Emerging Markets Preview of the Week Ahead

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

EM is starting the week with a mixed tone.  EM currencies are on the weaker side but EM equities are generally firmer, especially in China as weaker data spur calls for more stimulus.  Stabilizing commodity prices are also helping sentiment, though it’s far too early to call a bottom.  Firm US jobs data supports our call for September Fed liftoff, and US retail sales data on Thursday should support this notion too.  We remain bearish on EM assets for now.

EM political risk will remain elevated, however, especially in Malaysia, Brazil, and Turkey.  The escalation of violence in Turkey over the weekend drives home the point that this may be the beginning of a protected period of turbulence for the country.  Meanwhile, mass anti-government protests are scheduled for Sunday August 16th in Brazil.

Hungary reports July CPI Tuesday, and is expected to rise 0.5% y/y vs. 0.6% in June.  Low base effects should see the y/y rate climb in H2.  It reports Q2 GDP Friday, and is expected to rise 3.2% y/y vs. 3.5% in Q1.  The firm growth outlook and rising inflation has led the central bank to say it was halting its easing cycle at its last meeting.  While it said rates would stay low for a long time, we think tightening is likely in 2016.

Turkey reports June current account data Tuesday, and is expected at -$3.2 bln vs. -$4 bln in May.  The June trade deficit came in slightly better than expected, so we could see the same for the current account.  Consensus reading would see the 12-month total fall to -$43.7 bln, the lowest since November 2010.  Most of the improvement has come from the import side.  If growth picks up, then the external accounts would start deteriorating again.

South Africa reports June manufacturing Tuesday, and is expected at -0.9% y/y vs. -1.4% in May.  We still think the SARB’s last 25 bp hike was ill-advised, as the economy remains weak.  Next policy meeting is September 23, and there is a risk that it hikes again despite the soft economy.

Brazil reports the first preview of IGP-M wholesale inflation Tuesday, and is expected at 7.8% y/y vs. 7.0% in July.  Price pressures continue to rise, and will keep pressure on COPOM to continue tightening.  On Wednesday, Brazil reports June retail sales, which are expected at -2.9% y/y vs. -4.5% in May.  It then reports June monthly GDP proxy Friday, and is expected at -2.45% y/y vs. -4.75% in May.  If so, Q2 GDP would likely come in near -3.5% y/y vs. -1.6% in Q1.

Mexico reports June IP Tuesday, and is expected to rise 1.1% y/y vs. -0.9% in May.  Mexico also reports July ANTAD retail sales Tuesday, which are expected to rise 5.5% y/y vs. 5.0% in June.  Banco de Mexico releases its quarterly inflation report Wednesday and then its minutes on Thursday.  July CPI data showed little in the way of price pressures still, despite the weaker peso.  Headline rose 2.74% y/y, down from 2.87% in June and the lowest on record.  Core CPI rose 2.31% y/y, matching all-time lows from April.  Data simply do not support a rate hike this year, despite Governor Carstens' comments. 

China reports July retail sales and IP Wednesday.  Sales are expected to rise 10.6% y/y, while IP is expected to rise 6.6% y/y.  China should report money and loan growth data this week, with new loans expected to moderate to CNY750 bln from CNY1.28 trln in June.  Trade data out over the weekend was weaker than expected, suggesting downside risks to this week’s data.  Markets seem more concerned with the equity market than the macro picture these days.  However, it does seem that some further slowing could be seen in the coming months, along with expectations of more stimulus measures.

India reports June IP Wednesday, and is expected to rise 3.3% y/y vs. 2.7% in May.  It also reports July CPI, which is expected to rise 4.4% y/y vs. 5.4% in June.   On Friday, it reports July WPI and is expected at -2.8% y/y vs. -2.4% in June.   RBI was cautious in keeping rates steady last week, but if disinflation continues, we think some more easing is likely in H2.

Malaysia reports Q2 GDP Thursday, and is expected to rise 4.5% y/y vs. 5.6% in Q1.  It also reports Q2 current account data Thursday.  Growth is clearly slowing, and so we think policymakers will have to contemplate easing.  Fiscal tightening is in the system after the 6% GST was enacted in April.  As such, it will likely fall on monetary policy to provide stimulus in H2. 

Philippine central bank meets Thursday and is expected to keep rates steady at 4.0%.  CPI rose 0.8% y/y in July, down from 1.2% in June and further below the 2-4% target range.  The economy is still growing nicely at 5.2% y/y in Q1, but it is slowing.  For now, policymakers can stay on hold to see how the economy develops, but the central bank has leeway to ease policy if needed later in H2.

Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%.  CPI inflation was steady at 0.7% y/y in July, but remains well below the 2.5-3.5% target range.  While officials have downplayed the need for further easing, we think more rate cuts are likely in H2.  The exchange rate could be the deciding factor, with a drop in the key JPY/KRW cross making a rate cut more likely, and vice versa.

Poland reports July CPI (-0.8% y/y expected) along with June trade and current account data Thursday.  The external accounts are in good shape, which should help support the zloty.  It reports Q2 GDP Friday, and growth is expected to remains steady at 3.6% y/y.  Inflation should pick up in H2 due to low base effects.  The central bank has signaled low rates for the time being, but we think tightening should be seen in 2016.

Chile central bank meets Thursday and is expected to keep rates steady at 3.0%.  CPI rose 4.6% y/y in July, up from 4.4% in June and further above the 2-4% target range.  The economy remains weak, suffering from low copper prices, but the central bank can’t move while inflation is high and still rising.

Peru central bank meets Thursday and is expected to keep rates steady at 3.25%.  CPI rose 3.6% y/y in July, up from 3.5% in June and further above the 1-3% target range.  Here too, the economy remains weak, suffering from low copper and gold prices, but the central bank can’t move while inflation is high and still rising.

Indonesia reports Q2 current account data on Friday.  The trade surplus narrowed slightly in Q2, so we could see the current account deficit widen from -$3.85 bln in Q1.  The external accounts are generally improving, however, as imports are contracting faster than exports. 

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