Emerging Market Preview of the Week Ahead

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

After an eventful few sessions, EM assets this week will be wedged between a US holiday on Monday and expectations ahead of the ECB meeting on Thursday. Bar any unexpected developments, we doubt there will be a lot of conviction for trades in the near term.

The three main market factors to watch will be: (1) how Chinese markets behave after the regulatory crackdown on margin trading which led to a near 8% selloff on Monday; (2) the potential for a dovish surprise for Turkey’s central bank meeting; (3) new headlines from Poland and Hungary regarding FX-linked debt related losses and potential government support (Poland already hinted at some) following the Swiss move.

China reports December retail sales and IP on Tuesday. The former is expected to rise 11.7% y/y, while the latter is expected to rise 7.4% y/y. Q4 GDP will also be reported Tuesday, expected to rise 7.2% y/y vs. 7.3% in Q4. On Friday, HSBC reports its flash China manufacturing PMI, expected at 49.5 vs. 49.6 final reading in December. Markets are prepared for further softening of Chinese data, but so far have digested it well. Expect more fine-tuning easing measures from PBOC in 2015.

Taiwan reports December export orders Tuesday, expected to rise 1.8% y/y vs. 6.0% in November. It then reports December IP and commercial sales Friday. The former is expected to rise 4.48% y/y vs. 6.86% in November, while the latter is expected to rise 1.1% y/y vs. 0.7% in November. With the mainland economy slowing, it’s no surprise to see some knock-on effects for Taiwan. The central bank has kept rates steady at 1.875% since June 2011. With the PBOC already easing and more to come, we expect Taiwan’s central bank to lean dovish and cut rates too in 2015.

Turkish central bank meets Tuesday. Consensus is for no change, but the market is split. Of the 22 analysts polled by Bloomberg, 14 see no change, 6 see a 25 bp cut, and 2 see a 50 bp cut. Given all the dovish central bank surprises last week, we think the odds of a cut from Turkey are pretty high. The central bank would probably like to wait one more month for confirmation on the inflation trends, but it is coming under increasing pressure as Erdogan and the government have resumed jawboning for lower rates. The macro picture justifies a cut soon, with inflation falling and growth sluggish. If not this month, then we almost certainly see a cut in Q1.

Poland central bank releases minutes of its policy meeting last week on Tuesday, when it kept rates steady at 2.0%. Policy statement left the door open for more rate cuts if deflation risks deepened. We think they have, and look for rate cuts in Q1 or early Q2. Poland then reports December IP and PPI on Wednesday. The former is expected to rise 5.2% y/y vs. 0.3% in November, while the latter is expected at -2.1% y/y vs. -1.6% in November.

Mexico reports December ANTAD retail sales on Tuesday, expected to rise 0.8% y/y vs. 2.4% in November. It then reports mid-January CPI Thursday, expected to rise 3.47% y/y vs. 4.20% in mid-December. Core is expected to rise 2.68% y/y vs. 3.27% in mid-December. This is the main reason we don’t look for higher Mexico rates this year, despite the recent warning from Governor Carstens. Lack of price pressures and negative impact of lower oil prices should keep Banxico on hold in 2015. If anything, balance of risks is tilted towards lower rates, not higher.

Malaysia reports December CPI Wednesday, expected to rise 2.9% y/y vs. 3.0% in November. There are upside risks to inflation due to fuel subsidy cuts, but the central bank is unlikely to react to such one-off factors. It appears that its tightening cycle is shaping up to be a rare “one and done.” Indeed, Bank Negara should take a more dovish bias as the year progresses.

South Africa reports December CPI Wednesday, expected to rise 5.5% y/y vs. 5.8% in November. Falling commodity prices should allow the SARB to refrain from any further tightening. Indeed, we see risk that an easing cycle begins in 2015 since the economy remains so weak. South Africa still faces downgrade risk if slow growth prevents the fiscal targets from being met.

Brazil central bank meets Wednesday and is expected to hike rates 50 bp to 12.25%. On Friday, Brazil reports mid-January IPCA inflation, expected to rise 6.7% y/y vs. 6.46% in mid-December. This brings inflation back above the 2.5-6.5% target range after a brief dip below. With electricity costs likely to be hiked this year (Energy Minister Braga hinted at 20-25%), the inflation outlook remains pretty bad. However, with the economy so sluggish, the central bank will not want to tighten too aggressively. Language after the COPOM decision Wednesday will be very important. Brazil also reports December current account data on Friday, expected at -$9.5 bln. This would keep the deficit above -4% of GDP for the second straight month.

Korea reports Q4 GDP Friday, expected to rise 2.8% y/y vs. 3.2% in Q4. The economy is facing strong headwinds, while inflation is well below the 2.5-3.5% target range. The BOK kept rates steady last week, even as it cut its growth and inflation forecasts for 2015 and 2016. We think it will cut rates this year, and the sooner the better.

Singapore reports December CPI Friday, expected at -0.1% y/y vs. -0.3% in November. Real sector data was mixed last week, with retail sales weaker than expected and trade stronger than expected. Overall, however, deflation risks are building and we think the MAS is likely to loosen policy at its April policy meeting by adjusting its S$NEER trading band.

Peru central bank releases its quarterly inflation report Friday. This should be of interest given the surprise 25 bp cut last week. We expect a very benign inflation outlook to be outlined, which would keep the door open for further easing ahead. Meanwhile, the economy continues to slow, hurt by falling commodity prices.