Emerging Market Preview: Week Ahead

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

EM assets are starting the week off on a soft note, picking up where we left off last week.  The usual culprits can be cited:  firmer US dollar, softer commodity prices, global growth slowing, and Fed tightening concerns.  However, the recent EM pattern of weaker currencies and firmer equities has paused for now, with both selling off in recent sessions.  If MSCI EM closes down today (it’s currently flat), it would be the 6th straight down day and 10 of the past 11.  Right now, it's testing the 200-day MA near 1000, and a break below 987 (62% of the March-April rise) would set up a test of the March low near 936.

 
We think this Friday’s US jobs report will be key in setting the tone for EM in H2.  Another strong reading would likely feed into further EM selling.  Furthermore, this is a week where we lean towards taking on less EM exposure given the number of crucial risk events globally (ECB meeting, Greek IMF payment due, OPEC meeting).  We still believe Asia will outperform, Latam will underperform, and EMEA will come in somewhere in between.  Many EM currencies are about to revisit their lows from March, and are likely to surpass them if the global backdrop deteriorates. 

Mexico reports May PMI Monday.  Banco de Mexico meets Thursday and is expected to keep rates steady at 3.0%.  Recent policy statements, minutes, and quarterly inflation reports have all been on the dovish side, so we’d expect more of the same from this meeting.  Indeed, most official growth and inflation forecasts have been slashed recently, making it harder to justify a rate hike in 2015.

Brazil reports May trade on Monday, expected at $2.3 bln.  It then reports April IP on Tuesday, expected at -8.5% y/y vs. -3.5% in March.  The central bank meets Wednesday and is expected to hike rates 50 bp to 13.75%.  Wholesale inflation measures continue to accelerate.  IGP-M rose 4.11% y/y in May vs. 3.55% in April, while PPI rose 5.63% y/y in April vs. revised 4.87% (was 4.94%) in March.  Consumer measures (IPCA, Fipe) continue to accelerate too, supporting the central bank's hawkish tone.  We look for another 25 bp hike in July to 14%. 

Korea reports May CPI Tuesday, expected to remain steady at 0.4% y/y.  It also reports April current account Tuesday.  External accounts have improved significantly, which is won-positive.  Low inflation and a relatively firm won (the key JPY/KRW is trading at multi-year lows below 9.0) are likely to push the BOK into easing again.  Next policy meeting is June 11, and a 25 bp cut to 1.50% is likely.  Last move was a 25 bp cut back in March.

 
Thailand reports May CPI Tuesday, expected at -1.1% y/y vs. -1.0% in April.  Core is seen steady at 1.0% y/y.  BOT targets core between 0.5-3.0%, and so recent readings are near the bottom of the range.  The economy has not fully recovered, and so the BOT is likely to maintain a dovish stance in H2.  BOT recently noted that the recovery will remain “slow and fragile.”  Bank officials warn that it may cut the 2015 growth forecast from 3.8% at its next meeting June 10.

Reserve Bank of India meets Tuesday and is expected to cut rates 25 bp.  While Governor Rajan has favored intra-meeting moves for this year’s previous two rate cuts, markets expect him to go back to moving at regularly scheduled meetings.  Given some reform slippage as well as El Nino risks on food prices, there is a small chance of a hawkish surprise and no cut.

Singapore reports May PMI Tuesday.  We believe the economy is still facing headwinds, and that the MAS may ease policy at its next policy meeting in October.

HSBC reports China May composite PMI Wednesday.  HSBC May manufacturing PMI final reading was 49.2 vs. 48.9 in April.  With the economy clearly slowing, the PBOC has continue to add stimulus.  However, its recent USD/CNY fixes have been near the bottom of this year’s range, supporting our view that China will not rely on a weak currency to boost growth.

Turkey reports May CPI Wednesday, expected at 8.20% y/y vs. 7.91% in April.  If so, this would be the fourth straight month of acceleration, and should cement expectations for steady policy at the next central bank policy meeting on June 23.  With the elections out of the way on June 7, the central bank may finally be given some leeway to tighten policy to help support the lira.

Hungary reports April retail sales Wednesday.  It then reports April IP Friday.  The real economy remains robust, while y/y CPI inflation should start to pick up due to low base effects.  As such, we think the end of the easing cycle is near, with perhaps one more 15 bp cut to 1.5% before it pauses.

Poland central bank meets Wednesday and is expected to keep rates steady at 1.5%.  Unless the economy takes a dramatic turn for the worse, steady rates are likely for the foreseeable future.  Looking ahead to next year, it seems central bank chief Belka is unlikely to be reappointed when his term runs out and so there is some risk that a less orthodox Governor is nominated by incoming President Duda.

Taiwan reports May CPI Friday, expected at -0.66% y/y vs. -0.80% in April.  With the economy sluggish and inflation non-existent, we think there is a small risk that the central bank cuts rates at its June 25 meeting.  The strong TWD/weak yen is another concern, as Taiwan has a very similar export structure to Japan.  Concern is especially high with the TWD/JPY making multi-year highs above 4, the highest since 1998.  Expect more FX intervention by the central bank.

Philippines reports May CPI Friday, expected at 1.9% y/y vs. 2.2% in April.  This would be below the central bank’s 2-4% target range.  Q1 GDP disappointed, slowing to 5.2% y/y vs. 6.6% expected.  For now, we see the central bank on hold, but further slowing may lead to a monetary policy response as well.  Separately, the country is being rocked by a deepening of the corruption scandal involving President Aquino’s Vice President Binay.

Czech Republic reports April retail sales Friday, expected to rise 7.5% y/y vs. 8.8% in March.  The real sector remains robust, and inflation is starting to edge higher.  Indeed, the central bank recently said Q1 GDP growth was stronger than it was expecting.  We see the bank keeping its forward guidance steady for now (EUR/CZK floor until at least H2 2016), with no need to extend this pledge now that growth is picking up.

Colombia reports May CPI Friday, expected at 4.47% y/y vs. 4.64% in April.  This would be a little closer to the 2-4% target range, but above it for the fourth straight month.  The central bank releases minutes from its policy meeting on Friday too.  Higher than targeted inflation has kept the bank on hold, but we think it will develop a more dovish stance once inflation moves back into the target range.

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