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  • Emerging Markets Debt Daily

    EM External Backdrop – Still Uncertain

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 17, 2020

    There are signs of improvements in EM’s global backdrop, but headwinds are real and should not be ignored. Brazil promises to send the first batch of tax reforms to the congress next week.

    Some aspects of the global macroeconomic backdrop for emerging markets (EM) look more reassuring these days. In the U.S., the New York Federal Reserve’s weekly economic indicator is grinding higher (see chart below). Many signals coming from regional trade hubs/”bellwethers” are also encouraging—Singapore’s non-oil domestic exports jumped by 16.1% year-on-year in June (well above consensus). But there are plenty of warning signs as well. This morning’s sizable downside surprise in the University of Michigan’s survey for July (including expectations) is one of them, and it shows that concerns about the virus’s second wave and re-closures are well-justified.  

    Brazil’s political noise is ever-present, but it looks like the government is getting its act together on the policy front. Minister of Economy Paulo Guedes confirmed that he will deliver the first batch of tax reform proposals to the congress on Tuesday. We are very eager to see what’s in the package, as Brazil is set to post one of the widest fiscal deficits in EM in 2020 (>14% of GDP). Guedes’s comment that he will stay in his post until the end of the mandate was icing on the cake.

    The EU summit is center-stage today and tomorrow, and we keep our eyes on the discussion about the EU Recovery Fund. First, this can strengthen (or weaken) global growth tailwinds for EM. Second, it can pave the way for sizable inflows to Central European economies. There are several fights happening at the same time. Germany and France are at odds with so-called “Frugal Four” (Austria, Netherlands, Denmark and Sweden). Poland and Hungary had been quite vocal in their opposition to linking the EU finances with the “arbitrary” rule of law. Stay tuned!

    Chart at a Glance: New York Federal Reserve’s Weekly Activity Indicator Is Improving

    Chart at a Glance: New York Federal Reserve’s Weekly Activity Indicator Is Improving

    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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