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  • Emerging Markets Debt Daily

    China Activity: Fright or Flight (to Quality)?

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    October 31, 2019

    An unexpected drop in China’s activity gauges raised concerns about the growth outlook amidst policy constraints. Moody’s is now expected to downgrade South Africa to junk tomorrow.

    China’s official activity gauges suffered a setback in October. The weakness was broad-based, but it appears that exports and real estate were affected the most. The former reflected trade tensions and weak global demand (synchronized slowdown). The latter suggests that authorities continue to pay attention to potential asset bubbles, despite growth headwinds. A case for additional stimulus looks stronger after today’s release. However, higher inflation pressures and less anchored inflation expectations argue for the continuation of a measured approach, especially as regards monetary policy. One final thought: A combination of monetary policy restraint with tight real estate and environmental regulations, the on-going shadow deleveraging, a push for lower financing costs for private companies and a rising share of longer-term corporate loans suggest that authorities tackle the quality of growth and not just growth rates.

    South Africa’s rand and bonds continued to melt down this morning as the market thinks that Moody’s will finally downgrade the sovereign to junk tomorrow. Minister of Finance Tito Mboweni admitted that “it is not looking good,” so volatility is likely to remain high over the next 24 hours. If indeed Moody’s downgrades South Africa’s tomorrow, this will be a big signal to Mexico, which is still rated single-A by Moody’s (for some mysterious reason).

    “A Hawkish Cut.” Nope, we are not talking about the Fed. This was the predominant reaction to yesterday’s 50bps rate cut in Brazil. The “hawkish” bit came from the statement, which (unexpectedly) emphasized “caution” when “considering possible new changes in the degree of stimulus.” Still, the statement left ample room for another 50bps cut in December—which is fully in line with market expectations.

    Chart at a Glance: A Setback for China’s Activity Gauges

    China Selected PMIs

    SourceSource: 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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