Emerging Markets: Week Ahead Preview

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

The EM selloff looks set to continue. USD/BRL is trading at highs not seen since late 2008, while USD/RUB is making all-time highs. Markets are putting greater pressure on the weaker credits, but even the stronger credits are getting hit.

There has been very little resistance by officials to the strengthening dollar trend sweeping across both emerging and developed countries. Brazil and Turkey have made token efforts by boosting their intervention programs, but far from enough. We see more room for EM FX weakness to continue, since the government in most EM countries are happy to have a more competitive currency. However, the "hands-off" trend is likely to begin shifting soon as positioning and pass-through inflation effects start to become a concern for some countries.

Korea reports August IP Tuesday, expected to rise 2.0% y/y vs. 3.4% in July. It then reports September CPI and trade Wednesday. CPI is expected to rise 1.5% y/y vs. 1.4% in August, while exports are seen rising 6.9% y/y and imports seen rising 6.5% y/y. Inflation is still well below the 2.5-3.5% target range, and there are still disinflationary forces in play from lower energy and food prices. If the economy slows, the BOK could resume cutting rates.

HSBC reports final September China PMI Tuesday, expected to remain steady from the flash reading at 50.5. Official manufacturing PMI will be reported Wednesday, expected at 51.0 vs. 51.1 in August. Non-manufacturing PMI will be reported Friday. Despite the firmer than expected HSBC PMI reading, global commodity prices remain soft. Iron ore prices continue to make new cycle lows.

Reserve Bank of India meets Tuesday and is expected to keep rates steady. Although price pressures eased a bit in August, inflation risks persist as the impact of the weak monsoon rains is still being felt. As such, we see steady RBI policy through year-end. Fundamentals look set to improve, as Modi inherited an economy that was already bottoming.

South Africa reports August money and credit growth, trade, and budget data Tuesday. This will be followed by September PMI on Wednesday, expected at 49.8 vs. 49.0 in August. Fundamentals remain weak, and the delay in naming a successor to outgoing SARB Governor Marcus may hurt investor sentiment further.

Turkey reports August trade Tuesday, expected at -$6.7 bln vs. -$6.5 bln in July. It then reports September PMI Wednesday followed by September CPI Friday, expected to rise 9.38% y/y vs. 9.54% in August. External account have improved this year, but mostly due to slow growth that has impacted import demand. Inflation remains too high, and justifies the central bank decision to keep rates steady last week.

Brazil reports August fiscal data Tuesday, with the primary balance expected at BRL100 mln vs. -BRL4.7 bln in July. It then reports September trade on Wednesday, followed by September FIPE inflation and August IP (-5.7% y/y consensus) on Thursday. Brazil central bank last week tweaked its FX swaps rollover program in response to BRL weakness, but stronger measures will likely be needed. The October 5 elections are nearing, but a second round on October 26 seems very likely.

Chile reports August manufacturing production and retail sales on Tuesday, with both expected to show continued weakness. Also on Tuesday, the central bank will release minutes from its last meeting on September 11, when it cut rates 25 bp to 3.25%. The economic outlook remains weak, and so we may see another 25 bp cut at the next meeting October 16. The minutes could provide some clues on this matter.

Indonesia reports August trade and September CPI Wednesday. Exports are expected to rise 8.65% y/y vs. -6% y/y in July, while CPI expected to rise 4.5% y/y vs. 4.0% in August. Inflation should remain within the 3.5-5.5% target range for now, and would allow Bank Indonesia to maintain steady policy until the impact of global headwinds can be better gauged.

Thailand reports September CPI Wednesday, expected to rise 1.97% y/y vs. 2.09% in August. Core inflation is seen rising 1.85% y/y vs. 1.83% in August, and seems likely to remain within the 0.5-3.0% target range for now. The economy has yet to recover from the political crisis, and now faces additional headwinds due to external developments. BOT has been on hold since the last 25 bp cut back in March, but we think it will have to resume easing if the slowdown persists or worsens.

Mexico reports September PMI Wednesday, with manufacturing component seen at 52.0 vs. 51.6 in August. This will be followed by September consumer confidence Friday, expected at 90.0 vs. 89.7 in August. Overall, the economy appears to be picking up steam and so the central bank is right to remain on hold now. However, the case for tightening is not strong at all, and we see steady Mexico rates until well after the Fed starts hiking.

Hungary reports September PMI on Wednesday, followed by August retail sales on Friday. The central bank last week lowered its 2015 GDP growth forecast from 2.5% to 2.4% while raising the 2014 forecast from 2.9% to 3.3%. For now, the easing cycle has ended but if global headwinds continue to pick up, the central bank may resume cutting rates.