Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
August 17, 2020
China conducted the first net positive medium-term liquidity injection since March. Central Europe’s core inflation continues to grind higher.
China continues to carefully craft its monetary policy response to the crisis. The central bank (PBoC) just rolled its 1-year Medium-term Lending Facility, injecting more than the August maturity (CNY700B vs. CNY550B). The PBoC’s net positive liquidity injection (the first one since March) comes on the heels of softer than expected activity indicators for July (both retail sales and industrial production). Mixed global/regional data releases also suggest that China’s policy accommodation is justified. The benchmark Shanghai Composite Index reacted positively to the news, rising by 234bps in today’s market.
Poland’s above-consensus core inflation reinforced the region’s reputation as the reflation hot-spot (see chart below). Yearly core inflation accelerated to 4.3% in July, which is nearly 2.2 standard deviations higher than the 3-year average. Elsewhere in EM, it is worth noting that even though the level of inflation in many Asian economies is still very low, they are getting out of the current deflation episode at a brisk pace. It remains to be seen whether the situation changes going forward – inflation pressures seem to be concentrated on the supply side, plus there are multiple COVID-related measurement issues. The emergence of inflation hot-spots might be inconsistent with low local yields in some EMs.
In Brazil, President Jair Bolsonaro’s mixed signals on the fiscal front keep the market on its toes. The president’s suggestion that the government might try amending the Spending Cap is particularly worrisome, given how much time and effort had been spent to put it in place and that this is the key element of the country’s longer-term fiscal consolidation strategy. The president’s comments came just days after his joint declaration with leaders of the senate and the congress supporting the spending cap rule – which added to the confusion. The fiscal concerns overshadow Brazil’s stronger than expected activity indicators and the nascent upside revisions of the 2020 growth forecast.
Chart at a Glance: Core Inflation – No Respite for Eastern and Central Europe
Source: VanEck Research; 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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