Emerging Markets: Preview of the Week Ahead

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

With some of the big near-term uncertainties gradually being cleared up (Greece and Ukraine), we think EM assets could get some traction this week. That said, EM FX will remain vulnerable and liable to selloffs should the dollar bullish-trend resume in earnest. The outlook for the FED will be the focal point now, and Yellen’s testimony this week could be decisive. We think the needle will move back towards a June hike. This may be a negative development for EM given that some investors are pricing in a later hike. But in the end, the Fed’s communication has been (relatively) clear and will give markets enough time to adjust.

Israel central bank meets later today and is expected to keep rates steady at 0.25%.  Deflation risks continue, but with rates at zero bound, we think policymakers are relying on a weaker shekel as its main policy lever now.  Political risk is rising a bit ahead of the March 17 general elections.  The most recent polls suggest the opposition Zionist Union will win 24 seats to ruling Likud’s 22, giving it first crack at forming a government.  Two weeks ago, Likud had a 4-seat lead, but a critical comptrollers report on questionable household spending by Netanyahu and his wife may be taking a toll.

Mexico reports December INEGI retail sales Monday, expected to rise 1.9% y/y vs. 1.2% in November.  ANTAD retail sales for December have already been reported at 1.3% y/y vs. 2.5% in November, but then recovering to 5.5% y/y in January.  Mexico then reports mid-February CPI Tuesday, followed by Q4 current account Wednesday and January trade Thursday.  Banxico minutes suggest it will follow the Fed with higher rates this year.  Yet, the central bank also lowered 2015 and 2016 growth forecasts and sees inflation remaining near or below the 3% target both years.

South Africa reports Q4 GDP Tuesday, expected to rise 1.0% y/y vs. 1.4% in Q3.  The government then presents the national budget on Wednesday, followed by January PPI Thursday (consensus at 4.7% y/y vs. 5.8% in December).  South Africa then reports January money and credit growth, trade, and budget data Friday.  The fundamental picture remains weak.  However, falling price pressures should prevent SARB from hiking rates.  Indeed, we believe it will move to a more dovish stance as the year progresses.

Turkish central bank meets Tuesday and is expected to cut rates.  However, the market is very split.  Of the 16 analysts polled by Bloomberg, 5 see no change, 4 see a 25 bp cut to 7.5%, 5 see a 50 bp cut to 7.25%, and 2 see a 75 bp cut to 7.0%.  Despite high inflation, we think the bank is likely to bow to government pressure and resume the easing cycle this month.  Turkey reports January trade Friday, expected at -$4.6 bln vs. -$8.5 bln in December.  If so, the 12-month total would drop to -$82.2 bln, the lowest since February 2011.

Hungarian central bank meets Tuesday and is expected to keep rates steady at 2.10%.  For some reason, the bank has remained cautious despite deepening deflation, and says it would like to see March CPI data before making any move.  That makes the April 21 meeting the soonest that it could cut rates.  Obviously, this is subject to change from any developments in the coming weeks.  Whatever the timing, we believe the easing cycle will resume this year.

Brazil reports mid-February IPCA inflation Tuesday.  Also on Tuesday, Brazil reports January current account data, seen at -$10.6 bln.  If so, the 12-month total should remain steady near -4.2% of GDP.  It reports February IGP-M Thursday.  January budget data will be reported Friday, and markets are braced for continued deterioration.  The December 2014 fiscal numbers were the worst since November 1998 for the primary balance (at -0.6% of GDP) and the worst since August 1999 for the nominal deficit (at -6.7% of GDP).  The fundamental picture remains poor, and the data this week should confirm that Brazil continues to face a “twin deficit” problem.

HSBC reports flash China PMI for February Wednesday, expected at 49.5 vs. 49.7 final in January.  Markets are braced for weaker China data ahead, but are also expecting more easing measures by policymakers.  PBOC continues to fix USD/CNY within the 6.11-6.14 range, signaling a desire to keep the exchange rate fairly stable.  US Treasury Undersecretary for International Affairs Sheets recently noted that China has stopped intervening in the FX market, suggesting US criticism of China’s FX policy is easing.

Hong Kong reports Q4 GDP Wednesday, expected to rise 1.6% y/y vs. 2.7% in Q3.  If so, it would be the slowest rate since Q3 12, as it appears that the regional and mainland slowdown is impacting Hong Kong.  Hong Kong then reports January trade Thursday, with exports seen rising 2.2% y/y and imports seen rising 4.0% y/y.  Both would be a pickup from December growth rates. 

Singapore reports January IP Thursday, expected to rise 1.9% y/y vs. -1.9% in December.  Given deflation risks and sluggish growth, we think the MAS will loosen policy again at its April meeting by adjusting its S$NEER trading band.  The last move was a surprise intra-meeting adjustment to the band back in January.

Chile reports January unemployment, retail sales, and manufacturing output Friday.  The economy is struggling to find traction, and so we think the easing cycle will resume later this year once the lower inflation trajectory has been confirmed.  CPI rose 4.5% y/y in January, the lowest since August and down from the 5.7% October peak, but still above the 2-4% target range.  The central bank has been on hold at 3.0% since the last 25 bp cut back in October.