Emerging Markets: Week Ahead Preview

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

EM assets are starting the week mixed, as markets await fresh signals for trading. Between the various central bank meetings in developed markets (BOE, ECB, RBA, and BOC) and the US non-farm payrolls, there are plenty of sources of volatility.  We think the jobs data will underscore our call for a Fed takeoff around midyear. On the EM side, markets will be closely watching for a chance of dovish surprise out of Brazil or Poland, though we think the chances of this happening in Brazil are very slim. 

Turkey CPI ocould impact CBT easing expectations, as well as a continuation of the verbal assaults on the bank.  Oil has been very volatile but has not broken any new ground on the upside or downside over the last couple of weeks, but will continue to be a potential for asymmetric risk to the asset class.

Mexico reports February PMI Monday.  Real sector data has been firming a bit recently, despite low oil prices.  On the other hand, inflation is running quite low and supports our view that a Banxico rate hike this year is by no means assured.  February CPI data out next week should confirm this.

Brazil reports February trade Monday.  It then reports January IP Wednesday.  COPOM meets later that day and is expected to hike rates by another 50 bp to 12.75%.  On Friday, Brazil reports February IPCA inflation, expected to rise 7.57% y/y vs. 7.14% in January.  Market sees no more hikes after this week, but that will depends on many things going just right for Brazil.  Price pressures are still rising, and so there is a risk that more tightening is in the pipeline.

Korea reports February CPI Tuesday, expected to rise 0.7% y/y vs. 0.8% in January.  Core inflation is seen steady at 2.4% y/y.  Bank of Korea targets headline inflation between 2.5-3.5%, yet below-target inflation has not led to any rate cuts since the last 25 bp back in October 2014.  We think the BOK will cut more this year, as headwinds build.

Taiwan reports January export orders Tuesday, expected to rise 9.7% y/y vs. 4.5% in December.  Export growth has been slowing, so a pickup in orders would be welcome news.  Taiwan then reports January IP Wednesday, expected to rise 8.0% y/y vs. 7.3% in December.  Commercial sales will also be reported Wednesday.  We think the economy continues to slow, and that the central bank may have to move to a more dovish stance this year.

Turkey reports February CPI Tuesday, expected to rise 7.42% y/y vs. 7.24% in January.  Core inflation is seen falling to 8.2% y/y from 8.63% in January.  Further rate cuts are expected, as above target (3-7%) inflation did not prevent the central bank from easing at its regular February meeting.  Governor Basci is still suffering a lot of public abuse by the government.  We think the chances of him resigning are rising, perhaps up to 25% now.  If that happens, get ready for a serious sell-off in TRY.

HSBC composite China PMI will be reported Wednesday.  HSBC flash manufacturing PMI moved back above 50, offering some signs of recovery in the economy.  However, PBOC FX policy remains a bit unclear after last Friday’s USD/CNY fix at the highest level since November.  Given nascent signs of a recovery, we do not think China’s FX policy has changed, and see basic stability in the coming months.

Hungary reports January retail sales Wednesday, expected to rise 4.9% y/y vs. 5.6% in December.  It then reports January IP on Friday, expected to rise 4.0% y/y vs. 4.6% in December.  Despite firm economic numbers, deflationary risks remain strong.  We believe the central bank will resume rate cuts, and markets are starting to price in risk of a rate cut at the March 24 meeting.  Central bank minutes on March 11 should provide some clues to the timing.

Poland central bank meets Wednesday and is expected to cut rates 25 bp to 1.75%.   However, the market is split.  Of the 34 analysts polled by Bloomberg, 22 see a 25 bp cut, 10 see a 50 bp cut, and 2 see no change.  Deflation risks are intensifying, and Governor Belka has strongly hinted that easing would resume.  It has been on hold since the surprise 50 bp cut back in October.  Since then, the macro outlook has dimmed.

Philippines reports February CPI Thursday, expected to rise 2.5% y/y vs. 2.4% in January.  Core inflation is seen rising to 2.4% y/y from 2.2% in January.  The bank targets inflation between 3-5%.  While the economy remains robust, growing headlines should push the bank into dovish mode this year.

Malaysia central bank meets Thursday and is expected to keep rates steady at 3.25%.  On Friday, Malaysia reports January trade, with exports expected to rise 1.7% y/y and imports expected to rise 0.6% y/y.  Here too, headwinds are building and so we expect the central bank to join the dovish crowd this year and ease.

Colombia reports February CPI Thursday, expected to rise 3.88% y/y vs. 3.82% in January.  This is still within the 2-4% target range, but could move above it in the coming months.  The slowing economy should get the central bank to start easing later this year, but only when the inflation trajectory has improved.

Chile reports February CPI Friday, expected to rise 4.3% y/y vs. 4.5% in January.  The January gain was the lowest since August, down from the 5.7% October peak but still above the 2-4% target range.  The slowing economy should get the central bank to resume easing later this year, especially if disinflation continues.