Emerging Markets: Week Ahead Preview

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

In a familiar refrain, EM is starting off this week on a soft note.  Most EM currencies are softer against the dollar.  MSCI EM is having trouble gaining traction, and appears to be still headed for the March lows.  EM bond yields are rising in tandem with DM bond yields even though we have only seen an increase in expectations for tightening in Brazil. 

The FOMC meeting looms ahead, where Yellen is widely expected to signal a September lift-off as the most likely scenario.  Leading up to the rate hike, we expect EM to continue trading with a weaker bias.  Meanwhile, the negotiations regarding Greece are progressing along the usual lines of brinkmanship. 

Saudi Arabia officially opened its stock market to foreigners Monday.  Stock exchange CEO Tadawul said the country is “not in a hurry” to be included in the MSCI EM index.  However, he added that 2017 is the current target for inclusion.  Under the initial rules, a Qualified Foreign Investor (QFI) will have a minimum of $5 bln AUM and at least five years of experience.  Among other limits, holdings in a single company by any one QFI will be limited to 5%.

Israel reports May CPI Monday, expected at -0.4% y/y vs. -0.5% in April.  Q1 GDP will be reported Tuesday.  The central bank continues to buy USD in an attempt to weaken the shekel.  Despite continued deflation, the bank seems hesitant to use unconventional measures again and so for now will rely on a weak currency for stimulus.

Brazil reports April retail sales Tuesday, expected to rise 0.7% m/m vs. -0.9% in March.  It reports April GDP proxy Wednesday, expected -2.4% y/y vs. +0.5% in March.  Mid-June IPCA inflation will be reported Friday, expected to rise 8.64% y/y vs. 8.24% in mid-May.  COPOM minutes suggest another 50 bp hike in July, and some are even pricing in another 25 bp move after that in September.

Colombia reports April retail sales and IP Tuesday.  The former is expected to rise 3.0% y/y while the latter is expected to contract -0.3% y/y.  Inflation is too high for the central bank to cut rates anytime soon.  However, the economy remains weak and so we think a more dovish bias will develop as inflation eases.  Q1 GDP rose 2.8% y/y, higher than expected but still the slowest since Q3 2012. 

Singapore reports May trade Wednesday, with NODX expected to rise 2.3% y/y vs. 2.2% in April.  The economy faces some headwinds, and so we think a dovish bias may develop ahead of the October policy meeting if data worsen.

South Africa reports May CPI Wednesday, expected to remain steady at 4.5% y/y.  Core is also seen remaining steady at 5.6% y/y.   April retail sales will also be reported that day, expected to rise 2.1% y/y vs. 2.0% in March.  The nation faces a stagflation-type scenario.  SARB next meets July, and we hope that Governor Kganyago does not hike rates as he has threatened.  Real sector data remain soft, while inflation is clearly not demand-led.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%.  The economy is slowing, but rising inflation and a weak rupiah will likely prevent any easing near-term.  Last move was a 25 bp cut back in February, but the underlying conditions no longer favor a rate cut rate now. 

Poland reports May real retail sales and IP Thursday.  The former is expected to rise 4.2% y/y vs. 1.5% in April, while the latter is expected to rise 3.3% y/y vs. 2.3% in April.  The central bank also releases its minutes that same day.  We see steady rates for now.  While the next move will likely be a hike, one seems unlikely until well into 2016.  The issue of a replacement for Governor Belka will also be an issue next year.

Russia reports May retail sales Thursday, expected at -10% y/y vs. -9.8% in April.  Earlier, the central bank cut rates 100 bp to 11.5%, as expected.  Inflation appears to have topped out, the ruble and oil prices have stabilized, and the economy is struggling.  As such, easing is warranted.  We were surprised, however, that the bank said there was limited scope for further cuts.  The central bank has signaled (at least to us) with its recent changes to FX intervention amounts that it is comfortable with a 50-55 or perhaps 50-60 range for USD/RUB.

Mexico central bank releases minutes on Thursday.  Despite hawkish talk from Governor Carstens, inflation is now below the 3% target and slack in the economy should keep it from rising much in H2.  We see steady rates.  Minutes should highlight that slack, as well as the (so far) lack of any inflation pass-through from the weaker peso.

Malaysia reports May CPI Friday, expected to rise 2.1% y/y vs. 1.8% in April. Officials believe the ringgit is too weak but are unlikely to do anything about if it’s due to broad dollar strength.  For now, there has been little inflation pass-through but policymakers in Asia are likely concerned about potential El Nino impact on food prices in H2.

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