Emerging Markets Debt Daily
China – No Further Acceleration = No Sharp TurnsNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 17, 2021
China’s domestic activity indicators reinforced the “no sharp turns” narrative. Hungary surprised with a decidedly hawkish monetary policy comment.
China’s equity indices were totally fine with domestic activity missing forecasts in April. Why? Because it reinforced the “no sharp policy turns” narrative. As regards softer domestic activity, the chart below shows that last year’s base effect will have a strong impact on annual growth numbers as we move away from Q1. This is normal. A big downside surprise in retail sales, however, raised concerns about the speed of the recovery’s rebalancing towards consumption. Many commentators pointed to softer consumer sentiment surveys and linked them to challenges experienced by privately-owned small and medium enterprises (which employ a big portion of the labor force). This is a strong argument for the continuing targeted support for this sector going forward.
There may be no sharp policy turns in China, but something is brewing in Central Europe. The Deputy Governor of the Hungarian central bank surprised with a decidedly hawkish message, saying that the board should consider a rate hike in June. So, obviously some policy-makers do not think that high inflation is transitory. And Hungary’s central bank is not the only one. The Czech National Bank’s hawks are also getting restless. So, the race is on. Who will be the first to hike? Hungary or the Czech Republic? The market prices in the same amount of tightening in both countries in the next three months. Exciting times… The Hungarian forint is loving every minute of it, outperforming most emerging markets (EM) peers in the morning trade.
LATAM is another region that may be heading for policy changes—populist changes that is. The left’s strong performance in Chile’s regional and constitutional convention elections this weekend was in the cards, but the extent was still surprising—the ruling center-right coalition is projected to get only ¼ of seats in the constitutional convention (below the veto threshold). A strong performance by the Communist Party in the municipal elections added to the perception that the election results were less market-friendly than expected. The Chilean peso is one of the biggest losers today—down by 209bps against the U.S. dollar (as of 10:06am ET, according to Bloomberg LP).
Charts at a Glance: China Domestic Activity – Mind the Base Effect
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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