Emerging Markets Debt Daily
China Foreign Trade Sends Mixed SignalsNatalia Gurushina, Chief Economist, Emerging Markets Fixed Income StrategyJuly 13, 2021
China’s softening commodity imports seem to corroborate the “recovery speed bump” story, but a stronger exports growth is a near-term tailwind.
We’ve got several developments this morning pertaining to key storylines in emerging markets (EM). First, what is the state of China’s recovery? All eyes are, of course, on tomorrow’s release of China’s Q2 GDP and activity indicators for June, but the foreign trade details – in particular softening key commodity imports – seem to corroborate the “recovery speed bump” narrative (see chart below). On the other hand, unexpectedly strong exports (up by 32.2% year-on-year in June) should be considered a near-term tailwind. The above-consensus export growth also sends a positive signal about the impact of vaccinations and reopenings in major economies on global demand.
Another story that we follow closely is the inflation/monetary policy divergence. Inflation in EM Asia is mostly moderating, but it is running at the levels that make monetary authorities in some Central European countries quite uncomfortable. This morning’s upside surprise in the Czech Republic – with the data pointing to a big jump core inflation - is a case in point, which explains why the market continues to price in 41bps of additional rate hikes there in the next 3 months. The market also stepped up expectations for rate hikes in Hungary (to 57bps in 3 months), and it now expects a small 25bps hike in Romania.
Finally, global institutions are often sympathetic when it comes to the pandemic’s impact on EM fundamentals, but the rating agencies are not always as forgiving. One recent example was Colombia’s losing its Investment Grade status. And this morning we learned that Fitch lowered the Philippines’ outlook to Negative. Among other things, Fitch mentioned the impact of mobility restrictions on the economic outlook, which echoes our own concerns about the slow pace of vaccinations in the region.
Charts at a Glance: China’s Commodity Imports Moderated in June
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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