Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 19, 2020
China’s Q3 growth was softer than expected, but the momentum remains strong and the recovery is getting more balanced. South Africa managed to strike the right note at the IMF meetings last week.
China’s Q3 GDP missed expectations, but still expanded at healthy 4.9% year-on-year (up from 3.2% in Q2). Importantly, higher-frequency activity indicators – industrial production and retail sales – surprised to the upside in September, signaling that the recovery momentum remains strong. Retail sales improved sharply (3.3% year-on-year – see chart below), which this means that the recovery is not just progressing but getting more balanced. There were some disappointments, such as below-consensus investments and infrastructure investments. There are also some capacity restrictions which weigh on services. This argues in favor of on-going targeted policy support (“drip” stimulus). Finally, China’s growth resilience is a boon to global GDP – especially against the backdrop of “double dip” concerns in Europe and the United States.
Today’s price action (especially in rates and FX) shows that South Africa’s delegation managed to strike the right note at the Annual IMF meetings. South Africa had been de-rating for some time now, but the last week’s presentations drew attention to hidden potential which can boost the recovery prospects. We are talking about the historically low prime rate (which already started to feed through into the real economy) and the central bank’s stellar reputation (which means that inflation is largely resistant to large FX depreciations), which create more policy space. The next important milestone is the budget presentation next week – a positive surprise is definitely possible due to very low expectations.
The exchange rate dynamics in Argentina are very concerning. The gap between the official and the market exchange rates widened to 116% and the international reserves are still falling despite the draconian capital controls. Authorities, however, claim that the market rate is not represent Argentine reality. A major risk is that this approach will ultimately result in disorderly devaluation, an even deeper recession, and political upheavals.
Chart at a Glance: China Growth – Consumption Is Catching Up
Source: Bloomberg LP
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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