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  • Emerging Markets Debt Daily

    U.S.-China: Détente?

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    November 07, 2019

    The market is celebrating the rollback of U.S.-China tariffs, but this does not change the structural nature of the conflict. Mexico’s core inflation eased further in October, paving the way for another rate cut.

    There is a lot of optimism this morning regarding the U.S. and China’s agreement (in principle) to roll back tariffs. The question is how long this is going to last given the structural nature of the U.S.-China conflict. Another reassuring part of this morning’s China narrative is that the international reserves stayed above the USD3T watermark in October—the recent policy shift towards a more flexible yuan definitely helped. However, I wish we had more information about the size of The People's Bank of China's (PBoC) forward book (for a more accurate assessment about the reserves’ drivers and dynamics).

    Mexico’s headline inflation came up a tiny bit higher than expected in October (3.03% year-on-year). However, core inflation continued to moderate (albeit very gradually). As long as price pressures continue to abate, the central bank should feel safe to provide more policy accommodation. The market expectations currently look very realistic (and maybe even conservative), with only 33bps priced in for the next month.

    This morning brought an upside growth surprise in emerging Asia. The Philippine Q3 gross domestic product (GDP) growth accelerated to 6.2% year-on-year (from 5.5%), reflecting—first and foremost—a big boost in public spending. The release argues in favor of a pause in the rate-cutting cycle, especially as headline inflation most likely had bottomed out in October.

    À propos: Here is an interesting story that serves as a useful historic backdrop for today’s “U.S.-China détente” headlines. Do you know the Chinese expression “Paper Tiger”? It means somebody who looks scary and powerful on the outside, but significantly less so in reality. This idiom became quite popular after Chairman Mao Zedong used it in his 1946 interview to describe “reactionaries” in general and American imperialism in particular. 


    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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