Emerging Markets: Preview of the Week Ahead

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

A risk-positive session on Monday should set the tone for the rest of the week. However, we think gains could be more expressive in the equity space than for currencies. This will depend on the geopolitical situation continuing to simmer to an uncomfortable yet low-intensity state. 

 The other major points to contend with are the data out of developed markets, which hasn't been as inspiring, to say the least, and the Jackson Hole risk event.  The inability of the dollar to extend its recent gains could eventually signal another rally in EM FX, but for now investors will probably stay defensive. Carry trades could be a good option in this environment.

Brazil reports the second preview of August IGP-M on Tuesday. It then reports mid-August IPCA on Wednesday, expected to rise 6.48% y/y vs. 6.51% in mid-July. Weak economic data and slowing inflation will surely lead to chatter about potential rate cut ahead of the October elections, but we see this as highly unlikely. It wouldn’t have much impact over the short run, and would very likely be taken badly by the markets. Brazil reports July current account data on Friday.

Russia reports July retail sales on Tuesday, expected to rise 0.9% y/y vs. 0.7% in June. The economy was weak in H1, and this should carry over and even intensify in H2 as sanctions bite more.

Taiwan reports July export orders on Wednesday, expected to rise 7.3% y/y vs. 10.6% in June. It also reports Q2 current account data later that day. With mainland China stabilizing, Taiwan’s economic outlook should improve. Recent strength in export orders points to strong exports in H2.

South Africa reports July CPI on Wednesday, expected to rise 6.4% y/y vs. 6.6% in June. With price pressures easing and the real economy still weakening, we see no rationale for SARB to hike rates again at its next meeting September 18.

Malaysia reports July CPI on Wednesday, expected to remain steady at 3.3% y/y. Price pressures are elevated, but not by enough to cause an aggressive tightening cycle by Bank Negara. Still, the stronger than expected Q2 GDP report last week should keep the central bank in a hawkish mood for now.

Poland reports July IP on Wednesday, expected to rise 1.8% y/y vs. 1.7% in June. The central bank releases minutes of its last meeting on Thursday. The economy is in fairly good shape, but we know policymakers are concerned about the euro zone economy as well as the Russian situation.

HSBC reports China flash PMI for August on Thursday, expected at 51.5 vs. 51.7 final in July. While the weak July loan data raises some questions about the economy, we believe it was an anomaly. We expect China macro data to remain fairly firm.

Israel reports June manufacturing production Thursday. While the economy is in fairly good shape, policymakers are likely concerned about the potential impact from the Gaza situation. While the central bank is likely to remain in dovish mode, it does not have a lot of room to cut rates. Instead, it may focus on keeping the shekel softer.

Mexico reports Q2 GDP on Thursday, expected to rise 1.5% y/y vs. 1.8% in Q1. It then reports mid-August CPI on Friday. Headline inflation is expected at 4.03% vs. 4.01% in mid-July while core inflation is expected at 3.29% vs. 3.20% in mid-July. The economy should pick up in H2. Coupled with upwardly creeping inflation, we see the central bank on hold in H2.