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  • Emerging Markets Debt Daily

    Signs of Life in China’s Activity Surveys

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    February 27, 2019

    Global activity data is mixed, with China’s official activity surveys showing signs of life despite several downside surprises. Turkey’s external adjustment is still ongoing, but January’s fiscal push is a big risk going forward.

    Today’s big global activity data dump sent mixed signals about the growth outlook
    . In emerging markets, India’s Q4 gross domestic product (GDP) undershot consensus at 6.6% year-on-year, giving the central bank an extra reason to stay dovish. Argentina’s economic activity proxy disappointed big time, contracting by 7% year-on-year in December. The weakness was broad based, pointing to more pre-election headaches for the Macri government. The Q4 real GDP growth in Brazil also undershot expectations at 1.1% year-on-year, with the scariest part being a sharp sequential decline in investments. Granted, most of these numbers are backward-looking, but they do raise some concerns about emerging markets' relative strength vs. their developed counterparts, especially after U.S. GDP growth delivered a sizable upside surprise in Q4. A good thing is that the newly-found dovishness of the U.S. Federal Reserve (Chairman Jerome Powell’s “pivot”) should give emerging markets central banks more policy space going forward.

    Continuing the emerging markets growth theme, China’s closely-watched official Purchasing Managers Indices (PMIs) surprised to the downside, but the story there looks more nuanced. The ongoing collapse in the small companies’ PMI is concerning (see chart below)—as regards both the quality of growth and structural imbalances (the return of shadow financing and re-leveraging). At the same time, the services PMI continued to look healthy at 54.3, the new orders PMI rebounded for the first time since May 2018, moving into expansion territory, the large companies’ PMI continued to grind higher, and the production and business expectations PMI made a big jump to 56.2. We need more time to tell whether the proverbial glass is half-full, but it definitely no longer looks empty.

    We continue to keep a close eye on Turkey’s external adjustment—and we are happy to report that there was no further deterioration in January’s trade deficit. The gap narrowed a bit (to USD2.5B, as expected), signaling that the adjustment mechanism is still working as intended. Our main concern at this stage is the government’s over-reliance on fiscal stimulus in the run up to the local elections (this is what January’s numbers seem to suggest), which might slow or even reverse external correction in the coming months.


    Chart at a Glance

    China's Selected PMIs

    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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