Emerging Markets: Preview of the Week Ahead

(from my colleagues Dr. Win Thin and Ilan Solot)

With many major idiosyncratic EM risk events now behind us, the general tone will be almost entirely set by the mood in developed markets and ongoing geopolitical events. Still, we think the recent sell-off in global financial markets may have created some opportunities to establish EM trades at better level. Long MXN and INR, for example, seem to offer good short-term opportunities. On the other hand, the risk-reward for the likes of ZAR and TRY are still not yet attractive enough, in our view. The test of the 2.30 area for the BRL, and the resulting action by the central bank (in the swaps market), also serves to reinforce that level as the trigger point for intervention. This could help entice some buyers of BRL.

China reports July new loan and money data during the week, but no date has been set yet. It then reports July IP and retail sales on Wednesday. IP is seen steady at 9.2%, while retail sales are seen rising 12.5% y/y vs. 12.4% in June. Over the weekend, CPI and PPI came in largely as expected and should keep policymakers focused on growth, not inflation.

Hungary reports July CPI Tuesday, expected at -0.1% y/y vs. -0.3% in June. It then reports Q2 GDP on Thursday, with growth expected to remain steady at 3.5%. The recovery remains on track, and so easing cycle has ended. The y/y inflation rate should move into positive territory in H2 due to low base effects from 2013. However, we do not expect any tightening until well into 2015.

India reports July CPI and June IP on Tuesday, followed by WPI on Thursday. CPI is seen rising 7.40% y/y vs. 7.31% in June, while IP is seen rising 5.6% y/y vs. 4.7% in May. WPI is seen easing to 5.10% y/y from 5.43% in June. Last week, the RBI kept its benchmark repo rate unchanged at 8.0%, but once again cut the Statutory Liquidity Ratio (SLR) by 50 bp to 22.0%.

South Africa reports June retail sales on Wednesday, seen rising 2.0% y/y vs. 2.4% in May. Most real sector indicators are slowing or remain very weak, and calls into question the ability or willingness of the SARB to continue hiking rates. Next SARB meeting is September 18.

Poland reports July CPI Wednesday, expected at -0.2% y/y vs. +0.3% in June. It also reports June trade and current account then. Poland then reports Q2 GDP on Thursday, with growth expected at 3.2% y/y vs. 3.4% in Q1. The recovery continues, but policymakers remain worried about headwinds from Western Europe and Russia.

Banco de Mexico releases its quarterly inflation report on Wednesday. July inflation came in a bit higher than expected, both headline and core. With headline inflation of 4.07% y/y now over the 2-4% target range, we shouldn't expect any more easing from Banco de Mexico. Indeed, we think the Mexican economy will follow the US higher in H2 and see no need now to ease again.

Bank of Korea meets Thursday and is expected to cut rates 25 bp to 2.25%. Rates have been kept at 2.5% since May 2013. We do not see a particularly strong case for cutting rates right now, as the recovery continues at a decent pace and the won has been softening too. While the q/q rate slowed to 0.6% in Q2, GDP still rose 3.6% y/y.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%. It then reports Q2 current account data on Friday. Q2 GDP was slightly weaker than expected, up 5.1% y/y vs. 5.2% consensus and 5.2% in Q1. This was the slowest rate since Q3 2009. Earlier this week, it reported July CPI easing to 4.53% y/y from 6.7% in June. Data will feed expectations of potential rate cuts, but we think that the central bank will retain a hawkish stance.

Czech Republic reports Q2 GDP on Thursday, with growth expected at 3.0% y/y vs. 2.9% in Q1. However, the q/q rate is seen slowing to 0.3% from 0.8%. Even though the recovery continues, policymakers remain worried about headwinds ahead. Minutes from the July 31 policy meeting show most central banks expect the koruna cap to be kept until 2016, pushing the time-frame further out.

Turkey reports June current account data on Thursday, expected at -$3.7 bln vs. -$3.4 bln in May. However, the June trade deficit was a bit wider than expected and so we see similar risks to the current account. Turkey held it presidential election Sunday, with current Prime Minister Erdogan winning as widely expected. This was the first direct election of a president in Turkey, and will most likely be followed by legislative action by Erdogan’s AKP to increase the powers of this post.

Brazil reports June retail sales Thursday, expected to rise 3.5% y/y vs. 4.8% in May. IPCA inflation unexpectedly eased to 6.5% in July, and high base effects should see the rate move back into the 2.5-6.5% target range by year-end. We do think fundamentals will improve modestly in the coming months which, when coupled with high yields, should prove attractive for foreign investors.

Chile’s central bank meets Thursday and is expected to cut rates 25 bp to 3.5%. However, we think there is a very small chance of steady rates after July CPI came in unexpectedly high at 4.5% y/y. This remains above the 2-4% target range. Easing is likely to continue, but the pace is likely to become more cautious until the inflation trajectory has improved.

Singapore reports June retail sales on Friday, expected to rise 1.0% y/y vs. -6.0% in May. July PMI was stronger than expected at 51.5 and the highest since July 2013. Forward looking new orders and new export orders components both rose modestly to 51.4 and 51.7, respectively. Electronics sub-index saw forward looking new orders and new export orders components both jumping to 53.5 and 52.7, respectively. If real sector data continue to pick up, MAS will see less need to ease policy at its October meeting.

Hong Kong reports Q2 GDP on Friday, expected to rise 2.4% y/y vs. 2.5% in Q1. With the mainland economy showing signs of stabilizing, Hong Kong growth should also start to improve. Meanwhile, inflows into Hong Kong have required the HKMA to continue intervening at the strong end of the HKD band.

On Friday, Colombia central bank releases minutes from its last meeting, when it hiked rates 25 bp to 4.25%. On the same day, it also reports June retail sales and IP. Sales are seen rising 7.2% y/y vs. 8.1% in May, while IP is seen rising 3.9% y/y vs. 2.0% in May. The economy remains strong, but price pressures are leveling out within the 2-4% target range and so the tightening cycle is likely nearing an end, perhaps with policy rates topping out around 4.75-5.0% in the coming months.