Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
June 15, 2020
China’s recovery continued in May, but the pace is uneven, which calls for more targeted support. The resignation of Brazil’s Treasury Secretary Mansueto Almeida soured market sentiment.
China’s activity indicators for May confirmed the recovery trend, which is good news as it shows that the stimulus is working. However, they also showed that (1) the pace of recovery is still modest, and (2) there is a clear dichotomy between manufacturing and consumption. As regards point #1, the rebound was softer than expected across the board (retail sales, investments, manufacturing), which raises some concerns related to a possible virus relapse (check overnight reports about selective lockdowns). Surging infrastructure investments is a welcome tailwind though, and it can get an extra boost from the latest credit support measures. As regards point #2, the demand-side recovery continues to lag (see chart below), due to remaining social distancing restrictions and subdued sentiment. To sum up, we see no need for major policy shifts at the moment, but the on-going targeted support—especially for consumers and small privately-owned enterprises—is a must.
The timing of the latest political twist in Brazil is unfortunate, given that the country is in the midst of the anti-COVID battle. The “twist” is the announced departure of much-respected Treasury Secretary Mansueto Almeida. We do not know yet who will replace him—Almeida tried to reassure the market by saying that the economic team (especially Economy Minister Paulo Guedes) remains committed to fiscal reform agenda. Almeida was a key in reflecting/showing the market fiscal credibility, and he will be missed.
We’ve got a sovereign ratingupgrade. Seriously. It’s hard to believe that these things still happen in this day and age, but here we are. Moody’s raised Ukraine’s rating by one notch to B3 with stable outlook. The upgrade was unscheduled, and it reflected a positive impact of the new IMF deal on the country’s external balance. We personally think that Moody’s action was a bit timid—Moody’s rating is still one notch below S&P and Fitch—so “room for improvement” is clearly there!
Chart at a Glance:China’s Recovery – Different Pace in Different Sectors
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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