Fixed Income

EMD Relative weekly notes

Week Ending February 15, 2019


James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

Another piece of the strong USD dollar thesis wobbled this week with a much softer-than-expected US retail sales number. How weak was it? The charts below demonstrate. Figure 1 shows that the Atlanta Fed's estimate for fourth-quarter GDP growth plummeted from 2.7% to 1.5%.

Source: Federal Reserve Bank of Atlanta. As of February 14, 2019. Blue Chip Economic Indicators and Blue Chip Financial Forecasts. The top (bottom) 10 forecast is an average of the highest (lowest) 10 forecast in the Blue Chip Survey.

Meanwhile, Figure 2 shows that the Citibank Economic Surprise index (US), which measures how data releases stack up versus expectations, fell dramatically.

Source: Bloomberg; The white line depicts the Citibank Economic Surprise Index:US while the yellow line depicts the Citibank Economic Surprise Index: Europe. As of February 14, 2019

The economic surprise chart above shows the US in white and Europe in yellow. What had been most important about that chart, prior to this number, had been the growing US-EU divergence. That gap had led to a near-2% dollar rally this month, and called to mind a similar divergence last April that led the dollar to a 5% rally that took EM dollar and local assets firmly into negative territory. That divergence—at least temporarily—has now been closed.

It seems to be a firm belief within the markets that growth in Europe and rest of world remains soft, with the only point of contention within the EU seemingly being whether a technical recession will occur in the coming quarters or just near-zero growth. With that as a background, risks to EM from a US economy that continued to hum along or even get stronger were ever present, even as the dollar essentially flat-lined from November to the end of January.  

Though too early to tell, accumulating evidence suggests to us that the US will not materially out-perform the rest of the world limits dollar upside, and provides essential breathing room for liquidity flows into EM—and asset prices may well follow, if history is any guide.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.