The continuation of current policies are under question in key emerging markets.
A pretty horrific inflation print for June sent the Turkish lira plummeting this morning (down 136 bps as of 10:10 a.m. ET, according to Bloomberg LP). Headline inflation surged to 15.39% year over year and core to 14.60% (see chart below), exceeding expectations by a wide margin. Inflation is now back to the levels last seen in 2003, making a big dent in the central bank's credibility. Meanwhile, moderating domestic activity suggests that the government's stimulus might be extended - and this would mean more inflation pressures down the road.
The Chinese yuan's movements remain firmly in focus following what looked like the central bank's verbal intervention and the currency's subsequent recovery (up 33 bps as of 10:10 a.m. ET, according to Bloomberg LP). An important question is whether the yuan's weakness will affect some key aspects of the government's policy framework, including deleveraging. The latter encouraged more external borrowing, causing a sharp rebound in the "other investments" items of the balance of payments (BOP), which comprises loans and trade credits (among other things). This BOP item is particularly sensitive to the exchange rate movements - and its potential reversal would leave China's overall BOP (and reserves!) in a weaker position. Today's headlines about the government focusing more on "structural deleveraging" sure look interesting against this background.
A nice 4th of July surprise from U.S. factory orders and the below-consensus retail sales in the Eurozone seem to agree with the narrative about the U.S.' relative outperformance in the less-synchronized world (growth-wise). U.S. factory orders rebounded more than expected in May (up 9.2% year on year), staying well above the multi-decade average and supporting market expectations of the Fed's rate hike in September (78.8% implied probability).
Chart at a Glance
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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