered credible and was tested before―so we do not expect a big negative impact on the international reserves.
A downside surprise in China’s January inflation was most likely due to a combination of a high base effect and new mobility restrictions (the winter COVID outbreak), both of which are transitory. But details also point to (potentially) longer-lasting consequences of the supply-side led rebound, as headline and core inflation continue to trail behind producer prices (see chart below). As regards policy implications, one thing is clear―today’s release argues against sharp policy turns and in favor of measured and gradual policy normalization.
The Russian government had been often criticized for being too “stingy” during the pandemic and not spending enough to support the population (especially the most vulnerable groups). Well, we keep hearing about a new social package to “boost morale” in the run up to September’s parliamentary elections. Most commentators agree that if the fiscal package materializes, if will be done “Russia-style”―small (0.5% of GDP or so) and funded via higher taxes.
Charts at a Glance: China Inflation – Reflection of Supply-Side Led Recovery
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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