Emerging Markets: The Week Ahead

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

Emerging market assets, in general, are lacking a defined direction. The fall in commodity prices seems to be stabilizing, for now at least, but the impact of the large level shift is still to be felt globally. Meanwhile, the dollar appears to be consolidating, which will reduce the pressure on EM assets. We do think the dollar uptrend remains intact, and should continue to hurt EM in the coming weeks. Asian countries, especially Korea, are still adjusting to the rapid depreciation of the yen, and if it continues, there will be action for sure. 

Idiosyncratic stories are mixed. The financial and geopolitical situation is Russia is still very tense and we are not yet convinced the bottom is in place. Brazilian politics are looking ever more complicated for Dilma’s new administration, which hasn’t even picked its finance minister. Meanwhile, financial reforms continue apace in China, buoying markets. 

Hungary reports October CPI Tuesday, expected at -0.3% y/y vs. -0.5% in September. Central bank minutes will be released Wednesday. Q3 GDP will be reported Friday, with growth expected at 2.9% y/y vs. 3.9% in Q2. The CEE countries are all facing headwinds from Western Europe. The central bank is on hold for now, but if these headwinds grow, we think continued deflation will allow it to resume cutting rates again.

South Africa reports September manufacturing production Tuesday, expected to rise 5.6% y/y vs. -1.2% in August. It then reports September retail sales on Wednesday, expected to rise 2.8% y/y vs. 2.1% in August. Fiscal tightening has helped the ratings situation for now, but at the cost of slower growth. The recent Moody’s downgrade was warranted but we disagree with the move to a stable outlook. We think that downgrade risk remains strong. 

Mexico reports September IP and October ANTAD retail sales Tuesday. The former is expected to rise 3.4% y/y while the latter is expected to rise 1.4%. Central bank minutes will be released Friday. The statement after the policy meeting last Friday was optimistic but balanced. It noted a “moderate recovery” under way, with external demand helping to bolster the economy. However, it said aggregate demand is not pressuring prices. It acknowledged the improvement in the macro outlook, but emphasizes little concern about price pressures now. 

India reports October CPI and September IP on Wednesday. The former is expected at 5.7% y/y vs. 6.46% in September, while the latter is expected at 0.5% y/y vs. 0.4% in August. October WPI will be reported Friday, seen rising 2.1% y/y vs. 2.38% in September. Price pressures continue to ease, but the RBI is likely to remain on hold for the time being as subsidy cuts still have to work their way through the economy.

Bank of Korea meets Thursday and is expected to keep rates steady at 2.0%. However, there is some risk of a dovish surprise given rising concerns about the weak yen and its impact on the Korean economy. We think BOK will continue cutting rates in the coming months, in the hopes of boosting growth and weakening the won.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%. With the fuel subsidy cuts still looming, we think the central bank will be cautious and keep rates steady into 2015. Indeed, inflation ticked higher to 4.83% y/y in October from 4.53% in September, and warrants caution.

China’s data deluge continues this week after October trade was reported over the weekend. Money and loan data is expected sometime this week, with new yuan loans expected at CNY626 bln vs. CNY857 bln in September. October retail sales and IP will be reported Thursday, with the former expected at 11.6% y/y and the latter expected at 8.0% y/y. We downplay talk of large-scale stimulus, and instead believe China will continue its current strategy of targeted stimulus.

Turkey reports September current account data Thursday, expected at -$2.6 bln. If so, this would keep pushing the 12-month total lower. Note that the trade deficit that month came in a little bit better than expected. Turkey is a big beneficiary of lower oil prices, and this should keep the external accounts in good shape even when growth and import demand picks up. Inflation still remains too high for the central bank to ease anytime soon.

Poland reports September trade and current account data as well as October CPI on Thursday. CPI is seen at -0.4% y/y vs. -0.3% in September. It then reports Q3 GDP on Friday, seen rising 2.7% y/y vs. 3.3% in Q2. The central bank confounded expectations by keeping rates at 2% last week. We think it will ease in December, but we’re not sure why they bothered waiting as deflationary risks remain strong.

Peru central bank meets Thursday and is expected to keep rates steady at 3.5%. The easing cycle has been fairly measured this year. After the 25 bp cut in September, the bank stood pat in October and so there is a very small chance of a dovish surprise here. Economic data remain soft, so further easing seems likely in the coming months. 

Brazil reports September retail sales Friday, expected to rise 0.7% y/y vs. -1.1% in August. The stars have aligned for continued BRL weakness, including bad budget and current account deficits, slow growth, and high inflation. That trend should continue near-term. Rousseff needs to quickly appoint an economic team that will impact market sentiment positively. Right now, the names being floated to replace Mantega as Finance Minister do not appear to fit the bill.

Colombia reports September retail sales and IP Friday. The former is expected at 7.0% y/y vs. 7.5% in August, while the latter is expected at 1.0% y/y vs. 0.3% in August. Central bank minutes will also be released Friday. The tightening cycle has ended, as data have come in softer and oil prices have continued to weaken. We think the rate hikes will be partially reversed with some easing in 2015.