Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 13, 2020
China’s foreign trade numbers confirm that the recovery momentum remains strong. Concerns about the virus’s second wave weigh on Central European currencies and macro outlooks.
China’s recent trade numbers confirm that the recovery momentum remains strong, with support coming both from domestic and external sides. The exports growth accelerated by 9.9% year-on-year, but it was a sharp rebound in imports (13.3% year-on-year—see chart below) that attracted the most attention. One factor that explains the surge is a low base. The renminbi appreciation also contributed to imports’ pickup—hence, yesterday’s measures to slow the pace of appreciation. Still, the strength was broadly-based, including commodity imports and even imports from the U.S. As regards exports, global demand for COVID-related goods remained strong—concerns about the second wave can actually be helpful going forward. However, exports of other goods can be hit if major trading partners are forced to re-impose strict lockdowns.
Concerns about the second wave of the crisis and its impact on growth are weighing on Central European currencies today. The Czech government’s decision to limit public gatherings led to 2020 growth downgrades—and to suggestions that the central bank might go for another policy rate cut. Well, one problem here is that the Czech benchmark rate is already very low in nominal terms (0.25%), and deeply negative in real terms (actually lower than in some advanced economies). The same applies to Poland and Hungary. So, the traditional monetary policy toolbox is pretty much exhausted, which poses additional challenges for the fiscal outlook and debt ratios.
A big upside surprise in Turkey’s industrial production (up by 10.4% year-on-year in August) reinvigorated discussions about the appropriate policy response against the backdrop of insufficient external adjustment (=wide current account deficits), the currency’s weakness and stronger geopolitical noise. The central bank continued its “backdoor” tightening (pushing the average cost of funding higher) after the surprising 200bps rate hike. However, policy credibility remains low, and this might require additional rate hikes.
Chart at a Glance: China Imports Unexpectedly Surged in September
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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