Emerging Markets: Preview of the Week Ahead

(from my colleague Dr. Win Thin)

EM assets remain on the defensive now that the dollar has regained some traction on the back of some firmer US data last week.  This Friday’s US jobs report will be key to determining whether the dollar’s current bounce can be sustained.  The 10-year UST yield has climbed above 2.10% for the first time since mid-March, but the positive impact on the dollar has been offset somewhat by a sharp rise in German 10-year yields as well to 0.41%, the highest level since early March.  EM local currency bonds are suffering as a result.

Weak China numbers recently have had little impact on sentiment, as this news has been offset by rising expectations of more stimulus by mainland policymakers.  This view has helped commodity prices get some traction, in turn bolstering some EM countries.  We believe investors will continue to differentiate within EM.  Emerging Asia remains well-positioned for this current environment, perhaps with the exception of IDR.  TRY and BRL appear to be the most problematic, with both suffering from idiosyncratic risks.  Some in EM are starting to fret about too much currency strength.

Mexico reports April PMI readings Monday, with manufacturing expected at 51.6 vs. 51.4 in March.  It then reports April CPI Thursday, with headline seen rising 3.08% y/y vs. 3.14% in March.  April consumer confidence will be reported Friday, seen at 93.6 vs. 93.1 in March.  Banco de Mexico left rates steady last week, as expected.  The accompanying statement was dovish, as it has been for several months.  With inflation likely to remain at or below the 3% target this year, we think it will be hard for Banxico to justify a rate hike in 2015.

Brazil reports April trade data Monday, with exports expected at -24% y/y vs. -4% in March.  Brazil reports April FIPE and March PPI inflation Tuesday, and both are expected to show rising price pressures still.  Brazil reports March IP Wednesday, expected at -3.0% y/y vs. -9.1% in February.  COPOM minutes from last week’s meeting (when it hiked 50 bp) will be released Thursday, as well as April IGP-M wholesale inflation.  On Friday, IPCA inflation will be reported, expected to rise 8.24% y/y vs. 8.13% in March.  We think another 50 bp hike will be seen in June, though much depends on the data and the exchange rate.  But rising rates that are meant to restore confidence are already pushing up borrowing costs, as Brazil increasingly faces a no win situation.

Taiwan reports April CPI Tuesday, expected at -0.65% y/y vs. -0.61% in March.  It reports April trade data Thursday, with exports seen -6% y/y and imports -11.2% y/y.  We know that officials are growing more concerned with the firmer TWD, which comes as the economy is showing signs of softness.  The central bank meets next in June, and may have to move to a more dovish stance if the economic outlook remains soft.

Philippines reports April CPI Tuesday, expected to remain steady at 2.4% y/y.  Core is also seen steady at 2.7% y/y.  The target range for headline inflation is 2-4%, and so there are no price pressures to worry about right now.  Furthermore, the economy remains fairly robust, especially in light of growing regional weakness.  For now, the central bank is likely to remain on hold.  If the economy does slow, then the bank will have cover to cut rates if needed.

Indonesia reports Q1 GDP Tuesday, seen growing 4.9% y/y vs. 5.0% in Q4.  This would match the cycle low from Q3.  The equity market is one of the worst YTD performers in EM, as market euphoria over President Widodo seems to have worn off.  Furthermore, relations with its neighbors and trading partners have worsened with the drug-related executions last week.

Colombia reports April CPI Tuesday, expected at 4.44% y/y vs. 4.56% in March.  This is still above the 2-4% target range, and justifies a cautious stance by the central bank.  Central bank minutes will be released Friday.  For now, we see steady rates.  While officials have tilted more hawkish in recent weeks, we think that the weaker growth outlook will make a rate hike hard to justify.

 
HSBC reports China April services and composite PMI Wednesday.  HSBC final manufacturing PMI was softer than expected at 48.9 vs. 49.2 flash and 49.6 final in March.  The trend of a softening Chinese economy seems well priced is, as are the prospects of more stimulus measures.  We do not believe policymakers are embarking on a weak yuan policy.  Indeed, PBOC fixed USD/CNY last week at the lowest level since December 17.  China reports April trade data Friday, with exports seen up 2.6% y/y and imports seen down -10.3% y/y.  On Saturday Asia time, China reports April CPI and PPI, with the former seen up 1.6% y/y and the latter seen down -4.5% y/y. 

Hungary reports March retail sales Wednesday, expected to rise 6.6% y/y vs. 6.4% in February.  The central bank will also release minutes from its April meeting, when it cut rates 15 bp to 1.8%.  Further cuts are likely to be signaled, and we think the policy rate will likely fall to 1.50%, perhaps even lower.  Hungary reports March IP Thursday expected to rise 5.7% y/y vs. 5.8% in February.  April CPI will be reported Friday, expected at -0.5% y/y vs. -0.6% in March.

Czech Republic reports March retail sales Wednesday, expected to rise 8.0% y/y vs. 7.2% in February.  It reports March trade, industrial, and construction output data Thursday.  Czech central bank also meets Thursday and is expected to keep policy steady.  It could tweak its forward guidance, but with recent data showing some improvement, the bank may not change its current pledge to maintain unconventional policies until H2 2016.  It did talk about moving the EUR/CZK “if needed” at its last policy meeting March 26. 

  
Poland central bank meets Wednesday and is expected to keep rates steady at 1.50%.  After its last 50 bp cut in March, it said the easing cycle was over.  However, this pledge will depend on how the data come in.  Inflation expectations remain anchored for the last nine months at 0.2%.  CPI is still in deflationary territory, -1.5% y/y in March.  A strong zloty exacerbates the deflationary conditions, but official comments so far do not show much concern here.

Malaysia central bank meets Thursday and is expected to keep rates steady at 3.25%.  Steady policy is likely for the time being, but if the economic outlook deteriorates, low inflation will allow the central bank to tilt more dovish.  Governor Zeti recently downplayed the need for a near-term rate cut, but noted that one was possible if the economy started to turn down. 

Chile reports April trade Thursday, expected at $1.25 bln vs. $1 bln in March.  It then reports April CPI Friday, expected to rise 3.9% y/y vs. 4.2% in March.  If so, this would be the first reading in the 2-4% target range since March 2014.  Despite some recent hawkish signals from the central bank, we think it will remain on hold for now.  But with the economy still soft and price pressures easing, we wouldn’t rule out a more dovish stance later this year.

Turkey reports March IP Friday, expected to rise 0.9% y/y vs. 1.0% in February.  The economy remains weak ahead of June elections, and yet the central bank has resisted calls to cut rates.  The central bank recently raised its 2015 inflation forecast from 5.5% to 6.8%, but added that inflation should continue to ease in H2 if food prices normalize.  Governor Basci said current inflation outlook doesn’t warrant additional tightening.  Next policy meeting is May 20.  April CPI came in much higher than expected.  If USD/TRY continues to make new all-time highs, we think that the bank will need to consider a hike in the main policy rate.