Emerging Markets: Week Ahead Preview

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

We think the rally in EM assets has longer to run, especially on the equity side, but we are growing more cautious as we move into Q4. For now, the positive election cycle is most behind us, with the exception of Brazil. 

Growth in Europe is slowing while the Chinese economy continues to lack momentum, as seen by tumbling iron ore prices. All that said, we don’t foresee any big downside risks for EM, especially on the FX side. EMEA is likely to come under more pressure than the other regions given the links to Europe and proximity to the Russia-Ukraine situation. 

Korea reports August CPI on Tuesday, expected to remain steady at 1.6% y/y. Despite the BOK’s stance that further rate cuts are unlikely, low inflation will give the central bank leeway to cut again if needed. Q2 final GDP is reported on Thursday.

Official and HSBC China services PMI for August will both be reported Wednesday. Manufacturing PMI readings were on the soft side. The data deluge starts in earnest next week, and markets will be looking for signs that the slowdown is limited.

The Brazilian central bank meets Wednesday and is expected to keep rates steady at 11.0%. Brazil reports August FIPE inflation on Thursday and then IPCA inflation on Friday. The economic data remain weak, even as inflation is topping out, but we see no rate cut for the foreseeable future.

Hungary reports July retail sales Wednesday, expected to rise 3.6% y/y vs. 4.1% in June. It then reports July IP on Friday, expected to rise 10.1% y/y WDA vs. 11.3% in June. The economy remains firm, supporting the central bank’s decision to keep rates steady at 2.1% last week. The easing cycle is over, but we do not see tightening until 2015.

Turkey reports August CPI Wednesday, expected to rise 9.36% y/y vs. 9.32% in July. The central bank kept its main policy rate steady at 7.5% last week, as price pressures remain too high to allow for easing now (despite government jawboning). Meanwhile, the central bank’s already low credibility continues to be chipped away.

Polish central bank meets Wednesday and is expected to keep rates steady at 2.5%. The recovery continues, but we know policymakers are worried about potential headwinds coming from external developments. 

Czech Republic reports July retail sales Thursday, expected to rise 4.8% y/y vs. 8.2% in June. Overall, the economic recovery continues but policymakers remain concerned about the negative impact coming from the euro zone and Russia.

Taiwan reports August CPI Friday, expected to rise 1.8% y/y vs. 1.75% in July. The economic data have been coming in a bit mixed lately, but low price pressures should allow the central bank to remain on hold for now.

Philippines reports August CPI Friday, expected to rise 5.0% y/y vs. 4.9% in July. The economy remains firm, with recent data coming in a bit firmer than expected. With price pressures still rising, we believe the tightening cycle will continue with another 25 bp hike to 4.0% on September 11.

Colombia reports August CPI Friday, expected to rise 2.95% y/y vs. 2.89% in July. The central bank hiked rates 25 bp to 4.5% last Friday, as expected. However, the language suggests the bank will remain on hold now.

The Mexican central bank meets Friday and is expected to keep rates steady at 3.0%. Earlier that day, August consumer confidence will be reported, expected at 91.0 vs. 90.5 in July. The economic data have been coming in a bit firmer in Q3, supporting our view that the US recovery will pull Mexico along too, and that further easing won’t be needed.