Emerging Markets: Preview of the Week Ahead

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

Falling commodity prices and better US economic data are the biggest macro drivers for EM, overriding just about all idiosyncratic variables – perhaps with the exception of the weaker yen for Korea. We note that aside from the huge fall of over 40% in the price of Brent oil from its highs, iron ore is down about 50% this year. Brazil, China and India are the biggest EM producers of iron ore. Markets are also becoming apprehensive of the parabolic rise in Chinese equities, in part due to expectations for further easing, which could be dashed just as fast as they have been created. Indeed, we think downside risks will continue to emanate from China, and could add more negative impulses to EM sentiment ahead.

Czech Republic reports November CPI Tuesday, expected to remain steady at 0.7% y/y. While economic data have been firm recently, we think downside risks remain high. October IP, trade, and construction output were all softer than expected. We expect the EUR/CZK floor to be maintained until 2016.

Hungary reports October trade Tuesday, expected at EUR700 mln vs. EUR939 mln in September. Central bank minutes will be released Wednesday. This will be followed by November CPI Thursday, expected at -0.5% y/y vs. -0.4% in October. Deflation risks continue, and we think the central bank may have to resume easing next year.

South Africa reports October manufacturing production Tuesday, expected to rise 2.4% y/y vs. 8.0% in September. It then reports CPI Tuesday, expected at 5.8% y/y vs. 5.9% in October. Core is expected to remain steady at 5.7% y/y. October retail sales will also be reported Tuesday, expected to rise 2.1% y/y vs. 2.3% in September. Q3 current account data was worse than expected, with the deficit coming in at -6% of GDP.

Chile reports November trade Tuesday, expected at $425 mln vs. $563 mln in October. The central bank meets Thursday and is expected to keep rates steady at 3.0%. Brazil trade data was awful for November, and so we expect similar readings from Chile. The central bank is likely on hold as inflation moves further above the 2-4% target range, with the weak peso adding to price pressures.

Mexico reports November CPI Tuesday, expected to rise 4.17% y/y vs. 4.30% in October. It also reports November ANTAD retail sales Tuesday, expected to rise 2.3% y/y vs. 2.1% in October. Mexico reports October IP Friday, expected to rise 3.2% y/y vs. 4.8% in September. The central bank delivered a very dovish message last Friday, on both interest rates and exchange rates. We do not think Banxico will feel compelled to follow the Fed higher in terms of rates next year.

China reports November CPI and PPI Wednesday. The former is expected to remain steady at 1.6% y/y, while the latter is expected at -2.4% y/y vs. -2.2% in October. China will also report November new loan and money data over the next week, but no date has been set. It is scheduled to report November retail sales and IP on Friday. Markets are braced for weaker China data this month, which would support our view that more PBOC easing is in the pipeline. Weak November import data shows some downside risks to domestic demand.

Turkey reports Q3 GDP Wednesday, with growth expected at 2.7% (2.6% WDA) y/y vs. 2.1% (2.4% WDA) in Q2. October current account will be reported Thursday, expected at -$1.9 bln vs. -$2.22 bln in September. Lower oil prices have helped improved fundamentals, and that should continue. However, the economy remains sluggish and so the central bank will likely come under greater pressure to resume easing.

Bank of Korea meets Thursday and is expected to keep rates steady at 2.0%. The market is split. Of the 13 analysts polled by Bloomberg, 3 see 25 bp cut and 10 see no move. We think they should, but then again, we thought they should've cut months ago. With JPY/KRW moving lower, we may get a dovish surprise. JPY/KRW is pushing lower to the lowest levels since early 2008. Rule of thumb is that Korean exporters like this cross above 10, and it's getting close to 9 instead.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.75%. After the surprise 25 bp hike last month after fuel subsidies were cut, the bank is likely to stand pat. However, it should maintain a hawkish bias for now, and there is a small chance of a hawkish surprise this week if BI sees the weaker rupiah pushing inflation risks higher.

Philippines central bank meets Thursday and is expected to keep rates steady at 4.0%. Lower oil prices and slowing regional growth support our view that the tightening cycle is over for now. Fundamentals remain solid, but there are already signs that exports and economic growth are already feeling some headwinds.

Brazil central bank minutes will be released Thursday. Markets did not react well to its policy statement after the 50 bp hike, so the minutes could be very important. Brazil is then scheduled to report October retail sales on Friday, expected to rise 0.9% y/y vs. 0.5% in September. The country faces a difficult mix of high inflation, weak demand, and worsening fiscal and external accounts.

Russian central bank meets Thursday. Most expect no change, according to BBG consensus, but forecasts are all over the place with a minority looking for anywhere from 25-250 bp of tightening. Inflation spiked higher in November, and so a case for more tightening can be made. But so far, past hikes have had little success in stabilizing the ruble.

Peru central bank meets Thursday and is expected to keep rates steady at 3.5%. However, the market is split. Of the 14 analysts polled by Bloomberg, 5 see a 25 bp cut and 9 see no move. Given the downside risks to the economy, we think the easing cycle is likely to continue in 2015. Falling commodity prices remain a big concern for Peru.

India reports November CPI and October IP Friday. The fundamentals continue to improve, and falling inflation should allow the RBI to ease policy in Q1 2015, as Governor Rajan has hinted at. The economy should accelerate in 2015 due to stronger domestic demand. India has the benefit of having a large domestic market and does not compete with Japan in terms of export structure. As such, India (as well as Indonesia) should perform well in the current slow global growth/weak yen environment.