By Natalia Gurushina, Economist, Emerging Markets Fixed Income for VanEck Global
There is a coordinated effort by major central banks to shield the global economy from the coronavirus. Following the U.S. Federal Reserve’s pledge on Friday to act pre-emptively, the Bank of Japan and the Bank of England made similar promises to support financial markets. The announcements led to a strong initial rally in emerging markets assets, albeit some of them faded when New York opened. There is still a lot of uncertainty as new coronavirus cases are popping up globally. But the market now prices in a lot of policy easing in the next 12 months, starting with 109bps of rate cuts by the U.S. Federal Reserve (the Fed), 20bps by the Bank of Japan, 19bps by the European Central Bank (ECB) and 45bps by the Bank of England. The gap in expectations for the Fed and the ECB and another big drop in U.S. Treasury yields pushed the U.S. dollar down by 83bps this morning.
China’s official activity gauges for February were hit hard, with the manufacturing PMI (Purchasing Managers’ Index) falling to 35.7 and the services PMI to 28.9. The Caixin manufacturing PMI (which has a larger share of respondents from the private sector) fared relatively better, falling “only” to 40.3, most likely due to the fact that respondents in some regions did not participate. Labor shortages and supply chain disruptions were a major drag. There were also signs of disinflationary pressures, as the factory gate price gauge moved into negative territory. Interestingly, respondents were quite positive on future output, expecting it to pick up once travel and other restrictions are lifted.
Concerns about coronavirus recession refuse to go away, so it was reassuring that activity gauges in emerging markets ex-China held up pretty well. Manufacturing PMIs in Russia and Turkey actually improved. Asian economies—Korea, Philippines and Thailand—showed either marginal deterioration or no deterioration at all. India’s manufacturing PMI was a real stunner, staying well in expansion territory at 54.5. The business sentiment sub-component, however, weakened in many countries. In addition, the PMI methodology treats longer delivery times as a sign of stronger growth, which is clearly not the case in this particular episode. So, it is too early to declare victory even though the numbers looked good.
Chart at a Glance: China Activity Gauges – Coronavirus Fall
Source: Bloomberg LP
IMPORTANT DEFINITIONS AND 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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