Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    China – Feeling at Ease to Ease More

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 12, 2020
     

    China’s disinflation intensified in April, opening room for more policy easing. Mexico’s industrial production weakened further, highlighting structural issues and justifying more rate cuts. 

    China’s inflation moderated further in April, freeing more policy space for monetary easing. Disinflation was broad-based – affecting both food and non-food prices (see chart below). Producer prices moved deeper into negative territory (-3.1% year-on-year), reflecting lower global commodity prices/soft domestic demand and raising concerns about industrial profitability. With headline inflation getting closer to the 3% target, the central bank should feel more at ease (no pun intended) to introduce additional monetary stimulus in the coming weeks. 

    Mexico’s industrial production (IP) dropped by 4.91% year-on-year in March. The number looked bad, and it’s tempting to blame it on the coronavirus. But this is only one part of the story. The problem is that Mexico’s industrial sector entered the COVID crisis in a weakened condition, contracting non-stop for the past twelve months (17 months if we include a zero growth rate in February 2019). Mexico’s issues are structural, but there is understandably little appetite (or policy space) to deal with them right now. Monetary easing is one of the policy avenues that is still open, and the market is justified in its expectations of a 50bps rate cut later this week.

    Brazil’s monetary policy minutesconfirmed that the central bank stands ready for more policy support. There was a reference to policy gradualism – in a context of potential financial instability, fiscal uncertainty, and a higher risk premium in emerging markets (EM). Nevertheless, the board concluded that recessionary and deflationary forces prevail and unlikely to disappear any time soon. In fact, board members think that inflation expectations may be too low and no longer in line with the inflation target. Hence, the central bank is likely to deliver another sizable rate cut at its next meeting.

    Chart at a Glance: China - Broad-Based Disinflation

    Chart at a Glance: China – Broad-Based Disinflation

    Source: Bloomberg LP

    1Monetary Policy Minutes– The minutes of the Monetary Policy Committee’s meetings present the Committee’s analysis of recent economic developments, the prospects for the Brazilian and global economies, and related balance of risks.

  • 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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.