Emerging Markets Debt Daily
China Steps Up Anti-Bubble RhetoricNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMarch 02, 2021
China's anti-bubble drumbeat is getting louder. Even though the banking regulator's comments were not just about domestic developments and real estate, many took notice, wondering what it means for China's policy normalization. Is China moving too fast? A recent report from the IMF argues that China's monetary policy accommodation during the pandemic was broadly in line with the Taylor Rule1-implied rates (see chart below). With this in mind, it won't be a stretch to suggest that the "taper" will not be out of line with fundamentals either – a sign of a more mature and orthodox policy framework, in our opinion. Please make sure to check our latest insights on China's economy in the post-COVID world here.
The market keeps frontloading Brazil's rate hike expectations. The swap curve now prices in 60bps of tightening in March (up from 31bps just a month ago) due to persistent concerns about the emergency aid package and its impact on the fiscal outlook. The government's decision to raise the corporate tax on banks to compensate for lower taxes on diesel and cooking fuel was not particularly well received. And Minister of Economy Paulo Guedes's (somewhat belated) reassurance that he will stay in the government was not enough to lift the sentiment. The Bovespa equity index2was down by 143bps and the real by 154 bps against the U.S. Dollar at the time of the note (as of 10:30am ET, according to Bloomberg).
Russian equities and the currency are in the celebration mood this morning after the imposition of "toothless" U.S. sanctions. First, the new sanctions focus on individuals and businesses. Second, the U.S. approach is similar to that one of the EU. And third, the sanctions are mostly in line with expectations. Party on, Wayne!
Charts at a Glance: IMF’s Verdict on China’s Policy Stance During Pandemic – Spot On
1The Taylor Rule – a formula that can be used to predict or guide how central banks should alter interest rates due to changes in the economy. Taylor's rule recommends that central banks should raise interest rates when inflation or GDP growth rates are higher than desired and vice versa.
22Brazil’s Bovespa index - Benchmark index of about 70 stocks that are traded on the B3 (Brasil Bolsa Balcão), which account for the majority of trading and market capitalization in the Brazilian stock market.
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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