By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income
U.S. Slowdown
The flash estimate for the U.S. Q1 GDP growth was much weaker than expected, slowing to 1.1% quarter-on-quarter annualized vs. 1.9% expected. While the print had no discernible impact on market expectations about next month’s rate hike by the U.S. Federal Reserve (88% implied probability or so), it did raise questions about potential implications for emerging markets (EM), especially if U.S. growth weakness persists due to tightening credit conditions.
Mexico Nearshoring
There are various ways to gauge the impact of exogenous shocks on growth – one of them is to look at transmission via trade channels. The chart below shows the share of exports to the U.S. from major EMs as a percentage of their respective GDP. Mexico is a standout on this metric, and it remains to be seen whether the nearshoring story – which is a great longer-term investment theme – will help to shield the economy (and the Mexican peso) in the coming months.
EM Growth and China Rebound
Central European countries and Brazil look significantly less exposed via trade channels – the former are joined at the hip with Europe (which is why we keep an eye on tomorrow’s Q1 flash GDP print there) and the latter is a more closed economy than Mexico. Several Asian economies also have significant trade exposure to the U.S., but their stronger correlation with China’s rebound should help to mitigate the negative impact of potential growth headwinds from the U.S. Stay tuned!
Chart at a Glance: EM Exports to the U.S. – Top 10, Bottom 10
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Source: VanEck Research; Bloomberg LP.[/caption]
Originally published by VanEck on April 27, 2023.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; 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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