Emerging Market Preview: The Week Ahead

(from my colleague Dr. Win Thin)  

EM assets are starting off the week on a softer footing.  The China situation remains unsettled, with stocks on Monday posting their biggest one-day loss in eight years.  More support measures seem likely if the rout continues.  The calm in China equity markets from last week has been shattered, and is having reverberations across EM as MSCI EM breaks down to multi-year lows.  Indeed, the June 2013 low is approaching, and a break below would target the 2011 low.

Lower commodity prices are adding to the EM gloom, with oil and copper making new lows for this current move.  We expect negative EM sentiment to continue building.  Many EM currencies are trading at multi-year or all-time lows, and we think more will join this growing group in the coming days and weeks.

Thailand reports June manufacturing production Tuesday, expected at -5.0% y/y vs. -7.6% in May.  On Friday, it reports June trade and current account data.  The economy remains soft, but the external accounts continue to improve from plunging imports.  As deflationary conditions continue, the BOT seems likely to cut rates again in H2. 

South Africa reports June M3 and private sector credit on Wednesday, expected to rise 8.55% and 9.27%, respectively.  Later that day, it reports Q2 unemployment, expected at 26.5% vs. 26.4% in Q1.  High unemployment will feed into social tensions, even as the labor unions negotiate for higher wages.  June trade will be reported on Friday, expected at ZAR4.4 bln vs. ZAR5.0 bln in May.  The resumption of the tightening cycle will weigh on the already weak growth outlook.  Furthermore, the rate hike did nothing to help the rand, which ended last week at multi-year lows.

Brazil central bank meets Wednesday and is expected to hike rates 50 bp to 14.25%.  Earlier that day, Brazil reports June PPI.  On Thursday, it reports July IGP-M wholesale inflation, expected to rise 7.0% y/y vs. 5.6% in June.  Price pressures continue to build, and will keep pressure on the central bank to continue hiking rates.  Central government budget data for June will also come out Thursday, followed by consolidated budget data on Friday.  Recent adjustment to the primary surplus target could be the trigger for a Brazil rating downgrade.

Singapore reports Q2 unemployment Thursday, expected at 1.9% vs. 1.8% in Q1.  The MAS has expressed concern about wage pressures in the past, but they do not seem to be filtering over into wider inflation.  CPI came in as expected at -0.3% y/y in June, the eighth straight y/y drop.  Low base effects should see a move back to positive territory in H2, but overall, price pressures remain under control.  Taken in conjunction with the softening economy, we think the MAS could loosen policy at its October policy meeting by adjusting its S$NEER band.

Chile central bank releases minutes from its July 14 meeting Thursday.  It kept rates steady at 3% then, while noting higher than expected inflation.  CPI rose 4.4% y/y in June, above the 2-4% target range.  Chile also reports June manufacturing production and retail sales Thursday, expected at -1.9% and +2.5% y/y, respectively.  The economy remains soft, but high inflation and a weak peso have tied the central bank’s hand for the time being.  Lower copper prices will continue to weigh on the economy.

Mexico central bank meets Thursday and is expected to keep rates steady at 3.0%.  Mid-July CPI came in lower than expected at 2.76% y/y vs. 2.87% consensus.  This was the lowest since at least 1989, and moves further below the 3% target.  Real sector data remains fairly soft.  Under these conditions, we do not expect Banco de Mexico to make good on its intent to hike rates this year.  USD/MXN is making new all-time highs this week, yet there simply has been no inflation pass-through. 

Korea reports June IP Friday, expected at -2.1% y/y vs. -2.8% in May.  On Saturday, it will report July trade, with exports seen -6% y/y and imports at -16% y/y.  The economy remains sluggish, and so the BOK may have to continue its easing cycle.  The weaker won is helping at the margin, with the key JPY/KRW cross rising and about to test the March high near 9.46.  That is also the 50% retracement objective of the October-June drop.  The 62% comes in near 9.61, and break of that would signal a test of the October high near 10.09.

Taiwan reports Q2 GDP Friday, expected to rise 2.6% y/y vs. 3.4% in Q1.  The economy is slowing even as price pressures remain low, and yet the central bank kept rates steady at its June policy meeting.  The weaker TWD will help, but we think that the central bank will have to consider cutting rates in H2 if the slowdown deepens.

Turkey reports June trade Friday, expected at -$6.3 bln vs. -$6.75 bln in May.  If so, the 12-month total would continue to shrink.  Much of the improvement has been coming on the import side, as they are collapsing faster than exports.  If growth picks up again, then the external accounts are likely to worsen.  Political risk remains high for Turkey, from both external and internal sources. 

Russia central bank meets Friday and is expected to cut rates 50 bp to 11%.  After it cut by 100 bp last month, the bank signaled that the case for further easing was limited due to inflation risks.  In that regard, inflation had been easing slowly to 15.3% y/y in June.  However, recent ruble weakness risks a return of price pressures.  Lower oil prices are likely to be the more important driver of RUB, rather than interest rates.

Colombia central bank meets Friday and is expected to keep rates steady at 4.5%.  CPI rose 4.4% y/y in June, above the 2-4% target range.  The economy remains soft, but high inflation and a weak peso have tied the central bank’s hand for the time being.  Lower oil prices will continue to weigh on the economy.   Officials do not seem concerned by the weak peso, which is trading lows not seen since 2003.  There is risk of inflation pass-through as weakness continues.

China will report official July PMI reading on Saturday, expected at 50.1 vs. 50.2 in June.  However, after the weaker than expected Caixin (formerly HSBC) flash PMI reading of 48.2, the risk is to the downside for the official reading.  We expect further stimulus measures in H2, but we do not see an effort to weaken the yuan to boost exports.  If the stock market plunge deepens, we also would look for more support measures.

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