Emerging Markets: Preview of the Week Ahead

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

Given the absence of any major US data, market attention will be directed to China and Europe.  EM sentiment starts the week caught in a crosscurrent.  

The latest measures by the Chinese government (basically making it easier to short local stocks) set a negative tone at the end of last week.  Then today, the extra stimulus from the PBOC in the form of a 100 bp cut in reserve requirements has helped to offset that, feeding into a rebound in Developed Market stocks.   HSBC gives us the first snapshot of April activity in China with its flash PMI reading.  This is expected to fall further, but damage to sentiment will likely be limited since markets have already priced in further weakness as well as further stimulus.

While not likely to be short-term a market moving event, the voting in the US and negotiations surrounding the Trans-Pacific Partnership trade agreement could lead to some important long-term developments.  In the FX market, the dollar's advance seemed to have stalled in recent weeks, but we still caution against getting too bullish on EM currencies.  Overall, we expect EM FX to continue range-trading, but with a bias towards resumed weakness.   The Greek saga continues, and while a resolution this week is unlikely, there is negative headline risk for EM.

Hungary central bank meets Tuesday and is expected to cut rates 15 bp to 1.8%.  With deflationary risks still present, we think that the bank has scope to ease the policy rate to 1.5% by midyear.  However, we think the risks are tilted towards even more easing, not less.  The firmer forint is also tightening monetary conditions, so the central bank would have to cut rates more just to offset this.

Malaysia reports March CPI Wednesday, expected to rise 0.9% y/y vs. 0.1% in March.  With price pressures so low, we expect Bank Negara to join the parade of easing central banks in Asia this year.  The drop in oil prices will weigh on the economic outlook.  Indeed, GDP growth is seen slowing to 4.7% this year from 6% in 2014.

South Africa reports March CPI Wednesday, expected to rise 4.1% y/y vs. 3.9% in February.  Core CPI is expected to remain steady at 5.8% y/y in February.  Price pressures remain low compared to recent readings, but the SARB retains a hawkish tilt.  The next policy meeting on May 21 will be important, as the bank will likely set the tone for H2 then.  If the data remain soft, then SARB may move to a more neutral/dovish stance.

Turkey central bank meets Wednesday and is expected to keep policy rates steady.  However, the bank may take some minor measures to help support the lira.  With the June elections looming and the AKP’s popularity waning, it will get harder and harder for government officials not to criticize the bank for its cautious stance.  However, easing in the current environment would be terrible for Turkish assets.

Brazil reports March current account data Wednesday, expected at -$5 bln.  If so, the 12-month total would likely fall slightly from the -4.2% of GDP posted in February.  Still, the external accounts remain worrisome, as they are wide despite a sluggish economy.  When domestic demand picks up, imports will rise and put upward pressure on the trade and current account gaps.

Korea reports Q1 GDP Thursday, expected to rise 2.3% y/y vs. 2.7% in Q4.  Bank of Korea has already responded to the weakening economy with a 25 bp rate cut to 1.75% in March, and further easing is expected in Q2 as well as H2.  Deflation risks remain in play, with headline CPI rising only 0.4% y/y in March vs. the 2.5-3.5% target range.  April consumer confidence will be reported Friday, and stood at 101 in March.

HSBC reports flash China manufacturing PMI for April Thursday, expected at 49.4 vs. 49.6 final in March.  This is the first April snapshot, and follows a generally weak Q1.  The PBOC has already responded to the softening economic outlook with a reserve requirement cut over the weekend, and further stimulus is likely this year.  However, Premier Li has pledged not to use a weak yuan to stimulate the economy.

Singapore reports March CPI Thursday, expected at -0.5% y/y vs. -0.3% in February.  Core CPI is seen rising 1.1% y/y vs. 1.35 in February, so the drop in headline is clearly feeding through to the core rate.  Singapore then reports March IP Friday, expected at -5.9% y/y vs. -3.6% in February.  We were surprised that the MAS chose to keep policy steady this month despite deflationary risks and a slowing economy.  We would not rule out further easing this year.

Taiwan reports March IP and commercial sales Thursday.  The former is expected to rise 5% y/y, while the latter is expected to rise 0.75% y/y.  The economy is slowing along with the region.  The central bank has been on hold since June 2011, but could move to a more dovish stance if the data continue to come in soft.

Poland releases central bank minutes Thursday.  The central bank kept rates steady then and reaffirmed its intent to end the easing cycle after the 50 bp cut to 1.5% in March.  However, perhaps the minutes could reveal some hints as to what could trigger a resumption in the easing cycle.

Mexico reports mid-April CPI Thursday, with headline expected to rise 3.27% y/y vs. 2.97% in mid-March.  However, core is seen rising 2.32% y/y vs. 2.42% in mid-March.  Mexico then reports INEGI February retail sales Friday, expected to rise 4.5% y/y vs. 4.7% in January.  We think that the combination of low inflation and weak real sector data will keep the central bank on hold this year, despite its hawkish intent to start the tightening cycle.

Colombia central bank meets Friday and is expected to keep rates steady at 4.5%.  With inflation above the 2-4% target range, the bank is likely on hold for the time being.  Despite more hawkish official comments lately, we think the central bank is likely to keep rates steady in 2015 as the growth outlook weakens.