Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
October 21, 2020
South Korea’s flash foreign trade numbers point to the on-going global rebound, but the second-wave concerns pose a major risk. Brazil’s bill on the central bank’s formal independence can be approved this week.
South Korea’s flash foreign trade estimates raised a number of questions about the global growth backdrop for Emerging Markets (EM). 20-day headline exports looked surprisingly weak, contracting by 5.8% year-on-year – compared to 3.6% year-on-year growth one month earlier. Details, however, appear to be less “traumatic” as there were fewer working days in October. After this adjustment, average daily exports show a broad-based 5.9% yearly growth, which signals that the rebound is still on-going. Looking forward, the virus’s second wave remains a major concern. One factor that can separate winners from losers within EM is the available policy space.
The central bank independence billcontinues to make progress in the Brazilian parliament, and – if all goes well – it might be voted in the Senate tomorrow. The central bank’s de-facto policy credibility is not an issue here and its current reputation is absolutely solid. But it is reassuring to have a document that guarantees monetary authorities’ formal autonomy and sets up clear rules for appointments, dismissals, etc. The price stability will remain the central bank’s primary policy objective, with subordinated targets of financial stability and full employment. The approval of the bill should strengthen Brazil’s institutional framework – and should be rating- positive.
The inflation landscape in EM remains unsettled, and September saw some very sharp moves in both directions (see chart below). The morning reports show that Malaysia’s yearly headline inflation surprised to the downside yet again in September (-1.4%) – in line with the rest of the region except India (which remains the sole regional hotspot). Emerging Europe is at the opposite end of the inflation spectrum, and this already led to hawkish policy reversals in Hungary and Turkey. The “first wave” COVID-related distortions are still very much in play (especially on the supply side) – the impact of the second wave can make the EM inflation picture even more complicated.
Chart at a Glance: EM Inflation – All Over The Place
Source: VanEck Research; 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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