Emerging Markets Debt Daily
China’s Mixed Activity Signals – What’s Next?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyApril 30, 2021
China’s mixed activity signals raised concerns about the pace of normalization. Brazil’s encouraging fiscal news raised hopes that the worst is over.
China’s official and Caixin activity gauges (Purchasing Managers Indices, or PMIs) stayed in expansion zone but moved in opposite directions in April. This raised some questions about the pace of policy normalization and the direction of structural changes (dealing with asset bubbles and allowing more corporate defaults). As regards tapering, the large-scale stimulus is over but China has enough levers to provide targeted support if growth headwinds intensify. Plus, China’s corporate spreads did not widen as much as would be expected from the previous upticks in defaults. This may be interpreted as a sign that the economy is mature enough to deal with the potential moral hazard of encouraging loans without jeopardizing the financial system’s stability. But we keep our eyes open.
Brazil’s latest fiscal numbers raised hopes that the worst might be over. The government’s primary surplus was larger than expected in March, while the debt-to-GDP ratio dropped a few decimal points. We are not that naïve to assume that there will be no fiscal bumps in the pre-election year―especially in light of ex-President Luiz Inácio Lula da Silva’s (Lula’s) political resurrection. Still, the stabilizing or falling debt-to-GDP ratio (see chart below) may calm the bond market. There are also signs that tax reform might be more alive than we thought―headlines suggest that there is a deal to vote on reform in four stages, and this includes the creation of a national value-added tax (VAT). Expectations are super-low, so any positive news might produce a nice market reaction.
First things first―Poland’s central bank (NBP) will not do anything about higher inflation right now. Headline annual inflation surged unexpectedly to 4.3% in April, but the super-dovish NBP continues to treat upside surprises as transitory. The fact that headline inflation is driven mainly by elevated fuel and food prices, while the core price momentum appears to be waning, boosts the central bank’s confidence. There are several structural issues that can push Poland’s inflation higher on a more sustainable basis (a higher minimum wage, for example). But the market thinks Poland’s policy tightening is 2022 business (unlike Hungary or the Czech Republic).
Charts at a Glance: Brazil Debt/GDP Ratio – The Worst Is Over?
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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