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  • Emerging Markets Debt Daily

    China Reserves Take a Breather

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 07, 2018

    China’s international reserves edged higher in November, and Chinese bonds’ index inclusion may provide further near-term support. India’s widening current account gap and Mexico’s upside inflation surprise present major policy challenges to monetary authorities.

    China’s stabilizing reserves and India’s widening current account deficit caught our attention in Asia this morning. China’s international reserves edged higher in November (to USD3.061T, see chart below), despite some pressure on the currency and signs of intervention. Looking forward, the inclusion of Chinese bonds into the Bloomberg Barclays Global Aggregate Index1 is expected to generate sizable inflows, pointing to near-term support to both the renminbi and the reserves. The ongoing deterioration of India’s current account balance (which reached USD19.1B in Q3 – the largest since 2013) should be firmly on the central bank’s radar. The dynamics hardly justify the signs of indecision at the last policy meeting.

    The Mexican peso continued to outperform the Brazilian real this morning, despite the diverging macro dynamics. Mexico’s inflation surprised to the upside (both core and consumer price index), pointing to more tightening by the central bank and reflecting badly on the country’s growth prospects. By contrast, Brazil inflation undershot consensus in November, staying well below the 4.5% target and supporting market expectation of no hikes until the second half of 2019. Portfolio Manager Eric Fine just returned from a trip to Brazil believing that: 1) the long-term trajectory for the economy is likely to be boosted by the incoming government’s strongly reformist economic team, but 2) the incoming president’s commitment to social security reform is not yet clear, representing a key near-term uncertainty. Expect a full report shortly!

    The U.S. dollar traded a bit weaker after the softer than expected U.S. labor market report. Risky assets used the opportunity to stage a mini-rally, as the release seems to echo the market expectation of the less hawkish Federal Reserve. The University of Michigan’s somewhat mixed preliminary consumer sentiment survey for November (stronger current conditions, but moderating expectations survey and lower inflation forecasts) reaffirmed this sentiment.


    Chart at a Glance

    Turkey Consumer Price Index

    Source: VanEck; 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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