Emerging Markets: Preview of the Week Ahead

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

EM starts the week on a mixed footing.  Turkey is the star performer from the surprise result of the elections that ended the period of political uncertainty, but there was limited spill over to other EM markets.  Energy prices are still under pressure, weighing on sentiment.  On the other hand, prospects of further easing in Europe have helped boost sentiment in equity markets, even as markets remain split on a December Fed hike.

China PMI data over the weekend suggests the mainland economy is stabilizing in Q4.  However, further PBOC easing seems likely.  Several EM central banks meet this week, but none are expected to change policy.  These include Thailand, Poland, Malaysia, and Czech Republic.  A raft of CPI reports will also come out this week, with Latin America experiencing upside risks and Asia, EMEA experiencing downside risks.

Mexico reports October PMIs later today, with both manufacturing and non-manufacturing expected to improve slightly to 50.2.  Banco de Mexico releases its quarterly inflation report on Wednesday.  The central bank left rates steady last week and issued a fairly dovish statement, and so we would expect a similar tone in the inflation report.  We continue to downplay risks of Banxico tightening, regardless of the Fed lift-off.  October consumer confidence will be reported Friday.

Korea reports October CPI Tuesday, and is expected to rise 0.7% y/y vs. 0.6% in September.  This would still be well below the 2.5-3.5% target range.  Core inflation is expected to remain steady at 2.1% y/y.  Over the weekend, Korea reported October trade data, the first snapshot for last month.  Exports contracted -15.8% y/y, and imports by -16.6% y/y, both weaker than expected.  We think downside risks will move the BOK to a more dovish stance in 2016, and the next rate cut becomes even more likely if the JPY/KRW cross resumes moving lower.  

Turkey reports October CPI Tuesday, and is expected to rise 7.80% y/y vs. 7.95% in September.  This is still well above the 3-7% target range.  Core inflation is expected to rise 8.47% y/y vs. 8.23% in September.  Weekend elections were surprising, to say the least.  With Erdogan and his AKP now firmly in power, what happens to economic policy?  Will the government put more pressure on the central bank to ease?  If so, the post-election lira rally probably won’t last.  

Brazil reports October trade Tuesday, with both exports and imports expected to continue contracting y/y.  It reports September IP Wednesday, and is expected at -11.4% y/y vs. -9.0% in August.  October IPCA inflation will be reported Friday, and is expected to rise 9.90% y/y vs. 9.49% in September.  Despite inflation moving further above the 2.5-6.5% target range, COPOM minutes suggest rates will remain on hold for the time being.  

China Caixin composite PMI will be reported Wednesday.  Over the weekend, official manufacturing PMI was reported steady at 49.8 vs. 50 expected, while Caixin manufacturing PMI was reported at 48.3 vs. 47.6 expected and 47.2 in September.  China seems to be neutral/positive for global market sentiment, with risk of some more positive spillover if and when the PBOC eases again (which we expect).

Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%.  October CPI was just reported at -0.77% y/y, still well below the 2.5-3.5% target range.  And yet the BOT has kept rates steady since its last 25 bp cut in April.  For now, the bank seems to be putting the onus of providing stimulus on fiscal policy.

Hungary central bank minutes will be released Wednesday.  Last week, central bank Vice President Nagy said it could hold rates steady into 2019.  This went beyond the formal forecast horizon of steady rates until 2017.  Deflation risks persist, but it’s hard to see how anyone can try to predict monetary policy four years out.  September retail sales will be reported Thursday, and are expected to rise 5.0% y/y vs. 4.6% in August.  On Friday, September IP will be reported and is expected to rise 5.5% y/y vs. 6.2% in August.

Polish central bank meets Wednesday and is expected to keep rates steady at 1.5%.  Earlier today, Poland reported October CPI steady at -0.8% y/y, well below the 1.5-3.5% target.  We think the NBP will likely restart the easing cycle, but probably not until early 2016, when the incoming Law and Justice can stack the MPC with doves as the existing terms end.  

Taiwan reports October CPI Thursday, and is expected to rise 0.2% y/y vs.0.3% in September.  The central bank started an easing cycle in September with a 25 bp cut, and is expected to continue cutting rates well into 2016 as deflation risks persist and the economy weakens.  Q3 GDP contracted by a greater than expected -1% y/y.  

The Philippines reports October CPI Thursday, and is expected to remain steady at 0.4% y/y.  Core inflation is expected to remain steady at 1.4% y/y.  Headline inflation remains well below the 2-4% target range, but the central bank has kept rates steady at 4% since its last 25 bp hike in September 2014.  Slowing growth and persistent deflation risks should push the central bank into a more dovish mode in the coming months.

Malaysia central bank meets Thursday and is expected to keep rates steady at 3.25%.  Inflation has been falling recently.  Although the central bank does not have an explicit inflation target, it has kept rates steady at 3.25% since July 2014.  Malaysia reports September trade data on Friday, with exports expected to rise 3.5% y/y and imports by 3.1% y/y (both in ringgit terms).  In dollar terms, this would represent contractions of -23% y/y for both series and continues a string of weak readings.

Czech central bank meets Thursday and is expected to keep rates steady at 0.05%.  The central bank has sounded more concerned about deflation risks lately, and we cannot rule out a dovish extension of its forward guidance (which currently promises steady policy until “at least” H2 2016).  Earlier that day, Czech retail sales for September will be reported, and are expected to rise 4.0% y/y vs. 4.4% in August.  On Friday, it reports September trade (CZK17 bln expected), industrial (3.5% y/y expected), and construction output.  

Colombia reports October CPI Thursday, and is expected to rise 5.6% y/y vs. 5.35% in September.  This would move it further above the 2-4% target range, and would help explain why the central bank hiked rates by a larger than expected 50 bp to 5.25% Friday.  It was the second month in a row of tightening too, but we do not think this aggressive pace will be maintained for too long.  

Russia reports October CPI Friday, and is expected to rise 15.6% y/y vs.15.7% in September.  Last week, the central bank kept rates steady at 11%.  Market was basically split between no move and a 50 bp cut.  The bank said it would cut rates if CPI falls as forecast.  It sees inflation below 7% y/y in October 2016 and at 4% in 2017.  Yes, base effects in Q1 should see the y/y rate drop sharply, but the central bank's forecasts seem a tad optimistic.  We see steady rates in Q4.

Chile reports October CPI Friday, and is expected to rise 3.9% y/y vs. 4.6% in September.  This would be the first time back within the 2-4% target range since March 2014, and helps explain why the central bank considered leaving rates steady at its October meeting.  In the end, the bank decided to start the tightening cycle then with a 25 bp hike to 3.25%, but the falling inflation trajectory supports our view that the tightening cycle is not going to be aggressive.

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