By Natalia Gurushina, Economist, Emerging Markets Fixed Income for VanEck Global
Markets “high fived” China’s confirmation that it reached Phase 1 agreement with the U.S. Brazil’s growth momentum continues to gain traction, while Turkey’s growth scare seems overdone.
It’s rally time! Markets squealed in delight after Chinese authorities confirmed that they reached Phase 1 agreement with the U.S. According to China’s Commerce Vice Minister Wang Shouwen, the U.S. will remove tariffs on Chinese goods in phases, while China will increase imports from the U.S. and other countries. The date for signing the deal has yet to be determined, but we keep our fingers crossed.
Brazil’s growth momentum continues to gain traction. The monthly economic activity indicator surprised to the upside in October (2.13% year-on-year), coming on the heels of encouraging retail sales, services and industrial production. Various GDP nowcasts show a strong pickup in Brazil’s Q4 growth. However, the rebound’s inflation implications are likely to be limited for now. Economic slack is still substantial (double-digit PNAD unemployment rate, big output gap) and this should give the central bank ample room to contemplate the next policy move.
Today’s growth scare in Turkey seems overdone. It is true that industrial production (IP) started Q4 on a weak note, with the yearly growth significantly weaker than expected (3.8%). However, monthly IP series can be rather volatile, and our preferred measure of 3-month moving average shows that the recovery momentum is intact (pink line on the chart below). This metric suggests that the central bank can easily take a pause after a bigger than expected rate cut yesterday (especially if geopolitical noise weighs on the currency).
Chart at a Glance: Turkey’s October Growth Scare Is Overdone
Source: Bloomberg LP
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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