Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
July 20, 2020
China kept its Loan Prime rates on hold, as domestic activity continues to rebound. A stronger than expected domestic activity in Central Europe signals that the rate cutting cycle is close to an end.
China’s decision to keep its 1-year and 5-year Loan Prime Rates on hold is in line with the improving activity data. A popular mid-month gauge – Emerging Industries Purchasing Managers Index (EPMI) – strengthened further in July (to 52.1), indicating that the rebound continued in Q3 (the gauge usually correlates well with the official PMI). Details, however, signal that the recovery is uneven – the EPMI exports sub-index remained well in contraction zone (= global headwinds). There are additional domestic risks associated with severe flooding in parts of China. Finally, the financing costs for China’s privately-owned companies remain high. All these factors call for the continuation of the drip stimulus, which targets specific areas of the economy.
A stronger than expected rebound in Poland’s industrial production (very close to V-shape – see chart below) sends a positive signal about the region’s near-term outlook. The fact that the European Union managed to reach a last-minute deal on the recovery fund means more support for the Central European growth through additional grants and loans. Policy-wise, a combination of the improving growth dynamics and upside inflation surprises suggests that the rate-cutting cycle is pretty much over.
Russia’s geopolitical situation might be complicated, but domestic economic policy is still good enough to get a nod of approval from major rating agencies. S&P just affirmed Russia’s sovereign rating at BBB- with stable outlook, pointing out that fiscal and external balances provide buffers against lower oil prices. S&P was also complimentary about the central bank’s ability to maintain a flexible exchange rate, which acts as a major-shock absorber and reduces pressure on the international reserves.
Chart at a Glance: Poland’s Industrial Production – As Close to V-Shape As It Can Get
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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