Emerging Markets Debt Daily
U.S. Surprises – EM-Friendly?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyMay 14, 2021
U.S. growth – slowing or rebalancing? The outcome matters for EM. EM central banks’ guidance is getting more hawkish as economies re-open and the pace of vaccinations picks up.
The U.S. macro releases continue to drive global risk sentiment, including Emerging Markets (EM). Today we had another big miss – surprisingly weak April’s retail sales. There could be a simple explanation that spending is shifting from things to services as the economy reopens - meaning the U.S. growth is rebalancing rather than decelerating. If confirmed, this would be a sign that EM’s global backdrop remains supportive – especially as the pace of vaccinations continues to accelerate and the U.S. Federal Reserve does not change its course. Judging by the market reaction this morning – a lot of green on our Bloomberg screens – this remains the base case for now.
Few central banks in EM can afford to be as relaxed as the U.S. Fed – the markets tend to punish EMs for policy mistakes. And this explains why we detect more and more hawkish undertones in latest communications. The central bank of Chile joined the club yesterday, tweaking its forward guidance and opening room for a rate hike already this year. Mexico’s central bank is now saying that inflation risks are skewed to the upside, giving more credence to the market expectation of at least one full rate hike in the next 6 months.
Global factors do have an impact on EM, but the chart below is a reminder why we should never forget/ignore local developments. It shows performance of country sub-indices of the J.P. Morgan’s local government bond index (GBI-EM)1relative to the pre-COVID average. And the unit is “standard deviations”. Yep. The chart’s “wingspan” is massive – and so is the difference in total returns. VanEck’s monthly comments are a good source to check on how we see our respective asset classes – the latest one for EM Debt can be found here. Have a great weekend!
Charts at a Glance: EM Local Debt – Countries’ Specifics Matter for Performance
Source: VanEck Research; 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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