Emerging Market Preview: Week Ahead

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

Waning risk appetite along with growing uncertainty in Europe about Greece have set up emerging markets for a difficult week. In addition, the wave of monetary policy easing and expectations for further easing by EM central banks has removed another buffer against further currency depreciation. This will become especially important if the trend of dollar appreciation continues – which we expect to happen, even if not immediately. 

The exception, of course, is Brazil, where rates are set to go even higher. We also note that the Mexican peso is facing an important technical level of MXN 15.0 against the dollar, and a decisive break of this level could trigger further selling. The Chinese yuan is also worth watching, with the spot and fixing both continuing to edge higher, though we stick to our view that currency weakness will be temporary and not the beginning of a longer trend.

Brazil reports January trade Monday.  Export are seen -13% y/y, while imports are seen -16% y/y.  Brazil then reports December IP Tuesday, expected at -2.3% y/y vs. -5.8% in November.  Brazil reports January IPCA inflation Friday, expected to rise 7.11% y/y vs. 6.41% in December.  This is well above the 2.5-6.5% target range, and signals more rate hikes ahead despite the weak economy.  Twin deficits are likely to get even worse.

Korea reports January CPI Tuesday, expected to rise 0.9% y/y vs. 0.8% in December.  This remains well below the 2.5-3.5% target range, and yet the BOK has stood pat.  We think easing will resume this year, as the real sector is showing signs of further weakness, though the January manufacturing PMI rose to 51.1 from 49.9. 

Reserve Bank of India meets Tuesday and is expected to keep rates unchanged.  However, we cannot rule out another dovish surprise after the one in January.  Of the 35 analysts polled by Bloomberg, 27 see no change and 8 see a 25 bp cut.  If not February, then the next cut is likely at the meeting that follows.  Price pressures remain very low. The manufacturing PMI slipped to 52.9 in January from 54.5 in December. 

Turkey reports January CPI Tuesday, expected to rise 6.79% y/y vs. 8.17% in December.  Governor Basci has warned of a potential emergency meeting and rate cut on Wednesday if inflation falls more than one percentage point.  However, the plunging lira led officials to suggest Friday that current market conditions were not conducive to rate cuts.  Turkey's manufacturing PMI fell to 49.8 from 51.4, the first sub-50 reading since last July. 

Singapore reports January PMI Tuesday.  We expect to see further weakness in the data after the MAS surprise easing last week.  As such, we would not rule out another easing move at the regularly scheduled April policy meeting.

Mexico reports January PMI Tuesday.  It then reports January consumer confidence Friday. Banco de Mexico policy statement last week was quite dovish, even as it kept rates steady at 3%.  While steady rates are likely this year, we think the risks are tilted towards lower rates, not higher.

HSBC reports China January services and composite PMI Wednesday.  Markets are prepared for softer China data, but are also expecting further stimulus measures.  The official measures were out over the weekend.  The manufacturing slipped to 49.8 from 50.1 and the service sector slipped to 53.7 from 54.1.   The final HSBC manufacturing measures was revised to 49.7 from 49.8.  We do not think the PBOC has embarked on a plan to weaken the yuan. 

Czech retail sales for December will be reported Wednesday, expected to rise 5.5% y/y vs. 0.8% in November.  The central bank meets Thursday and is expected to keep policy unchanged, but could extend its forward guidance deeper into 2016 as the overall economic outlook remains vulnerable.  December industrial and construction output and trade will be reported Friday.  Its January manufacturing PMI rose to 56.1 from 53.3.  This is the highest level since July. 

Hungary December retail sales will be reported Wednesday expected to rise 5.8% y/y vs. 5.1% in November.  It then reports December IP Friday.  The economy is recovering, but remains vulnerable to the weak eurozone outlook.  We think easing will resume, especially as deflation remains deep in Hungary at -0.9% y/y in December. Earlier today Hungary reported a 54.2 on its manufacturing PMI, up from 50.9 in December

Polish central bank meets Wednesday and is expected to keep rates unchanged at 2.0%.  However, a small minority of analysts are looking for a 25 bp cut.  We think that easing will resume this year as deflation risks remain strong.  Poland reported its January manufacturing PMI rose to 55.2 from 52.8.  This is the strongest reading since last February. 

Taiwan reports January CPI Thursday, expected to rise 0.3% y/y vs. 0.6% in December.  With absolutely no price pressures to speak of, we think the central bank will lean more dovish and cut rates later this year.   The January manufacturing PMI rose to 51.7 from 50.0.

Philippines reports January CPI Thursday, expected to rise 2.3% y/y vs. 2.7% in December.  Q4 GDP was much stronger than expected, and should keep the central bank on hold near-term.  However, falling inflation and rising headwinds should move the central bank into the easing camp later this year.

Colombia reports January CPI Thursday, expected to rise 3.79% y/y vs. 3.66% in December.  Inflation is still rising and moving towards the top of the 2-4% target range.  This may keep the central bank on hold near-term, but we expect an easing cycle to start later this year.

Chile reports January CPI Friday, expected to rise 4.3% y/y vs. 4.6% in December.  Inflation remains above the 2-4% target range, but is falling back towards it.  We think the central bank will resume easing later this year, as the economy remains sluggish.