Emerging Markets Preview for the Week Ahead

(from my colleague Dr. Win Thin)

EM currencies are searching for some direction after ending last week on a softer note. China data out this week should provide further evidence that the world's second biggest economy is stabilizing. Elsewhere, Chilean and Turkish central banks meet and both are expected to deliver rate cuts. On the other hand, the Brazilian central bank will most likely keep rates steady amidst a backdrop of slow growth and elevated price pressures.

We believe EM will firm up this week, as the global backdrop should remain positive in Q3. External factors that could impact EM this week include US retail sales for June on Tuesday and Yellen's semi-annual testimony to Congress on Tuesday and Wednesday. The Fed's Beige Book on Wednesday is unlikely to provide any surprises, coming ahead of the FOMC meeting on July 30 that should also be devoid of surprises.

India has already reported its inflation gauges.   June CPI rose 7.3% y/y vs. 8.28% in May. This was a bit lower than expected.  Earlier it reported WPI inflation at 5.43% y/y.  This too was slightly lower than than the expected 5.78% and is down from 6.01% in May. Price pressures continue to ease, but we do not think the RBI will cut rates anytime soon. Looming ahead is the risk of a poor monsoon season, which would put upward pressure on food prices. With rates to remain high, we continue to view India positively from a yield perspective. Improving growth prospects should help underpin equities too, with $11.2 bln of foreign equity inflows already seen YTD.

Singapore reports May retail sales on Tuesday, expected at -8.2% y/y vs. -9.0% in April. It then reports June trade on Thursday, with NODX expected at -2.7% y/y vs. -6.6% in May. Advance Q2 GDP came in weaker than expected at 2.1% y/y vs. a revised 4.7% (was 4.9%) in Q1, and could start tongues wagging about possible loosening of policy by MAS at its next meeting in October. Real sector data has been coming in weak, but we’re not sure it's enough to get looser policy just yet. Still, it's clear that tighter policy won't be seen anytime soon.

Poland reports June CPI on Tuesday, expected to remain steady at 0.2% y/y. Core CPI comes out Wednesday, also seen steady at 0.8% y/y. Poland then reports June IP on Thursday, expected to rise 3.7% y/y vs. 4.4% in May. We think the central bank will remain on hold in H2. Low base effects should see the y/y inflation rate start to pick up in the coming months. The real economy is still in recovery mode, and so there should be no urgency to move rates either way in H2.

Chilean central bank meets Tuesday and is expected to cut rates 25 bp to 3.75%. It’s close call, however. Of the 18 analysts polled by Bloomberg, 10 see a 25 bp cut and 8 see no change. Even though inflation is above the 2-4% target range, CPI fell to a lower than expected 4.3% y/y in June from 4.7% in May. The weak economy could push the bank into cutting this month, something we saw earlier this month from Peru.

China reports June retail sales, IP, and Q2 GDP on Wednesday. GDP growth is seen remaining steady at 7.4% y/y. Earlier in the week, we should see new loan data but no date has been set. New loans are seen at CNY955 bln vs. CNY870.8 bln in May. Data should continue to show stabilization of the economy, albeit at weaker rates than in the past. It’s worth noting that last week’s USD/CNY fix was the lowest since late march. Yuan strength came right as senior US and China officials met in Beijing last week as part of the annual Strategic and Annual Dialogue.

Malaysia reports June CPI on Wednesday, expected at 3.3% y/y vs. 3.2% y/y in May. The central bank hiked rates 25 bp to 3.25% last week, and acknowledged that inflation was running “above the long-run average.” The central bank has also expressed concern recently about financial stability risks stemming from loose monetary policy. That the bank hiked even as USD/MYR was making new lows for the year suggests comfort with additional ringgit strength.

South Africa reports May retail sales on Wednesday, seen rising 0.7% y/y vs. 1.8% in April. The central bank then meets Thursday and market expectations are quite mixed. Of the 24 analysts polled by Bloomberg, 12 see no change, 5 see a 25 bp hike to 5.75%, and 7 see a 50 bp hike to 6.0%. Despite a hawkish verbal stance by the SARB, we think that the economy is simply too weak to hike rates anytime soon, and so we see steady rates. Manufacturing production was reported last week at a much weaker than expected -3.7% y/y in May.

Brazilian central bank meets Wednesday and is expected to keep rates steady at 11.0%. Earlier in the day, it will report May retail sales that are expected to rise 3.8% y/y vs. 6.7% in April. Monthly GDP proxy for May will come out Thursday, seen at -0.3% y/y vs. -2.3% y/y in April. The second preview for July IGP-M wholesale inflation will be released Friday, and should show further disinflation. Wholesale and PPI inflation have already turned lower, but consumer inflation remains stubbornly high. Brazil’s World Cup loss will likely lead to lower poll numbers for Dilma in the coming weeks, which in the past has been taken as positive for Brazil markets.

Central bank of Turkey meets Thursday and is expected to cut rate the benchmark repo rate 50 bp to 8.25%. The lower bound of the rates corridor is also seen being lowered by 50 bp to 7.5%, which is needed in order to accommodate a lower repo rate in the future. The policy rate is falling faster than inflation, and so real yields appear likely to remain in negative territory for the time being. Cutting rates is a gamble, but with the rest of EM holding up well, Turkey may get away with easing for now.