By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy, VanEck Global
China drops the GDP growth target, focuses on employment and introduces another fiscal package that is smaller than expected. Argentina is heading for another default, as the grace period ends today.
Headlines from China continued to reverberate through markets this morning. A new national security law for Hong Kong generated multiple concerns about the territory’s future as a financial/economic hub, as well as suggestions that this might increase tensions between the U.S. and China. The takeaways from the National People’s Congress were also noteworthy. The 2020 growth target was dropped, but there is an employment target (9M new urban jobs), and it is binding. Authorities will rely on additional fiscal stimulus to achieve this objective. However, the size of the package (approximately 3.5% of GDP) appears to be smaller than expected—which can be described as “prudent/conservative” compared to fiscal packages in many other countries. Finally, monetary policy will remain pro-active, with total social financing (TSF)1 growth “significantly higher than last year”—which gives the green light to more rate cuts going forward.
This morning’s Argentina headlines are telling us that the country is heading for another sovereign default. The grace period for missed coupon payments ends today, and a deal with creditors has not yet been reached. The government has been promising that it will not pay these coupons, and will default. However, last night the government said that negotiations with creditors will continue until June 2, hinting at progress, whether a default occurs or not. The market has been strong all week, viewing all of this as negotiation tactics, and arguably priced a likely default already. It is not clear at this stage whether the government will remain current on payments until the end of the negotiations or will stick to their promise to suspend interest payments.
India surprised the market with an unscheduled 40bps repo rate cut this morning. The central bank cited significant downside risks to growth as the main reason, promising to do more if necessary. Another round of monetary easing looks logical given that the recently announced fiscal package includes only 1.2% of GDP of new spending. The central bank acknowledged a spike in food prices in April, but noted that risks to growth are much more significant at this stage.
À propos: I am “chartless” again today, so I guess I have to use another Russian literary masterpiece. The book in question—Mikhail Bulgakov’s Master and Margarita—is (naturally) long, but the quote is short and uplifting: “Everything will turn out right, the world is built on that.” Have a great weekend!
1Total social financing is a broad measure of credit and liquidity in the economy and includes off-balance sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.
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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