Emerging Markets Debt Daily
Can Policy Response Limit Contagion?Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategySeptember 20, 2021
With no end to China/Evergrande contagion fears, the focus shifts to this week’s monetary policy meetings in the U.S. and major EMs.
China/Evergrande contagion fears continue to dominate headlines, with spillovers to China’s Investment Grade bonds (including real estate – see chart below), commodities (iron ore) and developed markets (DM) (Australian Dollar) watched especially intently. China’s central bank (PBoC) injected CNY100B of additional liquidity over the weekend, but there are no signs of authorities easing on regulations. A popular view is that both the government and the central bank have enough capacity to add policy support – but we suspect it might be a question of willingness (and possibly a higher “pain” threshold) this time around. Anyway, we will keep an eye on tomorrow’s PBoC decision regarding 1-year and 5-year Loan Prime rates (the consensus sees no change in both).
Another important aspect of the Evergrande story is the impact on China’s growth outlook (especially near-term). Real estate and construction account for about 20% of China’s GDP, and the prolonged weakness in the sector can (a) reinforce China’s slowing growth momentum, and (b) delay the growth rebalancing towards consumption. It remains to be seen whether authorities will tolerate the slowdown as part of the political/ideological “rebalancing”, but China’s status as a global growth driver can have implications for the growth differential between emerging markets (EM) and DM – that is, unless the growth momentum in DM slows as well. This week’s preliminary activity gauges (Purchasing Managers Indices) in Europe and the U.S. will give us a better idea about the latter.
Against this backdrop, this week’s monetary policy decisions in the U.S. and major EMs will be of utmost importance. In particular, we keep an eye on the pace of tightening in Brazil and Hungary, any hints of policy easing in Turkey and China-related financial stability considerations in Indonesia and the Philippines. In the U.S., the Federal Reserve (Fed) might tweak its tapering language after it releases a new set of “dots”. We also wonder whether the Fed will mention China in its communications – as it has done in the past. As of today, it might still be early - but things are moving really fast, so stay tuned!
Chart at a Glance: Will Evergrande Woes Affect China IG Bonds?
Source: Bloomberg LP
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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