Natalia Gurushina, Economist, Emerging Markets Fixed Income
March 04, 2020
Brazil’s Q4 GDP surprised to the upside, but structural issues remain. Poland’s central bank decided to keep rates on hold, despite rate cuts in developed markets and the threat of the coronavirus.
I saw “Bohemian Rhapsody” on an airplane a few days ago and Freddie Mercury’s line “…but life still goes on” from one of my favorite songs, “I Want to Break Free”, reminded me that there is other stuff happening in China besides the coronavirus. There is a trade war pause with its peace dividends. There is also China’s inclusion into the J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM)—the decision was made in September, but the actual inclusion happened last Friday. We just published some cool China comments by Jan van Eck and Portfolio Manager David Semple, in which they talk about things other than February’s hard-hit activity gauges. So, please make sure that you visit our website and check them out. And, somebody, please make sure that David sees “Bohemian Rhapsody”!
On the surface, Brazil’s Q4 GDP growth supports an argument about very gradual recovery. After all, real growth accelerated more than expected to 1.7% year-on-year. However, a closer inspection reveals structural problems. In particular, Q4 growth was driven mostly by consumption and higher government spending. Meanwhile, fixed assets investments continued to weaken. So, as much as we liked a small upside surprise, today’s release underscores the need for further pro-growth reforms, including changes in tax legislation.
Poland’s central bank was unmoved by the coronavirus’s threat and the market’s sentiment swings and decided to keep its policy rate on hold at 1.5%. The reason was very simple—yearly inflation surged to 4.4% year-on-year in January, leading to several calls for a rate hike in the past couple of weeks. We think that a threshold for a hike is quite high, but we caution that falling support for current President Andrzej Duda (who is backed by the ruling party) might result in fiscal slippages, potentially creating additional inflation pressures down the road.
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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