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  • Emerging Markets Debt Daily

    China-U.S. Truce Overshadows EM Fundamentals

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 03, 2018

    The China-U.S. trade war truce obscured several less “palatable” emerging markets fundamentals this morning, including mixed activity gauges, transitory disinflation in Turkey, and problematic policy initiatives in Mexico.

    The 90-day trade war truce between China and the U.S. gave a big boost to risky assets this morning, obscuring another soft activity survey in China (the Caixin manufacturing Purchasing Managers’ Index (PMI) stayed close to the contraction range in November) and mixed activity gauges in the rest of emerging markets. There were some positive surprises (such as stronger PMIs in India, Russia, Brazil, and South Africa – albeit many from low levels). However, Turkey stayed deep in contraction territory and Poland unexpectedly dipped below 50. Importantly, November’s Institute for Supply Management manufacturing survey in the U.S. was much stronger than expected (59.3), reinforcing the narrative about the narrowing growth differential between emerging and developed markets.

    A lack of negative surprises in President Andres Manuel Lopez Obrador’s inauguration speech and reports about the government’s USD1.8B buyback proposal for the new Mexico City airport bonds (out of USD6B issued) supported the Mexican peso’s initial rally this morning. However, the president’s remarks about the need to make changes in the 2019 budget to reflect government projects and the realization that the remaining airport bonds may not be paid at par delivered a dose of reality later in the day. In our view, the latest data- and news-flow in Mexico is negative for sovereign credit, albeit the full extent of the fiscal impact may not become obvious until much later next year.

    Turkish rates rallied but the lira failed to respond positively to a sizable downside inflation surprise this morning (most likely due to a sharp increase in the price of oil). Headline inflation fell to 21.62% and core inflation to 20.72% year-on-year in November (see chart below), reflecting the impact of lower consumption taxes (gasoline, autos, home furnishings). However, tax cuts are likely to end in January, and we are yet to see a significant impact from weaker domestic demand on inflation (such as services prices). So, there is barely any room for the central bank (CBRT) to relax its policy stance for now, especially as the government is increasingly relying on the budget to prop up gross domestic product growth. The risk is that the CBRT may come under greater political pressure to do so if growth continues to disappoint and the lira remains relatively stable.


    Chart at a Glance

    Turkey Consumer Price Index

    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.

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