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  • Emerging Markets Debt Daily

    China: More Stimulus at a Controlled Pace

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 21, 2018

    China’s authorities intend to continue the controlled stimulus policy to support growth. The latest inflation prints in Mexico fully justify the central bank’s policy rate hike.

    Our main takeaway from China’s annual economic conference is that authorities will continue their policy of controlled stimulus, with more emphasis on fiscal measures (significant cuts in taxes and fees), additional monetary easing (reference to “neutral” was dropped), targeted deleveraging, and easing some real estate controls. There is still uncertainty whether the stated measures will help to revive lending to private companies, which suffered the most from the reduction in shadow financing. Judging by the market’s reaction this morning, investors were not fully convinced that measures would be effective in boosting China’s growth (even though this might not be the actual intention of policy-makers).

    The mid-monthly inflation prints in Mexico fully justify the central bank’s decision to raise its policy rate by 25bps to 8.25% yesterday. Headline inflation jumped unexpectedly to 5% year-on-year and core inflation also exceeded consensus, feeding into the market expectation of additional 44bps of tightening in the next three months. Meanwhile, Mexico’s regional peer, Brazil, continues to enjoy a very benign inflation backdrop. Mid-month inflation eased a bit more than expected (3.86% year-on-year), while another larger than expected basic balance surplus (current account + foreign direct investments) points to strong fundamental support for the currency, which should limit second round inflation risks in the coming months.

    The U.S. Dollar seemed to be unfazed by this morning’s dovish macro flow in the U.S., with Q3 gross domestic product (GDP) growth revising a bit lower (3.4% quarter-on-quarter), durable/capital goods orders missing expectations by a wide margin and personal income turning lower than expected in November. One possible explanation is that a lot of negativity regarding the growth is already in the price, with the implied probability of the full rate hike below 50% for all 2019 Federal Open Market Committee (FOMC) meetings.



    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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