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China Pushes Support for Domestic Demand

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By Natalia Gurushina, Economist, Emerging Markets Fixed Income, VanEck Global

China introduces additional targeted measures to shield domestic demand. Turkey’s inflation looks OK for now, but cracks are appearing.

China unveiled additional targeted measures to support domestic demand, including a 100bps cut in the reserve requirements for rural and provincial commercial banks. The central banks (PBoC) also lowered – for the first time in more than 10 years! – the interest rate paid on excess reserves. The emphasis on lifting domestic demand is especially justified against the rapidly deteriorating global growth backdrop (see chart below) and still wobbly services sector (the Caixin non-manufacturing PMI remained in contraction territory in March – see chart below). The impact of layoffs on social coherence/order also ranks high on the priority list.

The Turkish currency weakened by 10% in March, but monthly headline inflation remained subdued (in relative terms, of course) and yearly inflation actually cooled to 11.86% (close to expectations). The “saving grace” came in the form of much lower oil prices and weaker domestic demand. The latter no doubt helped to control core prices as well, but cracks are re-appearing – yearly core inflation accelerated further in March (reaching 10.49%), and pressure is likely to intensify if the currency continues to depreciate.

The global activity dataflow looks grim. The latest non-manufacturing sector gauges for Europe (see chart below) made China look almost robust in comparison. You probably already saw multiple comments this morning about the unprecedented declines, etc. The key issue for me is that services/consumption was supposed to underpin European growth, as manufacturing was barely alive in most regional economies even before the COVID-19 crisis. This support is now gone.

Chart at a Glance: Services Sector Takes a Hit Globally

Chart at a Clance: Services Sector Takes a Hit Globally

Chart at a Clance: Services Sector Takes a Hit Globally

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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