Natalia Gurushina, Economist, Emerging Markets Fixed Income
February 10, 2020
January’s inflation spike in China gave rise to “stagflation” concerns. Turkey re-introduced soft capital controls to stabilize the currency.
"Stagflation" concerns are making the rounds this morning in China-related comments. Analysts are busy downgrading their 2020 growth forecasts, but headline inflation surprised to the upside big time in January, accelerating to 5.4% year-on-year. The increase was driven by what can be described as transitory factors—a low base effect, the timing of the Lunar New Year, supply disruptions due to the coronavirus quarantine and the swine fever (pork prices surged by 166% year-on-year). Even though the headline inflation numbers look unsettling, the central bank is focusing solely on minimizing shocks to growth, providing generous policy support and liquidity (RMB900B via special lending funds this morning). We would also add that non-food and core inflation remain very low (1.6% and 1.5% year-on-year, respectively).
Turkey’s soft capital controls are back. The central bank decided to lower swap rate limits for local banks to non-residents, sending the overnight forward implied yield to 76.6% and causing a big selloff in local and sovereign bonds. The move comes after state-owned banks (yet again) wasted an estimated USD4B on futile currency interventions and authorities realized that controls are the only way to "stabilize" the currency, which is no longer protected by positive real rates. I do not know what else to say—it feels like Groundhog Day. I guess it’s good that the overnight rate did not go to 700%+ as in March 2019, but this is a small consolation.
Are Mexico’s gross fixed investments finally stabilizing? The yearly growth rate was still negative (-3.5%, see chart below), but the contraction was smaller than expected and the sequential change was positive (including investments in machinery and equipment). Looking forward, I am not fully convinced that the improvement is sustainable (there were false-starts before). I think the economy can/will get marginal support from the central bank, but a tight fiscal stance and policy uncertainty will continue to weigh both on investments and overall GDP growth.
Chart at a Glance: Mexico Investments – Finally Bottoming Out?
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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