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  • Emerging Markets Debt Daily

    No Policy “Bazooka” in China

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    March 05, 2019

    China’s 2019 action plan calls for more policy accommodation (but no major stimulus) in order to stabilize economic growth. Mexico’s surging consumer confidence provides a much-needed boost to growth, but sends the wrong policy signal to the president.

    The Chinese government’s 2019 action plan presented by Premier Li to the National People’s Congress confirmed that the economy needs to grow above 6% in order to meet the job creation target. This, in turn, requires more policy support—hence a less hawkish overall tone. On the fiscal side, tax cuts were deeper than expected (about 2% of gross domestic product (GDP)), with manufacturing expected to be the main beneficiary. One thing that is worth noting is manufacturing’s higher multiplier coefficient when it comes to boosting GDP growth. It was also obvious that authorities continue to see investments (especially “new infrastructure” investments, such as 5G1 and artificial intelligence (AI)) as a main tool to offset downside growth risks while moving higher in the value-added chain. On the monetary side, enhancing the transmission mechanism, lowering funding costs, and increasing credit supply to the private sector were named as main priorities, which would require additional targeted easing, but no policy “bazookas” that would create new long-term risks.

    Unlike rating agencies, Mexican consumers really like President Lopez Obrador (AMLO) and his policy agenda. The consumer confidence index continued to surge in February, reaching the highest level since late-2001 (see chart below) and beating consensus by a wide margin. The improvement was broad-based, with all three surveys (current conditions, future conditions, and purchasing power) looking very strong. Resilient consumer confidence and solid remittances' growth should support private consumption and GDP growth in a situation when other activity indicators look very soft. Of course, heterodox policies have consequences (eventually), but it looks like the “honeymoon” continues for now, signaling to AMLO that he is doing the right thing.

    The disinflation trend in the Philippines is getting more pronounced, with headline inflation moderating more than expected in February (3.8% year-on-year) and falling back to the target range (3%±1%). This sends a strong signal to the newly appointed governor of the central bank, Benjamin Diokno (who is considered a dove), that the pro-growth policy bias is OK. It is hardly surprising that the market is now expecting one full rate cut in the next twelve months.

    Chart at a Glance

    Mexico Consumer Confidence Index

    Source: Bloomberg LP

    15G, short for "5th Generation", is the latest generation of cellular mobile communications.


    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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