Emerging Markets Preview: The Week Ahead

(from my colleagues Dr Win Thin and Ilan Solot)

EM currencies are starting the week off firm, helped by the weak US jobs data on Friday.  While we continue to see the US economy’s weakness in Q1 as transitory, risk sentiment should remain fairly strong near-term as Fed rate hike expectations have been pushed out further.  There are no major US data points until next week, when March retail sales will be reported.  This could give EM some further upside potential this week. 

The MSCI World Index (Developed) has outperformed the MSCI Emerging Markets Index over the past six months, but has begun lagging recently.  This improved trend for EM is poised to continue over the next several weeks.  However, it is mostly tactical and opportunistic for EM, as we remain concerned about the end of commodities super-cycle, slower growth in China, and the impact of higher US rates eventually. We continue to favor Asia and Eastern Europe over Latin America.   

Russia reports March CPI Monday, expected to rise 16.8% y/y vs. 16.7% in February.  Core is seen rising 17.2% vs. 16.8% in February.  The central bank next meets April 30, and consensus is for another 100 bp cut to 13%.  Inflation appears to have topped, especially in light of recent RUB firmness and so the bank should continue to cut rates at a modest pace.

Philippines reports March CPI Tuesday, expected to rise 2.6% y/y vs. 2.5% in February.  Core is seen rising 2.8% vs. 2.5% in February.  It reports February exports Wednesday, expected to rise 0.8% y/y vs. -0.5% in January.  The next central bank policy meeting is May 14, and no move is expected.  It has stood pat since the last 25 bp hike in September 2014, but may move to a more dovish stance in H2 if the economic outlook softens.  Inflation at 2.5% y/y remains in the bottom end of the 2-4% target range.

Reserve Bank of India meets Tuesday and is expected to keep the repo rate steady at 7.50%.  However, a minority expects a 25 bp cut to 7.25%.  During this year’s easing cycle, the RBI has preferred to move intra-meeting, cutting in January and March while standing pat at the scheduled February meeting.  While timing is hard to predict, we do think easing will continue this year at a modest pace since price pressures remain low.  

Chile reports March trade Tuesday, surplus expected at $708 mln vs. $748 mln in February.  It then reports March CPI Wednesday, expected to rise 4.4% y/y.  The central bank signaled a more hawkish stance recently, warning of a potential rate hike.  Minutes from its last meeting show a rate cut was not discussed, but we think a hike this year is unlikely.  With inflation above the 2-4% target range, a rate cut seems unlikely for now, but the soft economic outlook suggests a rate hike may not be easy to justify.

Taiwan reports March CPI Wednesday, expected to fall -0.70% y/y vs. -0.19% in February.  It also reports March trade on Wednesday, with exports seen -2.0% y/y and imports seen -13.6% y/y.  Deflationary pressures remain in play, and with the economic outlook a bit soft, we see a chance that the central bank moves to a more dovish stance in 2015.

Turkey reports February IP Wednesday, expected at -1.4% y/y vs. -2.2% in January.  It then reports February current account data on Friday, expected at -$2.8 bln vs. -$2.0 bln in January.  The February trade balance was slightly wider than expected, and points to similar risks for the current account.  However, the external accounts remain in good shape as imports have fallen due to lower energy prices and overall weak domestic demand.  

Hungary reports February IP (consensus 6.2% y/y), trade, and retail sales (consensus 6.5% y/y) as well as March CPI (consensus -0.8% y/y) Wednesday.  Central bank minutes will also be released Wednesday.  At that last meeting, the bank resumed its easing cycle with a 15 bp cut to 1.95%.  Next meeting is April 21, and another 15 bp cut is expected.  We see further cuts this year, with rates likely to bottom around 1.25%.

Brazil reports March IPCA inflation Wednesday, expected to rise 8.20% y/y vs. 7.70% in February.  This is well above the 2.5-6.5% target range, and should lead COPOM to deliver another 50 bp hike to 13.25% when it next meets April 29.  Tighter monetary and fiscal policies will hurt growth, which in turn will make it even harder to meet budgetary targets this year.  

Bank of Korea meets Thursday and is expected to keep rates steady at 1.75%.  March CPI came in as expected at 0.4% y/y vs. 0.5% in February.  This is well below the 2.5-3.5% target range.  BOK finally cut rates with a 25 bp move in March.  We think easing will continue as inflation remains very low, but another move in April seems too soon.  

Czech Republic reports March CPI Thursday, expected to rise 0.3% y/y vs. 0.1% in February.  It then reports February IP (consensus 4.4% y/y) and construction output Friday.  At the central bank’s policy meeting last week, Governor Singer warned that the odds of a shift higher in its EUR/CZK floor have risen.  The bank also repeated its existing forward guidance of maintain the cap until at least H2 2016.  So despite the improvement in the economic outlook, policymakers remain concerned.

South Africa reports February IP Thursday, expected at -1.3% y/y vs. -2.3% in January.  The economic outlook remains weak, which still leaves us puzzled as to why the SARB took such a hawkish tone at last month’s meeting.  We do not think rates will go higher this year, but it is clear that a rate cut is just as unlikely.

Mexico reports March CPI Thursday, expected to rise 3.04% y/y vs. 3.00% in February.  Banco de Mexico will also release minutes from its last policy meeting Thursday.  On Friday, Mexico reports February IP, expected to rise 1.6% y/y vs. 0.3% in February.  Here too, the uncertain economic outlook should keep the central bank on hold this year, despite hawkish comments from Governor Carstens.

Central bank of Peru meets Thursday and is expected to keep rates steady at 3.25%.  However, a small handful is looking for a 25 bp cut to 3.0% and one analyst is looking for a 25 bp hike to 3.5%.  We see steady rates.  CPI rose 3% y/y in March, right at the top of the bank’s 1-3% target range.  This should keep the bank on hold for now.

China reports March CPI and PPI Friday.  The former is expected to rise 1.2% y/y vs. 1.4% in February, while the latter is expected to remains steady at -4.8%.  Most of the China data deluge will come out next week (new loans, trade, retail sales, IP).  For now, markets seem comfortable with the modestly softer China outlook, as expectations build for more monetary and fiscal stimulus ahead.