Emerging Markets: Preview of the Week Ahead

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

Emerging markets seem to be on a slightly better footing after a few turbulent weeks. Many EM currencies were able to appreciate against the dollar in the wake of the ECB’s QE announcement, despite most major currencies depreciating. Meanwhile, EM fixed income markets were able to benefit from the trend lower in yields and equity markets were buoyed by the global rally and the stabilization in energy markets. We doubt that weakness in EM is entirely behind us, but it appears as if we are entering into a stage of greater differentiation. Broadly speaking, we still think Asia has a greater potential to outperform in the short term, followed by EMEA, while LatAm is likely to underperform, in our view.

Mexico reports November ANTAD retail sales Monday.  Consumption has been improving in recent months, but may be impacted by job losses due to lower oil prices.  This will be followed by December trade Tuesday.  Export growth has slowed two straight months, though manufacturing strength has helped offset some weakness from petroleum.  Banco de Mexico then meets Thursday and is expected to keep rates steady at 3.0%.  Inflation is falling sharply, and suggests that Carstens will likely reevaluate his outlook for higher Mexico rates in 2015.

Israeli central bank meet shortly today, and as expected to keep rates steady at 0.25%.  With rates at the lower bound, the bank has raised the possibility of unconventional measures.  For now, the weak shekel is doing the heavy lifting, and policymakers seem comfortable with this.  

Korea reports December consumer confidence Tuesday.  It then reports December IP on Friday, expected at -1.6% y/y vs. -3.4% in November.  Consumption and economic activity is slowing, and headwinds are building.  Q4 GDP rose only 2.7% y/y, the slowest since Q2 2013.  We think the BOK will resume easing soon, following the global trend of looser monetary policy.

Poland reports December retail sales Tuesday, expected to rise 2.2% y/y vs. -0.2% in November. December unemployment will also be reported, expected to rise to 11.6% from 11.4% in November. The central bank is inching closer to a rate cut, as Governor Belka noted that there is close to a majority at the bank that wants to.  Deflationary conditions are likely to deepen and continue.

Hungarian central bank meets Tuesday and is expected to keep rates steady at 2.1%.  While the bank is on hold for now, we think deepening deflation risks will lead to more easing in 2015. Hungary then reports December PPI Friday.  For now, policymakers are signaling that the strong Swiss franc’s impact on Hungary will be limited.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.0%.  However, the market is split.  Of the 15 analysts polled by Bloomberg, 11 see no change and 4 see a 25 bp cut to 1.75%.  We think there is scope for a dovish surprise, especially in light of the numerous dovish surprises we’ve seen around the world lately.  The economy remains weak, and further easing is needed this year.  Thailand then reports December trade on Friday.

Malaysian central bank meets Wednesday and is expected to keep rates steady at 3.25%.  Of the 14 analysts polled by Bloomberg, 13 see no change and 1 sees a 25 bp cut to 3.0%.  We think it’s probably too early to cut here, but do believe easing will be seen in 2015.  The economy is feeling the impact of lower oil prices, and Q4 GDP growth is likely to slip again from 5.6% y/y in Q3 and 6.5% in Q2.

The Philippines reports Q4 GDP Thursday, expected to rise 6.0% y/y vs. 5.3% in Q3.  Given recent trends in manufacturing, trade, and vehicle sales, we think the risks are to the downside here.  The central bank has been on hold since its last 25 bp hike to 4% back in September.  With inflation falling and headwinds on the economy growing, we think an easing cycle will start this year.

Brazil reports January IGP-M wholesale inflation Thursday, expected to rise 3.73% y/y vs. 3.69% in December.  The central bank will also release minutes Thursday from this month’s policy meeting, when it hiked 50 bp to 12.25%.  We expect the minutes to show a more hawkish tilt that leaves the door wide open for further tightening.  Brazil then reports December PPI and fiscal data on Friday.  Fiscal numbers are likely to get worse before they get better.  The current account gap was wider than expected in December, and highlights the growing “twin deficits” problem in Brazil.

Chile reports December manufacturing output and retail sales Thursday.  Both series have been slowing along with the overall economy.  The central bank then releases minutes from its last meeting on Friday.  Though it has held rates steady at 3% since October, the weak economic outlook should lead to resumed easing if inflation continues to ease.

Taiwan reports Q4 GDP Friday, expected to rise 3.25% y/y vs. 3.63% in Q3.  If so, this would be the weakest rate since Q3 2013.  The economy has been slowing for the most part, hurt by the mainland slowdown.  The central bank has been on hold since its last 12.5 bp hike to 1.875% back in June 2011, but we think it is likely to join the parade of dovish central banks sometime this year.

South Africa Reserve Bank meets Thursday and is expected to keep rates steady at 5.5%.  After the lower than expected CPI print for December, Governor Kganyago said the bank was assessing the impact of lower oil prices before making a call on whether to cut interest rates.  This meeting seems too soon, but there is a chance of a dovish surprise.  If not, we think a cut at the March 26 meeting is almost certain if current disinflation trends continue. South Africa then reports December money and private sector credit growth Friday.  It also reports December trade and budget data that same day.

Russian central bank meets Friday and is expected to keep rates steady at 17.0%.  Of the 18 analysts polled by Bloomberg, 17 see no change and 1 sees a 200 bp cut to 15.0%.  However, there has been chatter about changes with new First Deputy Governor Tulin now in charge of monetary policy.  Meanwhile, hostilities in east Ukraine have intensified, and this cuts short a move that had appeared to have been growing in parts of Europe to relax the sanction regime.  

Colombian central bank meets Friday and is expected to keep rates steady at 4.5%.  However, with the economic outlook weakening, we think an easing cycle will start in 2015.  The last move was a 25 bp hike to 4.5% back in August.  Inflation was 3.7% y/y in November and December, within the 2-4% target range but the high for this cycle.  The central bank may feel more comfortable waiting for inflation to move back towards the 3% target.