Emerging Markets: The Week Ahead

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

The focus this week will be squarely on the major markets, and Emerging Markets will take the back seat. The FOMC meeting could prove to be a major market moving event for rates and the dollar, which will of course impact EM directly. The take up in the first TLTRO by the ECB will be an important variable for risk appetite and could have collateral impact on sentiment towards CE3, especially PLN and HUF. Lastly, the Scottish referendum is likely to be less important for EM, but a potentially disruptive event for markets nevertheless.

Israel reports August CPI Monday, expected to rise 0.2% y/y vs. 0.3% in July. It follows up with Q2 GDP on Tuesday. With inflation at cycle lows, it’s no surprise that policymakers are focusing on growth. Interest rates really can’t go any lower, and so further easing will focus on unconventional measures, and probably trying to weaken the currency. Recent official comments suggest comfort with an exchange rate around 3.7-3.8.

Colombia reports July retail sales and IP on Monday, with the former expected to rise 7.0% and the latter expected to rise 3.5% y/y. On Tuesday, it reports Q2 GDP and is expected to rise 4.6% y/y vs. 6.4% in Q1. With lower commodity prices and previous tightening likely to push inflation down going forward, we think the tightening cycle is nearing an end in Colombia.

Singapore reports August trade Wednesday, with NODX expected to rise 2.6% y/y vs. -3.3% in July. Data have mostly been coming in weak, and we think there is a growing chance of a dovish tilt to MAS policy when it meets in October. MAS runs monetary policy via the exchange rate and right now, current policy is for a gradual appreciation of S$NEER. We think it could move to zero appreciation policy in light of the weak economy.

Thai central bank meets Wednesday and is expected to keep rates steady at 2.0%. Data have remained soft, while price pressures remain limited. As such, we think the BOT will stand pat while maintaining a dovish bias, with risk of easing ahead. Rates have been steady since a 25 bp cut in March.

South Africa reports August CPI on Wednesday, expected to rise 6.2% y/y vs. 6.3% in July. It also reports July retail sales, expected to rise 0.6% y/y after a flat reading in June. South African Reserve Bank then meets Thursday and is expected to keep rates steady at 5.75%. The market is a bit split, however. Of the 20 analysts polled by Bloomberg, 15 see steady rates and 5 see a 25 bp hike to 6.0%. Given downside risks to growth and inflation across most of EM, we see steady rates and we think any tightening cycles under way will end up very shallow. SARB falls into this category, and we see steady rates this year with growing risk of easing in 2015.

Malaysia reports August CPI Wednesday, expected to remain steady at 3.2% y/y. The central bank then meets Thursday and is expected to keep rates steady at 3.25%. The market is split, however. Of the 17 analysts polled by Bloomberg, 10 see steady rates and 7 see a 25 bp hike to 3.5%. Here too, data have started to come in softer. While price pressures remain somewhat elevated, we think the focus will move toward growth. As such, we see steady rates now and the tightening cycle should end up being very shallow.

Poland reports August IP Wednesday, expected to rise 0.2% y/y vs. 2.3% in July. On Thursday, minutes from its meeting will be released. Deflationary risks remain strong, and we know that a rate cut was discussed at this meeting. Minutes should shed some light on easing prospects ahead, but Belka has already highlighted risks for more than one rate cut.

Russia reports August retail sales Wednesday, expected to rise 1.0% y/y vs. 1.1% in July. Central bank kept rates steady last week, though we felt there was a chance of a hike given RUB weakness. They may be forced into hiking again if RUB selling continues. Deeper sanctions were ostensibly the reason for RUB underperformance last week. Sharply lower commodity prices have also added to the Russian gloom.

Brazil reports mid-September IPCA and second September preview of IGP-M inflation on Friday. The former is seen accelerating to 6.55% y/y, while the latter is seen decelerating to 3.7% y/y. Lower global commodity prices should at the margin help lower Brazil price pressures at the consumer level, but not by enough to warrant any BCB easing anytime soon. Polls suggest a very close race ahead, as Marina’s initial surge has worn off a bit.

Banco de Mexico releases minutes from its meeting on Friday. With the data starting to pick up and inflation above target, we think Banxico will continue to send the message of no more rate cuts ahead. Yet, tightening is still a ways off and probably won’t be seen until well after the Fed starts hiking rates next year.