Emerging Markets: Preview of the Week Ahead

(from my colleague Dr. Win Thin)

EM assets are starting off the weak on a soft note, driven by risk off sentiment stemming from Greek developments.  The weekend PBOC easing measures had little impact, with China stocks adding to their recent losses.  With another strong US jobs report expected on Thursday, we suspect EM will continue to trade with a weak bias.  Asia should still outperform, while Latin America and EMEA should underperform.

Korea reports May IP Tuesday, expected at -1.9% y/y vs. -2.7% in April.  It then reports June CPI Wednesday, expected to rise 0.7% y/y vs. 0.5% in May.  June trade will also come out Wednesday, with exports seen -2% y/y and imports seen -11% y/y.  Korea reports May current account data Thursday.  The external accounts continue to improve, while the sluggish economy is keeping price pressures down.

Thailand reports May manufacturing production Tuesday, expected at -5.0% y/y vs. -5.3% in April.  It then reports June CPI Wednesday, expected at -1.0% y/y vs. -1.3% in May.  Core is seen rising slightly to 1.0% y/y.  Official comments suggest no more rate cuts, but we feel the fundamentals warrant further easing.  Perhaps they are worried about upside inflation risks in H2.  June consumer confidence will be reported Thursday.

South Africa reports May money and loan growth, trade, and budget data Tuesday.  Despite hawkish signals from the SARB, we think the fundamentals warrant steady rates, not higher rates.  SARB next meets July 23.  Market is pricing in several rate hikes this year, with Bloomberg consensus expecting a 25 bp cut per quarter that take the policy rate up 100 bp to 6.75% in Q3 2016.  We do not think the data will support such an aggressive tightening cycle. 

Turkey reports May trade Tuesday, expected at -$6.6 bln vs. -$5 bln in April.  It then reports June CPI Friday, expected to rise 7.65% y/y vs. 8.1% in May.  The target range is 3-7% and so with inflation too high, the central bank kept policy steady this month. Even better, government officials have (so far) refrained from attacking the bank for its cautious stance.  Given heightened political uncertainty ahead, we think the bank will remain cautious.

Chile reports May manufacturing output and retail sales Tuesday.  The former is seen at -1.0% y/y, while the latter is seen at +2.0% y/y.  Central bank minutes last week came in on the hawkish side.  The bank said that it expects rate hikes to start in early 2016, and that persistent inflation will prevent further easing.  However, the bank also noted that the economic recovery has been weaker than anticipated.  We see no more rate cuts, but think that a rate hike in early 2016 will be hard to justify if the data continue to come in soft. 

Brazil reports consolidated budget data Tuesday, with the primary balance seen at –BRL7.0 bln.  Tax revenues for May came in weaker than expected.  It also doesn't help that the Brazilian congress is still gumming up the works on the expenditure side.  Last week, the lower house approved an amendment that raises pension payments by the same formula used to calculation minimum wage increases.  We continue to expect a downgrade to junk in H2, as Levy is fighting a recession as well as a rebellious congress.  Brazil then reports June trade Wednesday.  June FIPE inflation and May IP (consensus -10.5% y/y) will be reported Thursday.

China reports official manufacturing PMI Wednesday, expected at 50.4 vs. 50.2 in May.  We note that the HSBC flash June manufacturing PMI rose to 49.6 from 49.2 final in May.  The stock market swoon is surely raising concerns.  Regardless of the market gyrations, however, we thought that this latest round of stimulus was the right response to soft economic data.  More stimulus is likely to be seen in H2.

Indonesia reports June CPI Wednesday, expected to rise 7.4% y/y vs. 7.2% in May.  While the sluggish economy warrants lower rates, Bank Indonesia hands are tied right now by above-target inflation and a vulnerable rupiah.  CPI is currently well above the 3-5% target range.  Vice President Kalla said recently that the economic team may be replaced, which underscores how unhappy the government is with the current situation.

Peru reports June CPI Wednesday, expected to remain steady at 3.4% y/y.  The target range is 1-3%, and so high inflation has prevented the central bank from easing policy in response to the sluggish economy.

Malaysia reports May trade Friday.  Both exports and imports are seen contracting -9% y/y.  Malaysian markets have been jittery, as a Fitch review is due this week.  Back in March, Fitch said there was “more than 50%” likelihood that it would downgrade its A- rating due to the worsening external balance as well as concerns about the ability of state-owned 1MDB to pay its debt.  Our own sovereign rating model now has Malaysia falling a notch to BBB+, and so a downgrade appears likely.

Hungary reports May retail sales Friday, expected to rise 5.5% y/y.  The unemployment rate fell to 7.1% in May, the lowest since 2007.  This should help support consumption.  Central bank minutes indicated limited scope for further easing.  We think perhaps one more cut will be seen in July and then steady policy after that.  Tightening seems unlikely until well into 2016.

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