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  • Emerging Markets Debt Daily

    China Keeps Stimulus Dripping

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    July 30, 2019

    China’s mid-year Politburo meeting reiterated that “drip” stimulus remains the preferred policy option. Mexico’s President joined other heads of state calling for lower policy rates.

    China’s Politburo members admitted at their mid-year meeting that there is more downward pressure on growthbut it looks like the “drip” stimulus remains their preferred policy option and that a real estate policy “bazooka” is not in the cards. The reference to “abundant” liquidity suggests that monetary policy will stay accommodative, albeit it remains to be seen whether this will involve a policy rate cut down the road. The reference to “structural deleveraging” was dropped, so it will be interesting to see whether this will affect the shadow financing numbers going forward. China’s official Purchasing Managers Indices (PMI) for July are out tonight—the policy narrative might get tweaked if there are big surprises (in either direction).

    Mexico’s president Andrés Manuel López Obrador joined the “Erdogan Club” yesterday, calling for a lower policy rate. The president opined that the central bank should take both inflation and growth into consideration, echoing earlier reports about a possible shift to a dual policy mandate. Deputy Portfolio Manager David Austerweil just returned from Mexico, and he believes that the odds of a rate cut—perhaps as soon as the next meeting—are rising, especially if upcoming data confirms that Mexico has already entered a recession. There are major concerns that fiscal responsibility will be lost in the 2020 budget—the government will be constrained by lower tax revenues and greater spending needs for the Pemex business plan and the announced fiscal stimulus package. One of David’s main takeaways is that the risk of sacrificing the credibility of the budgeting process is higher now, especially in the case of unrealistic growth projections in order to boost expected tax revenues.

    The “U.S. divergence” narrative got an extra boost this morning in the form of the above-consensus consumer confidence print in the U.S. The Conference Board Consumer Confidence Index bounced to 135.7 in July, getting closer to the Trump era’s highs. For many observers, this is an additional reason to place a “precautionary” stick-it note on tomorrow’s U.S. Federal Reserve (Fed) rate cut.

    Chart at a Glance: U.S. Consumer Confidence – “Never Give Up, Never Surrender!

    U.S. Consumer Confidence – “Never Give Up, Never Surrender!”

    Source: Bloomberg LP

    Conference Board Consumer Confidence Index: measures the degree of optimism on the U.S. economy that consumers are expressing through their saving and spending activity.

    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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