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When Rate Cuts And Hikes Are Not Enough

August 15, 2022

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Can the old policy playbooks reverse China’s growth slide and Argentina’s surging inflation?

China Slowdown

Can a small 10bps rate cut solve China’s growth problems? Nope. First, China’s slowdown is linked to unresolved real estate issues and the zero-COVID policy. Second, tiny rate cuts have less (or no) impact when interbank rates are already well below their benchmarks (this was our argument against China’s rate cuts). Third, July’s domestic activity numbers question China’s preference for supply-side stimulus (infrastructure), while demand side (consumption) remains an “orphan”. The start of Q3 looked weak across the board – with below-consensus industrial production, retails sales and investments – suggesting that the old policy playbook should be updated. Today’s newswires reported that authorities will be providing more liquidity support to select developers via guaranteed bonds. This can create opportunities for investors, but the impact on growth is still unclear. In the meantime, China’s 2022 consensus growth forecast keeps sliding down (see chart below).

Argentina Macroeconomic Adjustment

Can a massive rate hike solve Argentina’s inflation problem by itself? Nope. On the surface, Argentina’s central bank is doing the right thing. In the past two weeks, it delivered a double-punch of rate hikes (800bps in late July followed by 950bps on Friday), bringing the total to 3150bps in the current cycle – by far the largest among major emerging markets (EM). Argentina’s effective policy rate now stands at 96.82% (!). However, the central bank cannot fight inflation alone, because the underlying problem is a lack of serious fiscal adjustment and the resulting “explosion” of monetary financing. An action plan proposed by Argentina’s new Economy Minister, Sergio Massa, did not do much to alleviate fiscal concerns – or concerns about external adjustment, for that matter.

Turkey Policy Agenda

Another country in dire need of a new policy playbook is Turkey. The central bank is “frozen”, despite annual inflation nearing 80%, and measures to stabilize the currency – largely unsuccessful – are putting more pressure on the balance of payments. These were the reasons why Turkey’s sovereign rating was cut again – moving deeper into non-investment grade territory – by Moody’s. Turkey’s policy agenda will feature more prominently in economic discussions as we are getting closer to the elections – market participants are watching this space. Stay tuned!

Chart at a Glance: China Growth Forecast - Still Down

US-Emerging-Markets-Daily-2022-08-15.png

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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