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  • Emerging Markets Debt Daily

    China Loosens Liquidity Tap

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    January 04, 2019

    China loosened its monetary policy stance a bit more, announcing a 100bps blanket cut in the required reserve requirements. In Brazil, the market was disappointed by President Jair Bolsonaro’s remarks about softer pension reform.

    China’s central bank (PBoC) opened the liquidity spigot a bit more overnight, announcing two blanket cuts in the required reserve ratio (RRR)1to take effect January 15 (50bps) and January 25 (another 50bps). The timing of the cuts suggests that the PBoC was in part motivated by the need to ease liquidity constraints before the Chinese New Year. However, a series of weak activity prints and surveys point to the need for more policy support, especially in the private sector, which is the main “casualty” of the shrinking shadow lending (check Premier Li Keqiang’s latest call for “inclusive” finance). Most commentators expect more blanket RRR cuts later this year. One obvious problem, however, is that China’s transmission mechanism appears to be working less effectively in the current easing cycle, raising a question mark about the RRR cuts’ ability to boost credit creation (and growth). The quality of the data flow will remain key for the timing and the scope of additional easing moves – note that the Caixin services survey surprised to the upside in December, rebounding to 53.9 (see chart below).

    In Brazil, President Bolsonaro’s remarks about a softer version of social security reform rattled the market, pushing the currency and local bonds weaker in the morning trade. Investors were disappointed by the president’s insistence that a higher retirement age (65 years for men and 62 for women) would be unsuitable to some workers. Portfolio Manager Eric Fine was in Brazil recently, and one of his main takeaways is that presidential support for pension reform is still lacking, despite the plethora of headlines from the economic team saying that reform will happen. Eric’s report will be published shortly.

    A big contrast between yesterday’s disappointing Institute for Supply Management survey and today’s super-strong labor market report in the U.S. provides an interesting macro backdrop for the Federal Reserve. The U.S. dollar rallied on higher than expected non-farm payrolls (312K) and the above-consensus hourly earnings (3.2% year-on-year), which suggest that the underlying inflation pressures are not quite dead yet. The market, however, remains super-dovish, pricing in 10bps of the Fed’s cuts in the next 12 months and 35bps of cuts in the next two years.


    Chart at a Glance

    Caixin China Manufacturing PMI

    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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