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  • Emerging Markets Debt Daily

    Eyes on China

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    December 18, 2018

    China’s authorities are in offensive mode this morning, while the Brazilian central bank opts for a cautious policy stance despite a string of downside inflation surprises.

    President Xi Jinping’s reform anniversary speech made waves this morning. The president noted that “no one is in the position to dictate to the Chinese people what should and should not be done”, signaling that the trade war truce might turn out a bit more volatile than originally expected. All eyes are now on the outcome of this week’s Central Economic Working Conference. Yesterday’s article in China Securities Journal gave us some indication about what to expect: a neutral monetary policy stance, providing funds to small and medium companies, strengthening domestic consumption, and more fiscal stimulus, including infrastructure spending.  

    Potential upside inflation risks continue to influence the Brazilian central bank’s response function, according to the latest policy minutes. This is despite the fact that actual inflation undershot expectations lately. The main reasons for the cautious stance are (a) the uncertain global environment and (b) risks associated with the implementation of reforms under the new administration. Looking forward, the central bank’s motto appears to be “Flexibility, Caution, Serenity, and Perseverance”, which the market interprets as no changes in the policy rate for most of 2019.

    Dovish expectations for tomorrow’s Federal Open Market Committee (FOMC) meeting weighed on the U.S. Dollar in the morning trade. The market currently sees only 8bps of tightening beyond December, with a lot of emphasis on the slope of the United States Treasury (UST) curve and seemingly less importance attached to the macro flow/consumer cycle. Meanwhile, indicators such as new housing starts (out this morning) signal that recession might not be imminent (see chart below).


    Chart at a Glance

    New Housing Starts Signal That Recession Might Not Be Imminent

    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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