By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
China’s March activity gauges confirm that the recovery is on track. Poland’s inflation surprise brings the EM reflation narrative to the front burner.
China’s latest activity gauges confirmed that the post-pandemic recovery is back on track. A big bounce in March (see chart below) was in part due to the Lunar Year seasonality, but the end of the winter COVID lockdowns also helped a lot. The manufacturing PMI (Purchasing Managers Index) rose more than expected to 51.9, and the services PMI soared to 56.3, confirming that the recovery is getting more balanced. China is now expected to grow by 8.5% in real terms in 2021, providing a nice Emerging Markets (EM) counterbalance to stronger U.S. growth. This can embolden Chinese officials to tackle asset bubbles and (potentially) try to reduce moral hazard by allowing even more corporate defaults.
Another thing that was back (with a vengeance) this morning is the EM inflation narrative. Poland’s headline inflation jumped much more than expected in March (from 2.4% to 3.2% year-on-year), reflecting higher fuel prices but also some core pressures. I would be surprised if the central bank jumps to action immediately after the release – fuel prices fall under the “transitory” category – but the market might start pricing in more tightening in Poland, above 23bps currently expected for the next 12 months.
We’ve got a bunch of trade balance/current account releases across EM this morning. I am not going to bother you with details (let me know if you need them) – I want to focus instead on the on-going upgrade of this year’s current account forecast for EM. EM’s finished 2020 with an aggregate current account surplus of ~1% GDP, sending a strong signal that orthodox policies in most (not all) countries led to speedy “textbook” external adjustment during the COVID crisis. This year’s shapes up nicely as well – the consensus expects a sizable aggregate surplus of around 0.7% of GDP, which means a stronger fundamental backdrop for EMFX going forward.
Charts at a Glance: China’s Activity Gauges Back on Track
Source: Bloomberg LP
Originally published by VanEck, 3/31/21
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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