Skip directly to Accessibility Notice
  • Emerging Markets Debt Daily

    China - Tiny Cut, Big Signal

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 05, 2019

    China’s central bank made a small cut in its benchmark rate, but signaled that large liquidity injections are not likely. South Africa’s consumer confidence took another big hit.

    China’s central bank (PBoC) surprised the market with a tiny 5bps cut in its key lending rate (1-year medium-term lending rate, or MLF) – presumably in order to lower the financing costs, especially for privately-owned and smaller companies. The move clearly signals that growth concerns trump risks associated with higher pork prices and their impact on headline inflation. So, monetary policy will remain accommodative for the foreseeable future. However, the PBoC’s decision to roll over the maturing MLF without a new liquidity injection also suggests that policy moderation will be key, with liquidity floodgates under strict control.

    South Africa’s consumer confidence took another big hit in Q3. The confidence index released by the Bureau for Economic Research unexpectedly dropped to the lowest level since 2017 (see chart below), wiping out all gains of the post-Jacob Zuma era. The reason we pay so much attention to this indicator is because consumption accounts for about 60% of South Africa’s gross domestic product (GDP). The consensus already expects the economy to expand by mere 0.6% in 2019 – the hesitating consumer can easily push it into recession (and the ensuing implications for fiscal performance and debt ratios).

    The highlight of the day in Brazil should be the government’s post-pension reform package. In the meantime, we keep ourselves occupied going through the central bank’s policy minutes, which confirmed newly-found cautious bias. The addition of a paragraph which talks about uncertainty regarding monetary transmission channels had “hawkish” undertones. So, the market is probably right to assume that the central bank will take a pause after delivering a 50bps rate cut in December.

    Chart at a Glance: South Africa’s Collapsing Confidence

    Source: 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.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change.

    Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.