Emerging Markets Preview: Week Ahead

(from my colleague Dr. Win Thin)

EM ended last week on a soft note, and that weakness seems likely to carry over into this week.  Dollar sentiment turned more positive after firm retail sales data on Friday, though US rates markets have yet to reflect any increase in Fed tightening expectations.  Over the weekend, China reported weaker than expected April IP, retail sales, and fixed asset investment.  This continues a string of weak data for the month, and will undercut notions that the world’s second largest economy is stabilizing.  

Country-specific risks remain in play.  Brazil markets are showing some “buy the rumor, sell the fact” price action after the Senate voted to continue the impeachment process.  Weak economic data suggest that incoming Finance Minister Meirelles will inherit a terrible mess.  Poland avoided a downgrade by Moody’s over the weekend, but the outlook was moved to negative and points to a likely downgrade ahead.  Turkey and South Africa continue to face downgrade risk as well.

Thailand reports Q1 GDP Monday, with growth expected to remain steady at 2.8% y/y.  Growth remains sluggish, but the Bank of Thailand has put the onus of stimulus on fiscal policy.  CPI rose only 0.1% y/y in April, which gives the central bank leeway to cut rates if the economy slows in H2. Next policy meeting is June 22, no move is seen.

Colombia reports March retail sales and IP Monday.  The former is expected to rise 3.4% y/y and the latter 6.6% y/y.  Central bank minutes showed a unanimous vote to hike rates in April.  A majority voted for the larger than expected 50 bp, while a minority favored a smaller 25 bp hike.  Next policy meeting is May 27 and further tightening then is possible if peso weakness continues.

Singapore reports April trade Tuesday.  NODX are expected at -7.4% y/y vs. -15.6% in March.  Data have been coming in soft in recent months, justifying the MAS decision to loosen policy at its April policy meeting.  Next meeting is in October.  While we think the MAS has a dovish stance, it’s too early to say if it will ease again then.

Czech Republic reports Q1 GDP Tuesday, which is expected to grow 2.7% y/y vs. 4.0% in Q4.  Both Hungary and Poland reported weaker than expected Q1 growth last week, so we see downside risks to Czech growth.  It would take a much sharper deterioration in the economy to get further easing.  For now, we think current policies will simply be maintained until mid-2017.  Next policy meeting is June 30.

Chilean central bank meets Tuesday and is expected to keep rates steady at 3.5%.  It has been on hold since the last 25 bp hike back in December.  The real sector is weak, while inflation has fallen.  This will allow the bank to remain on hold for now.  Chile then reports Q1 GDP Wednesday, which is expected to grow 1.8% y/y vs. 1.3% in Q4.

South Africa reports April CPI Wednesday, which is expected to rise 6.2% y/y vs. 6.3% in March.  March retail sales will also be reported that day, which are expected to rise 3.8% y/y vs. 4.1% in February.  South African Reserve Bank then meets Thursday and is expected to keep rates steady at 7.0%.  However, the market is split.  Of the 10 analysts polled by Bloomberg, 7 see no change and 3 see a 25 bp hike.  We think the rand will be the deciding factor; if weakness persists this week, then a 25 bp hike becomes more likely.

The Philippines reports Q1 GDP Thursday, which is expected to grow 6.7% y/y vs. 6.3% in Q4.  President-elect Duterte inherits a strong economy, but it will be very important for him to signal to the markets that orthodox economic policies will remain intact.

Bank Indonesia meets Thursday and is expected to keep rates steady at 6.75%.  The central bank is likely to remain on hold until August, when the new policy rate comes into effect.  An easing bias is in effect, however, especially with CPI inflation falling to 3.6% y/y in April.  This is near the bottom of the 3-5% target range.

Bank Negara meets Thursday and is expected to keep rates steady at 3.25%.  On Friday, Malaysia reports April CPI, which is expected to rise 2.1% y/y vs. 2.6% in March.  Bank Negara does not have an explicit inflation target.  However, easing price pressures will give the bank leeway to cut rates if the economy slows this year.

Poland reports April IP (3.4% y/y expected), construction output (-13.4% y/y expected), PPI (-1.3% y/y expected), and real retail sales (5.5% y/y expected) Thursday.  Q1 GDP growth was weaker than expected, and data will be closely watched to see if this weakness carried over into Q2.  A new central bank chief will be in place next month.  If the data remain soft, easing in H2 is likely.  Poland avoided a downgrade over the weekend, but the move to negative outlook suggests it will be cut later this year.

Banco de Mexico releases minutes on Thursday.  Rates have been kept steady at 3.75% since the emergency 50 bp hike back in February.  The central bank remains concerned about inflation pass-through from a weak peso, but we just haven’t seen it yet.  Barring a significant collapse in the peso ahead, we think the central bank is unlikely to tighten further this year.

Brazil reports mid-May IPCA inflation Friday, which is expected to rise 9.5% y/y vs. 9.34% in mid-April.  This would move it further above the 2.5-6.5% target range.  Still, COPOM is not expected to cut rates at its June 8 meeting.  However, a cut at the July 20 meeting seems likely provided the downward inflation trajectory remains intact.   

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