Emerging Market Preview: Central Banks and Key Data

(from my colleague, Ilan Solot)

Central Bank of Turkey meets Tuesday and is expected to keep policy rates steady, though given the pressure in EM currencies, we assume an off chance of a surprise rate increase. With the lira having stabilized for most of August, we do not see any need to tighten again yet. Average cost of funding remains near 6.5%, well below the 7.25% ceiling. However, CPI inflation of 8.9% y/y in July along with widening trade and current account gaps will make it hard for the lira to gain too much traction.

Mexico Q2 GDP due out Tuesday, expected at 2.3% y/y vs. 0.8% y/y in Q1. June retail sales will be reported Wednesday, while mid-August CPI will be reported Thursday and Q2 current account will be reported Friday. Overall, we think the backdrop of slow growth and low inflation will continue to fan rate cut expectations. However, we think the bar for further easing is quite high and we look for steady rates.

Bank of Thailand meets Wednesday and is expected to keep rates steady 2.5%. The economy continues to soften, but the BOT has been on hold since the last 25 bp cut in May. Inflation is not an issue, with headline decelerating to 2% y/y in July and core remaining at the trough of 0.9% y/y, just within the 0.5-3.0% target. We believe more cuts will be seen, but the pace will remain cautious. Before May, the previous cut was in October 2012.

South Africa July CPI due out Wednesday, expected at % y/y vs. 5.5% y/y in June. The economy is showing some modest signs of life, but the pace of growth remains very lackluster. Fiscal stimulus will be impossible due to its missing budget targets this year. While there will be pressure on SARB to ease, it will be a touch choice given still-high inflation and the weak rand. For now, we see steady policy.

Brazil mid-August IPCA inflation due out Wednesday, expected at 6.14% y/y. Brazil also reports July current account data on Friday. Data comes ahead of the COPOM meeting August 27/28, with markets looking for another 50 bp hike to 9.0%. Looking further out, we are hearing more chatter of a less tightening ahead.

China HSBC flash PMI for August due out Thursday, expected at vs. 47.7 in July. The July data overall was firmer than expected, and lessened market concerns about a hard landing in China. We would expect August data to continue this trend. In terms of macro policy, we think it’s steady as she goes for China. This means no major stimulus initiatives and a fairly stable exchange rate.