EM Review: Payroll Jolt Raised Fear Traders Have Been Too Dovish

(Bloomberg) -- Emerging-market equities trimmed their advance last week after a strong U.S. jobs report dimmed hopes of aggressive Fed interest rate cuts. Currencies retreated the most in seven weeks as the U.S. dollar strengthened.

Meanwhile, the yield on local-currency government bonds declined eight basis points, the most this year, to a record 4.33%, according a Bloomberg Barclays index. And while stocks fell on Friday, their rise last week extended their winning run to the longest since a rally that ended early February.

Read More: More Joy for Emerging Markets Now Hinges on Fed, Survey Shows

The following is a roundup of emerging-markets news and highlights for the week ending July 8.

Read here: our emerging-market week ahead story

Listen to the emerging-market weekly podcast, here.

• U.S. June non-farm payrolls rose 224k vs 160k expected; shifting the debate from how much the Federal Reserve will cut interest rates in July to whether the bank will move at all
• President Donald Trump said China and Europe are playing a “big currency manipulation game” and “pumping money into their system” to compete with the U.S.
• Trump said a new round of trade talks with China is underway, ending a stalemate between the two countries amid escalating tariffs
  • U.S. and Chinese officials will talk by phone in the coming week as they seek to resolve the dispute, said Larry Kudlow, Trump’s chief economic adviser
  • The U.S. added more European Union products to a list of goods it could hit with retaliatory tariffs in a long-running trans-Atlantic subsidy dispute between Boeing Co. and Airbus SE
• Turkish President Recep Tayyip Erdogan unexpectedly removed Murat Cetinkaya as central bank governor, after he was said to refuse an informal request to resign. The decision to oust him risks a market backlash just as policy makers were expected to start interest-rate cuts
  • Deputy Governor Murat Uysal was named as a replacement
  • The lira fell more than 3% in Asian morning trade on Monday
• Factory sentiment across Asia became even weaker in June, signaling a worsening in the region’s growth outlook as U.S.-China trade tensions continue to simmer
  • Gauges of activity in China’s manufacturing sector showed the economy remains fragile
• India plans to raise as much as $10 billion from its first overseas sovereign bond because there’s huge appetite for its debt in the foreign market, Economic Affairs Secretary Subhash Garg said in an interview on July 6
• A second consecutive rate cut is possible at the Russian central bank’s next meeting in July, said bank Governor Elvira Nabiullina, who refused to rule out a 50-basis-point reduction
• Saudi Arabia raised 3 billion euros ($3.4 billion) in a bond sale that highlights how tumbling borrowing costs are shifting the landscape in global capital markets
  • The kingdom is restarting preparations for a potential initial public offering of oil giant Aramco, months after putting the planned listing on hold, people familiar with the matter said
• Brazilian President Jair Bolsonaro’s flagship pension reform proposal passed a key congressional committee on Thursday, fueling investor optimism that the bill can be approved by the lower house before lawmakers go into the mid-year recess later this month
• Iran exceeded limits set on its enriched-uranium stockpile, a move that risks the collapse of the 2015 nuclear accord
  • Trump warned the Islamic Republic against stepping up uranium enrichment, the latest escalation of the conflict over the Islamic Republic’s nuclear program that has plunged the Gulf into renewed uncertainty
  • British special forces seized a supertanker off Gibraltar carrying Iranian oil to Syria in violation of European and U.S. sanctions against the war-torn country
  • READ: War or Not, Bond Investors Are Taking Their Chances in the Gulf
• Iron ore collapsed on Friday; China’s top iron ore industry group has urged the government to maintain order in the market after prices surged to a five-year high, prompting warnings that the rally can’t be sustained

Asia:

• People’s Bank of China adviser Ma Jun said the Chinese economy will probably maintain an expansion of at least 6% in 2019
  • Overseas investors boosted their holdings of onshore Chinese bonds for seventh straight month in June, adding 34.6 billion yuan ($5 billion), according to data released by ChinaBond
  • China’s securities regulator is soliciting public opinions over a rule allowing a state fund to bail out securities companies that “face significant liquidity risk”
• President Moon Jae-in’s government lowered its growth forecast for this year as South Korea’s economy continues to be battered by a downturn in the tech cycle and global trade woes
  • Exports took another hit in June, dropping 13.5% from a year earlier and falling for a seventh straight month
  • South Korea will consider “corresponding measures” if Japan doesn’t withdraw restrictions on some tech material exports, Finance Minister Hong Nam-ki says in interview with local CBS Radio
  • Samsung Electronics Co.’s quarterly profit more than halved
  • North Korea’s trade with the outside world has nearly collapsed under international sanctions in recent years, putting the country on course for an economic crisis, according to a report published by a South Korean think tank
• India’s new finance Minister Nirmala Sitharaman resisted calls for a fiscal boost to spur a weakening economy, sticking instead to a plan to narrow the budget deficit over time by keeping spending in check
  • The fiscal gap target for the year that began on April 1 was lowered to 3.3% of gross domestic product from 3.4% set in February’s interim plan. The deficit is forecast to ease to 3% of GDP by March 2021
  • Foreign exchange reserves soared to a record $426.4 billion in June, boosted by fund inflows into the country’s stocks and bond markets
  • Rahul Gandhi announced his resignation as leader of the opposition Congress party, taking responsibility for its dismal result in the recent national election, which saw Prime Minister Narendra Modi returned for a second term with an increased majority
• Indonesian consumer prices rose at a slower pace in June than the previous month, while core inflation accelerated to its highest level in more than two years
  • Bank Indonesia is taking its time lowering borrowing costs as it seeks to “maintain the attractiveness of our yield for investors,” according to a spokesman for the central bank
  • President Joko Widodo will announce a major overhaul of his cabinet aimed at firing up Southeast Asia’s biggest economy, but will delay the reshuffle until October
• Related departments at the Bank of Thailand are looking at possible measures as the monetary authority is “worried” about the baht’s comparative strength, its Senior Director Don Nakornthab said
  • The central bank trimmed its offers for 3-month and 6-month bills this month amid fund inflows that contributed to the currency’s appreciation
  • Thailand’s inflation eased to the slowest pace in four months in June, below the central bank’s target range of 1% to 4%
• Bangko Sentral ng Pilipinas has a lot of space for monetary policy easing given global developments, Governor Benjamin Diokno said
  • Inflation eased to 2.7% in June, the slowest since August 2017, resuming a downward trend which economists say makes room for more cuts to the central bank’s key rate and the amount of reserves required from lenders
  • The government will likely cut its 2019 budget deficit estimate to 3% of GDP from 3.2% after a delay in this year’s budget approval, Economic Planning Secretary Ernesto Pernia said
  • Gross international reserves at about $85 billion are more than enough of a buffer for any attack on the peso, Diokno told ABS-CBN News Channel

EMEA:

• Days before Erdogan dismissed Turkey’s central bank governor, a slowdown in inflation to 15.72% in June boosted the nation’s real rate to 8.3%, the highest since at least 2011
• South Africa’s government won’t consider using quantitative easing to help rescue troubled state power utility Eskom Holdings SOC Ltd., Deputy Finance Minister David Masondo said
  • The nation’s business confidence ticked higher in June, but remains below levels from a year ago after weak economic data and power blackouts in the first half of 2019
• In an effort to boost economic growth in Africa’s most populous country, Nigeria is giving its banks a choice: lend more of their money, or hand it over to the central bank and earn nothing on it
• Poland looked past the EU’s steepest pick-up in inflation to leave interest rates at a record low
• Romania refrained from raising interest rates to tackle the EU’s fastest inflation as the central bank takes its cue from the looser monetary-policy stance adopted by the world’s top economies
• The National Bank of Hungary wants to encourage local lenders to issue green bonds in what may be eastern Europe’s latest step to increase environment-friendly investments
• International Monetary Fund calls for “deeper fiscal adjustment” in Oman as its public and external vulnerabilities have continued to grow
• The United Arab Emirates will allow foreigners to own 100% of businesses across industries as the Arab world’s second-largest economy courts investors
• A Zimbabwean lawyer backed by a prominent legal group has challenged the government’s decision to revert to the Zimbabwe dollar and outlaw the use of U.S., South African and European currencies
• Mozambique’s economy will suffer in 2019 because of the cyclones that hit the country, but has the possibility of expanding 6% in 2020, President Filipe Nyusi said
• IMF expects Rwanda’s 2019 current account deficit to widen to 9.6% of GDP

Latin America:

• Signs that Brazil may be slipping into recession increased with the decline of industrial output in May. Production fell 0.2% from April after a 0.3% increase a month earlier, the national statistics agency reported
  • Brazil’s Central Bank President Roberto Campos Neto said there is “no mechanical relationship” between congressional approval of a key pension reform bill and a cut in interest rates, in an interview with the newspaper O Estado de Sao Paulo
  • Latin American governments and companies are set to step up bond sales in the second half of 2019, according to the region’s top underwriter. Brazil looks primed to lead the charge
• In Mexico, a dispute over seven gas pipeline contracts is the most recent test of President Andres Manuel Lopez Obrador’s relationship with the country’s business community
  • Lopez Obrador’s party plans to pass a law that would close Mexico’s economy ministry offices in cities from Washington to Geneva, arguing that it would help free up billions of dollars to be spent on the nation’s most destitute communities
  • After striking a deal with the U.S. to reduce illegal border crossings, Mexico tripled the number of migrant detentions in June from a year earlier, government statistics show
• President Mauricio Macri said Argentina is talking with Brazil about a potential U.S. free trade deal, less than a week after landing one with the EU
  • With borrowing costs dropping globally, Argentine companies are rushing to raise about $1 billion before the country’s presidential election
  • Argentina’s central bank is requesting IMF permission to expand its capacity to intervene in peso futures market, aiming to strengthen its position in the event of greater demand for U.S. dollars, according to people familiar with the matter
• U.S. efforts to drive Venezuelan President Nicolas Maduro from power by sanctioning Americans who buy and finance his country’s oil have failed partly due to people like Dragoslav Ilic, a Serb with a Panamanian business who’s trading Venezuelan oil in the shadows and helping to prop up the embattled regime
  • An unusual series of trades sent prices on Venezuelan bonds tumbling, shaking investors in a corner of the global debt market that has been eerily quiet for months
• Peru plans to host a meeting of as many as 100 nations in Lima next month to discuss ways to negotiate an end to the Venezuelan crisis and the return of democracy, said Foreign Minister Nestor Popolizio
• Chile’s Imacec index, a proxy for GDP, expanded 2.3% in May from the year earlier, the fastest pace this year, while retail sales rose more than three times faster than economists expected

--With assistance from Philip Sanders.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Colleen Goko in Johannesburg at cgoko2@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Joanna Ossinger

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With assistance from Bloomberg