Emerging Markets: Preview of the Week Ahead

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

Positive momentum for EM assets looks to extend its moves from last week.  EM sentiment is being buoyed by gains in developed markets equity indices, the weaker dollar more broadly, and gains in the commodity space.  Regarding the latter, we note that the moves in the MSCI EM index, for example, have closely mirrored the moves in CRB commodity index, even though the benefits to EM countries from moves in commodity prices are far from uniform.

Looking ahead, China trade numbers and Turkish current account data will be watched closely.  On the political side, Brazil will remain a focus as markets still try to assess whether the latest cabinet reshuffle by the government will bear fruits.  In Turkey, we doubt that the terror attack in Ankara will have a material impact in the upcoming elections on November 1, but it increases the risk of social discontent.  Elections in Poland, Argentina, and India (regional) are coming up, but we will discuss these more in depth in separate upcoming reports.

China reports September trade Tuesday, with exports seen at -6% y/y and imports at -16% y/y.  CPI and PPI will be reported Wednesday, with the former seen rising 1.8% y/y and the latter seen falling -5.9% y/y.  New loan and money supply data should come out this week.  New loans are expected at CNY900 bln, while M2 is seen rising 13.1% y/y.  Data is likely to be soft, but unlikely to put much of a dent into the recent global equity market optimism.

Singapore reports advance Q3 GDP Wednesday, and growth is expected at 1.3% y/y vs. 1.8% in Q2.  The MAS typically meets that same day.  Given weakness in the economy and rising deflation risks, we think the MAS will loosen policy with an adjustment to its S$NEER trading band.  August retail sales will be reported Thursday, and are expected to rise 1.6% y/y vs. 5.2% in July.  Lastly, September trade will be reported Friday, and NODX is expected at -3.1% y/y vs. -8.4% in August.

India reports September WPI on Wednesday, and is expected at -4.42% y/y vs. -4.95% in August.  On Monday, it reported CPI inflation at 4.41% y/y, close to consensus but above the revised 3.74% (was 3.66%) rate in August.  Price pressures remain low, and certainly gave the RBI cover to cut by a bigger than expected 50 bp last month.  Further easing is likely, but the pace is likely to remain modest in light of faster CPI inflation.  August IP was stronger than expected, rising 6.4% y/y.

Turkey reports August current account data on Wednesday, and is expected to be in balance vs. -$3.15 bln in July.  If so, the 12-month total would plunge to -$42.8 bln, the lowest since November 2010.  The trade deficit for August came in as expected at -$4.9 bln, and that 12-month total narrowed to the lowest since January 2011.  The recent bombing attack is a stark reminder that Turkey political risks remain elevated.

Poland reports August current account and trade data on Wednesday.  The external accounts have improved this year, but are starting to worsen again, albeit modestly.  The current account gap is still expected at only -0.5% of GDP this year vs. -1.5% last year.  This is very zloty-supportive.  However, deflation risks persist and suggest further easing may be needed ahead.  It might not be seen until 2016, when virtually the entire MPC will be replaced as their terms expire. 

Brazil reports August retail sales Wednesday, and is expected at -5.8% y/y vs. -3.5% in July.  On Thursday, it reports August GDP proxy and is expected at -4.2% y/y vs. -4.25% in July.  GDP contracted -2.6% y/y in Q2, and is still getting worse in Q3.  The economy remains in freefall, yet price pressures continue to rise and suggest more tightening is needed.  The next COPOM meeting is October 21, and a move then is unlikely, especially given the firmer real.

Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%.  A small handful look for a 25 bp cut to 1.25%.  CPI rose 0.6% y/y in September, way below the 2.5-3.5% target range, and yet the BOK has been on hold since the last 25 bp cut back in September.  For now, it appears that the BOK will let fiscal stimulus and the weak won boost the economy, but we think further monetary easing will be seen ahead.

Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%.  Inflation eased to 6.8% y/y in September, but is running above the 3-5% target range.  Indonesia reports September trade then too, with exports seen at -15.3% y/y and imports seen at -20.5% y/y.  The economy remains sluggish, but high inflation and the weak rupiah has kept BI on hold.  If inflation continues to fall and the rupiah firms, BI may try to sneak in a rate cut.

Israel reports September CPI Thursday, and is expected at -0.5% y/y vs. -0.4% in August.  With inflation so far below the 1-3% target range, the central bank has been getting more concerned about deflation risks.  Next policy meeting is October 26, and is expected to keep rates steady at 0.1%.  However, like last month, one analyst looks for a 10 bp cut to 0.0%.  Recent ILS gains may push policymakers into taking unconventional measures ahead. 

Central bank of Chile meets Thursday and is expected to hike rates 25 bp to 3.25%.  However, the market is almost evenly split and many see no move.  CPI rose a lower than expected 4.6% y/y in September, down from 5% in August but still above the 2-4% target range.  Taken in conjunction with the firmer peso, we think the bank could stand pat this month.  The bank has leaned more hawkish in recent months but whatever the timing of the first hike, we think the tightening cycle will not be aggressive.

Central bank of Peru meets Thursday and is expected to keep rates steady at 3.5%.  It just hiked at its September meeting, and officials have said that the next one was probably not needed for a couple of months.  Another hike may be seen this year, but the pace is IP data was weaker than expected, rising only 3% y/y.  The economy is slowing, but the central bank has been on hold since its last 25 bp hike to 3.25% back in July 2014.

Russia reports September IP Friday, and is expected at -4.8% y/y vs. -4.3% in August.  The economy remains weak, though the recent bounce in oil will help.  But rising inflation has prevented the central bank from cutting rates since its last 50 bp cut to 11% back in July.  Next policy meeting is October 30, and no move is seen then.

Colombia reports August retail sales and IP Friday.  The former is seen rising 3.0% y/y and the latter is seen rising 1.0% y/y.  Colombia followed Peru with the start of its tightening cycle last month, but here too, we think the pace of tightening will be modest.  This is especially true in light of recent EM FX firmness.  Next policy meeting is October 30, we think rates will be kept steady then.

(To see more of Dr. Win Thin and Ilan Solot's work, and other thought-leadership commentary, see BBH's blog:  www.mindonthemarkets.com).

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