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  • Emerging Markets Debt Daily

    EM – Global Growth Backdrop Mixed

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    July 29, 2020

    The global backdrop for emerging markets remains mixed in the run up to the U.S. Federal Reserve’s meeting. Turkey raises its inflation forecasts, but the market is skeptical about a credible policy response.

    We are just days away from the next batch of global activity gauges, but the latest data releases suggest that the global growth backdrop remains complicated, with both tailwinds and headwinds abound. The former include a decent pickup in South Korea’s July consumer confidence, as well as stronger than expected global remittances. The latter include a disappointing Q2 GDP print in Hong Kong (-9% year-on-year), several hiccups in the New York Federal Reserve’s weekly economic indicator for the U.S. as well as the virus’s second wave. All eyes are now on the U.S. Federal Reserve’s meeting this afternoon and the impact it might have on yield curves and the U.S. dollar.

    Turkey’s central bank finally acknowledged the existence of inflation pressures and raised its year-end forecasts for 2020 and 2021. The increase was meaningful (from 7.4% to 8.9% in 2020), and this signals that the hawkish policy tilt is here to stay (especially against the backdrop of the weaker currency and higher oil prices)—the market actually thinks that the central bank will be forced to hike the key policy rate (a lot) in the next 12 months. Hawkish bias is not sufficient to support the currency though, and this fact really bothers authorities—to the extent that they think it is acceptable to waste 40% of the international reserves on spot interventions (so far this year). One side effect of interventions is that they cap external adjustment (June’s trade deficit narrowed but the deteriorating trend is still in place), creating a negative feedback loop for the currency. Turkish equities, the lira and Turkish rates are feeling a lot of pain this morning. 

    South Africa’s inflation stayed close to multi-year lows in June (see chart below), but the market is not in a hurry to “translate” this into more expected rate cuts. One reason is that headline inflation will be trending higher from July onwards due to fuel prices and the economy’s re-opening. This fact will not remain unnoticed by Lesetja Kganyago, Governor of the South African Reserve Bank, and his (very credible) team.

    Chart at a Glance: South Africa Inflation – Benign Now but Reversal Is In Sight

    Chart at a Glance: South Africa Inflation – Benign Now but Reversal Is In Sight

    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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