Band Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
The latest credit figures confirm that China’s stimulus measures continue to focus on supply-side measures, which partly explains the absence of inflationary pressures.
Contrasting inflation in China and the United States
An ugly impression of inflation (= high + accelerating) in the United States – the highlight of the morning global macro macro – reaffirmed the market’s expectation of three consecutive rate hikes of +50 basis points by the Federal Reserve, and leads to a fairly aggressive flattening of the US Treasuries curve (short end up). Bloomberg reminded us that US inflation had just hit a 40-year high – a great contrast to the latest impression of inflation in China, which was (a) below consensus; (b) lowest among major emerging markets (EM) (2.1% YoY); and (c) right in the middle of China’s multi-year inflation range. Why such a difference ?
China Stimulus – Focus on Supply
One of the reasons is that China’s stimulus policy is firmly supply-side – and the latest credit figures clearly show that this is still the case. Overall financing from China surprised strongly on the upside in May, but it reflects a sharp increase in government bond issues, presumably to fund infrastructure investment. Household loans showed some improvement, but it might take a magnifying glass to see May’s sequential rebound in a proxy for mortgages (see chart below). It’s hard to see China’s local rates climbing much higher in this environment, which means that rate spreads with the United States should continue to move in the direction compatible with the weaker renminbi.
Turkey’s dysfunctional policies
In the immortal words of Commander Spock from Star Trek, the things we just talked about are “logical” – i.e. higher inflation = higher short rates (and vice versa), interest rate differentials changing interest rates = changing exchange rates. This is not always the case in “great countries, weird policies” corner of the world. Turkey refuses to increase despite headline inflation exceeding 70%. The last “out of the box” system to support the lira no longer works – the currency is trading above 17/US dollar – but instead of making an orthodox policy reversal (=rate hikes), authorities have come up with another “ready-to-use” plan, which includes the issuance of new income-indexed bonds (whatever that is). Well, good luck… And stay tuned!
Chart at a glance: China mortgage rebound – Get your magnifying glass
Source: Bloomberg LP
PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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