Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
April 29, 2020
Turkey continues to waste the international reserves to support the currency. The external backdrop for EM growth remains challenging.
We are taking a break from Brazil-related headlines this morning because authorities managed to successfully change the narrative and calm the market (at least for now). But there is another economy that is equally exciting – Turkey. The data flow is grim – the economic confidence index was at record low in April (down from 91.8 in March to 51.3 in April) – which is why authorities will continue to provide more stimulus, including monetary easing. This creates a lot of problems for the currency, because the real policy rate is already well below zero (equals no policy cushion). The response so far was to use the international reserves for interventions. Well, this kept the lira below the 7.00/USD threshold, but the gross reserves dropped by whopping 34% since early March (see chart below). Food for thought – the Mexican peso weakened much more than the Turkish lira in the past two months, but Mexico’s international reserves actually increased, while the latest foreign trade numbers suggest that the automatic correction mechanism is underway (equals more foreign exchange (FX) inflows and stronger fundamental support for the Mexican peso in the future). OK, this was long, but I hope worth it…
China’s activity gauges for April will be released later today, and this will be an important signal regarding the pace of recovery. In the meantime, we now have a new date for the National People’s Congress – it will convene on May 22nd– and we are eagerly anticipating additional information about the revised growth target and fiscal stimulus.
The latest activity numbers in developed markets (DM) signal that growth in emerging markets will continue to face significant external headwinds in the coming months. The U.S. Q1 real GDP growth was weaker than expected (-4.8% quarter-on-quarter annualized), with personal consumption taking a big hit. Growth nowcast1 models from the regional Federal Reserve banks suggest that the Q2 GDP print will be significantly worse - but this is expected. High-frequency indicators – such as NY Fed’s weekly economic index – show that the pace of contraction might be slowing. We look forward to hear more from the U.S. Federal Reserve this afternoon.
Chart at a Glance: Turkey – Wasting Reserves to Defend Currency
Source: Bloomberg LP
1Nowcasting is the prediction of the present, the very near future and the very recent past in economics.
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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