Natalia Gurushina, Economist, Emerging Markets Fixed Income
January 02, 2020
China’s activity gauges stayed in expansion zone, but authorities offered more policy support in the form of the reserve ratio cut to improve the growth momentum. Argentina issued a government bond to tap the central bank reserves for foreign debt payments.
China’s latest activity gauges remained in expansion zone in December—benefitting from the past stimulus and Phase One deal’s boost to sentiment. However, policy support is still needed—especially for smaller privately-owned firms. The Caixin manufacturing PMI (Purchasing Managers Index)—which has a larger share of private companies—showed no improvement in December (see chart below), while the official gauge for small companies moved deeper into contraction zone. High funding costs for smaller firms are often cited as a key reason that stifles growth. The latest policy initiatives—a new Securities Law, a blanket 50bps reserve requirements cut effective January 6th, the central bank’s decision to re-benchmark outstanding loan rates to LPR (Loan Prime Rate)—should help at the margin. However, the longer-lasting solution can only come via structural reform and greater transparency, which would make it easier for investors to assess corporate credit risks.
Argentina’s sovereign bonds welcomed the government’s decision to issue a 10-year USD1.326B note to the central bank, which allows the government to tap international reserves for debt payments. The measure was a part of the Solidarity bill, but it was officially announced today. The government is allowed to borrow up to USD4.6B from the central bank to pay off foreign debt and avoid technical default while it conducts negotiations with debt holders.
Indonesia’s inflation dynamics leaves the door open for additional rate cuts. Both core and headline inflation surprised to the downside in December, easing to 3.02% and 2.72% year-on-year respectively. As regards timing, financial stability and growth considerations remain key. The central bank wants to maintain a decent interest rate spread with the U.S. to make sure that local markets stay attractive. Growth-wise, the past easing started to show up in high-frequency indicators (industrial production, activity gauges). So, it makes a lot of sense for the central bank to wait before making the next move.
Chart at a Glance: China “Green Shoots” – Still There but Requiring More Support
Source: Bloomberg LP
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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