Emerging Markets Debt Daily
Rollout, Rotation, Reflation?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyApril 28, 2021
Rising global commodity prices and the idea of “reflation’s rotation” keep the market occupied going into the U.S. Federal Reserve’s meeting. Brazil is making additional preparations to make sure the 2021 budget stays on track.
The rate-setting meeting of the U.S. Federal Reserve is the main event of the day. And we are using the remaining few hours to check what’s going on in global macro. One narrative that is gathering momentum is “reflation’s rotation” – or the sequential recovery from the U.S./China to Europe, and then to ex-China Emerging Markets (EM). The key arguments here are that (a) the recovery will follow the vaccine rollout, and (b) the current expectations for the “laggard” regions might be too timid. Another development – which may have significant near-term implications for parts of EM – is a major uptick in global food and energy prices (see chart below). Policy implications aside, several commentators drew attention to potential societal issues (a risk of social unrest) if this trend continues.
The post-pandemic recovery bellwethers – China and the U.S. – are closely watched for signs of policy normalization. The next installment of China’s activity gauges will be released after the market close on Thursday. What shall we expect? The mid-month activity indicators looked a bit mixed. The weekly coal stocks for China’s six major power generators continued to moderate in April (which might be seasonal), but the Standard Chartered confidence index for China’s small and medium enterprises improved. Stay tuned!We continue to get more reassuring headlines about Brazil’s 2021 budget situation. The latest developments included a limited reshuffle in the Ministry of Economy with the idea of easing future negotiations with the congress. Of course, there are multiple “execution risks” going forward (Brazil is not different from other countries in this regard), but so far the market reacted positively to the end of the fiscal stalemate.
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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