China Rebound Finally Under Way

A notable rebound in China’s activity surveys cheered markets this morning. The official non-manufacturing Purchasing Managers’ Index (PMI) firmed to 54.8, and both the official and the Caixin manufacturing PMIs surprised to the upside, moving back into expansion territory (see chart below). Details show that the rebound was broad-based, signaling that the government’s stimulus is finally bringing results. With the value-added tax (VAT)¹ cut becoming effective today and with additional fiscal stimulus kicking in later this year, the 2019 growth outlook appears to be on firmer ground than a few months ago.

The Turkish lira is still struggling to find balance as markets are digesting the results of Sunday’s municipal elections. Even though President Erdogan’s coalition won a majority (around 52%, according to preliminary results), it lost several major cities, including Ankara. The results of the Istanbul vote are still being finalized, but it looks like the opposition is leading by a very thin margin with the ruling party willing to challenge the outcome. The key question right now is whether/how fast the excesses of the past few weeks (currency interventions and a major loss of reserves, fiscal profligacy, and tight liquidity) will be reversed. Meanwhile, the market priced out a lot of rate cuts, believing that the central bank will be forced to maintain a tighter policy stance in order to offset the aforementioned policy deficiencies.

This morning brought a strong rally in South Africa’s rand, as Moody’s deferred its scheduled rating review until November. So, the government was able to keep the investment grade rating going into the May elections, while gaining some extra time to fix the economy. Today’s weaker than expected activity survey—the manufacturing PMI slipped to a mere 45.0 in March—shows that the country badly needs structural reforms in order to improve its growth prospects (and its credit metric).

¹ Value-added tax is a tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.

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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