Emerging Markets Preview: The Week Ahead

(from my colleague Dr. Win Thin)

EM assets are starting off the week under some mild pressure. This comes after last week’s rally, which was fed by the positive combination of stabilizing commodity prices, continued dollar softness, and falling US yields. Those impulses are likely to continue this week. With little on the calendar this week in terms of US data that could help turn around market expectations on Fed lift-off, EM currencies could extend their rally.

Soft China data should continue with HSBC flash May PMI on Thursday. However, weak readings from China have had little market impact recently, as markets are simply assuming that more stimulus measures will be seen. Elsewhere, Indonesian and Turkish central banks could deliver some dovish surprises, which would be negative for their currencies. With many idiosyncratic risks still in play across EM, we continue to recommend that investors remain selective.

Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.5%. However, a small handful are looking for a 25 bp cut. Note that Q1 GDP came in weaker than expected at 4.7% y/y, and was the weakest since Q3 2009. We think Bank Indonesia retains an easing bias and so there is a chance of a dovish surprise, but we think no move is most likely. BI will have to be cautious in light of recent IDR softness and rising inflation, as a surprise rate cut would feed further into those negative impulses. CPI rose 6.8% y/y in April, already well above the 3-5% target. 

Banco de Mexico releases its quarterly inflation report Tuesday. The tone of the statement from its last policy meeting and the minutes were on the dovish side, and so we would expect the inflation report to take a similar stance. Mexico reports Q1 GDP Thursday, expected to rise 2.4% y/y vs. 2.6% in Q4. It then reports mid-May CPI Friday, expected to rise 3.02% y/y. With growth sluggish and price pressures low, the central bank can afford to keep rates steady this year.

Taiwan reports April export orders and Q1 current account Wednesday. Orders are seen at -2.3% y/y vs. +1.3% in March. Recent weakness in orders points to slowing exports. However, import demand remains restrained and so the external accounts remain in good shape. Growth is at risk, however, and the strong currency is raising some concerns with policymakers.

South Africa reports April CPI (4.6% consensus) and March retail sales (4.2% consensus) Wednesday. Base effects have been favorable, but are set to wear off in the coming months. As such, the y/y rate is likely to move higher. South African Reserve Bank meets Thursday and is expected to keep rates steady at 5.75%. SARB has maintained a hawkish stance, and is likely to retain it if the inflation numbers worsen. However, we don’t see how it can justify an actual rate hike in 2015 given the weak economy. It’s been on hold since the last 25 bp hike back in July 2014.

Turkey central bank meets Wednesday and is expected to keep rates steady at 7.5%. Inflation was 7.9% y/y in April, but the firmer lira has taken some pressure off the bank to hike the policy rate. It may not even have to hike some minor rates to support the currency, as it’s done in the past. With June elections looming, we think the central bank will most likely keep rates steady. Political uncertainty is picking up ahead of June elections, as latest poll shows AKP support falling to 38.2% from 43% at the end of April.

Poland reports April IP and real retail sales Wednesday. The former is expected to rise 5.5% y/y while the latter is expected to rise 4.0% y/y. GDP rose a stronger than expected 3.5% y/y in Q1, and was the strongest since Q2 2014. Deflation is persisting, but appears be ebbing. On Thursday, the central bank releases minutes from its last policy meeting. It has signaled the end of the easing cycle, which is being borne out by the real sector data.

HSBC reports flash May China manufacturing PMI Thursday, expected at 49.3 vs. 48.9 final April. However, weak China data hasn’t really impacted markets much recently, as further stimulus measures have largely been priced in. PBOC fixed USD/CNY at another new cycle low this week (and the lowest since February 2014), supporting our view that the authorities aren’t pushing a weak yuan policy to stimulate the economy.

Brazil reports its monthly GDP proxy for March Thursday, expected to rise 0.7% y/y vs. -3.2% y/y in February. If so, Q1 GDP would likely contract -1.4% y/y vs. -0.6% in Q4. Exports, retail sales, and IP all contracted deeply in Q1, and so we think there is downside risk to the GDP data. With COPOM still tightening, the growth outlook continues to worsen and will negatively impact the fiscal numbers. Brazil then reports mid-May IPCA inflation Friday, expected to rise 8.23% y/y. This is well above the 2.5-6.5% target range, and has led COPOM to signal another 50 bp hike to 13.75% on June 3.

Malaysia reports April CPI Friday, expected to rise 2.1% y/y vs. 0.9% in March. Low base effect should see y//y rates over the next several months. Q1 GDP rose 5.6% y/y, slower than 5.7% in Q4 but still quite robust. The central bank has signaled it is comfortable with the current policy stance. Given the mix of strong growth and low inflation pressures, steady rates seem advisable for now. Governor Zeti recently expressed optimism on China’s growth outlook, adding that China won’t be destabilizing for the region.

Colombia central bank meets Friday and is expected to keep rates steady at 4.5%. With CPI rising 4.6% y/y in both March and April, inflation has been above the 2-4% target range for three straight months. On the other hand, the economy is slowing, and the conflicting impulses suggest steady policy for now. After outperforming for much of Q2 so far, COP has started to underperform. This is likely due to negative investor sentiment coming from a court-ordered delay to the sale of the government’s 57.6% stake in hydropower company Isagen. Sale was originally planned for May 19.