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  • Emerging Markets Debt Daily

    China Activity – Stronger External Headwinds

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    April 30, 2020

    China’s activity gauges show that weak global growth poses near-term risks for recovery. Turkey’s trade deficit continues to widen as the central bank’s interventions keep the currency artificially strong.

    China’s official activity gauges for April confirmed that external headwinds pose a major near-term risk for domestic recovery. After a sharp rebound in March, the new export orders PMI dropped back to the 30 handle, contributing to the overall weakness of the official manufacturing PMI (50.8, and below consensus). The Caixin manufacturing PMI fared even worse, slipping back to contraction territory (49.4). To be fair, the latest release had some bright spots – like the on-going recovery of the services PMI (to 53.2) and some improvement in the small companies PMI. Still, the road to recovery is not an easy one, and the weak global growth backdrop justifies additional policy support (especially for privately-owned firms). 

    Turkey’s widening trade deficit is a sign that the currency’s artificial strength prevents it from acting as a shock absorber. Even though domestic activity softened and oil imports dropped by 27.5% year-on-year, total imports were up by 3.1% year-on-year. The widening external gap (see chart below) puts additional pressure on the international reserves, which dropped sharply in the past two months. There are multiple (real-life) examples of how external correction is supposed to work when the central bank (largely) stays away from the currency market. We saw it in Mexico earlier this week. Today’s larger than expected trade surplus in South Africa is another good case. 

    Mexico’s 1Q GDP print shows that the economy was already weak when it entered the coronavirus crisis. The quarterly output contracted by 1.6%, and the consensus expects more weakness in Q2. The central bank stepped up its policy support lately, which is a welcome development. The fiscal stimulus story is a bit more complicated. The bill that gives the president more control over emergency spending is making progress, but the opposition argues that the draft lacks in the “checks-n-balances” department.

    Chart at a Glance: Turkey Trade Balance – Deterioration Despite Weaker Growth

    Chart at a Glance: Turkey Trade Balance – Deterioration Despite Weaker Growth

    Source: Bloomberg LP


    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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