Despite the continued uncertainty about the start of the Fed tightening cycle, we don’t believe that much has changed regarding the broader performance of the dollar (and therefore EM).
Interest rate differentials will continue to move in favor of the US, keeping the pressure on EM currencies. That said, the positive start of the week for some equity markets plus the near 3% increase in oil prices may help EM assets to stabilize a bit. However, the asset class remains vulnerable to the same global risks as before.
Furthermore, we continue to look for idiosyncratic risks coming from Brazil and Turkey which remain tilted to the downside. China has likely become a greater source of negative risk ahead, though we think those risks remain manageable.
Banco de Mexico meets Monday and is expected to keep rates steady at 3.0%. Mexico reports July INEGI retail sales Wednesday, and is expected to rise 4.8% y/y vs. 5.4% in June. Monthly GDP proxy for July will be reported Thursday and is expected to rise 2.3% y/y vs. 3.1% in June. Mid-September CPI will also be reported Thursday and is expected to rise 2.48% y/y vs. 2.64% in mid-August. This would be another record low, and well below the 3% target. August trade will be reported Friday. Overall, the soft economy and low inflation should keep Banxico on hold well into 2016.
Turkey central bank meets Tuesday and is expected to keep rates steady at 7.5%. We should also see further steps towards the normalization of the monetary policy framework in Turkey. This may mean the end of the overnight lending rate (at 10.50%) which marks the upper end of the interest rate corridor. CPI inflation picked up in August to 7.1% y/y, back above the 3-7% target range after one month within it. The lira remains vulnerable to heightened political risk domestically and risk off sentiment globally. As such, we believe the bank is on hold until after the November 1 general elections.
Hungary central bank meets Tuesday and is expected to keep rates steady at 1.35%. CPI was flat y/y in August, well below the 2-4% target range. If deflation risks pick up, we wouldn’t rule out more easing in 2016 but for now, the central bank is on hold. It’s been on hold since the last 15 bp cut back in July. Real sector data remain firm, but the entire region is facing similar deflation risks.
Brazil reports mid-September IPCA inflation Tuesday, and is expected to rise 9.56% y/y vs. 9.57% in mid-August. It then reports August current account data Wednesday, and is expected at -$3.3 bln vs. -$6.16 bln in July. If so, the 12-month total would narrow slightly from -4.3% of GDP in July. The external accounts are improving, but it’s from the import side as the economy collapses. Brazil reports August PPI Friday. Inflation remains very high, and we are not sure that the tightening cycle has ended yet.
China Caixin flash manufacturing PMI will be reported Wednesday. Consensus is 47.5 vs. 47.3 final in August, but there are clearly downside risks. This is the first snapshot for September, and comes after a generally soft August. We were surprised that the Fed put so much weight on global (that is, China) risks last week. As such, China data has become more important. BBG consensus growth forecasts seem too optimistic. From ECFC page: 6.9% y/y for both Q3 and Q4 2015, followed by 6.8%, 6.7%, 6.6%, and 6.6% in each successive quarter for 2016. We think the risks are to the downside here.
Malaysia reports August CPI Wednesday, and is expected to rise 3.1% y/y vs. 3.3% in July. Bank Negara does not have an explicit inflation target, but should be happy if further disinflation is seen. The economy is slowing, and we think the central bank may have to tilt more dovish in the coming months. It’s been on hold since the last 25 bp hike back in July 2014. Political risk remains high due to the ongoing 1MDB scandal.
Singapore reports August CPI Wednesday, and is expected at -0.5% y/y vs. -0.4% in July. It then reports August IP Friday, and is expected at -5.3% y/y vs. -6.1% in July. The MAS does not have an explicit inflation target, but should be concerned that deflation risks remain strong. The economy is slowing, and we think the MAS will ease policy at its October meeting by adjusting its S$NEER trading band. It’s been on hold since the last emergency intra-meeting move back in January.
Taiwan reports August IP and commercial sales Wednesday. The former is expected at -2.9% y/y while the latter is expected at -3.5% y/y. The central bank then meets Thursday and is expected to keep rates steady at 1.875%. Export orders were much weaker than expected in August, -8.3% y/y vs. -4.7% consensus. Market is split, with 6 of 16 analysts polled by BBG looking for a 12.5 bp cut to 1.75%. With deflation stubbornly in place and the economy slowing, a rate cut is warranted and think a dovish surprise is possible.
South Africa reports August CPI Wednesday, and is expected at 4.8% y/y vs. 5.0% in July. The central bank meets later that day and is expected to keep rates steady at 6.0%. A very small handful expects a 25 bp hike to 6.25%. If CPI comes in near the center of the 3-6% target range, then we think steady rates are warranted. SARB just hiked 25 bp at its last meeting in July, and the weak economy argues against an aggressive tightening cycle. August PPI is expected to rise 3.5% y/y vs. 3.3%, and will keep the SARB on alert.
Philippines central bank meets Thursday and is expected to keep rates steady at 4.0%. CPI rose only 0.6% y/y in August, the lowest rate on record and well below the 2-4% target range. The economy is holding up relatively well but is still slowing. If these macro trends continue, we think the central bank will tilt more dovish. It’s been on hold since the last 25 bp hike back in September 2014.
Czech central bank meets Thursday and is expected to keep policy unchanged. There is a risk of some dovish tweaks to its forward guidance, however. Several central bankers have recently warned of the need to either extend or expand its unorthodox policies. CPI inflation eased to 0.3% y/y in August, the lowest since March after moving as high as 0.8% in June. The real sector data remain firm, but the persistent deflation risks are clearly concerning officials.
Israel central bank meets Thursday and is expected to keep rates steady at 0.1%. However, 2 out of 17 analysts polled by Bloomberg see a 10 bp cut to zero rates. Deflation risks remain in play, with CPI -0.4% y/y in August. This is well below the 1-3% target range, and persistent deflation and slow growth has led the central bank into discussing unconventional measures again. For now, the weak shekel will help a bit, but further deflation may push the bank into unconventional measures.
Colombia central bank meets Friday and is expected to keep rates steady at 4.5%. However, the market is split. Of the 26 analysts polled by Bloomberg, 17 see steady rates and 9 see a 25 bp hike to 4.75%. CPI rose 4.7% y/y in August, above the 2-4% target and still rising. The bank moved to a more hawkish stance at its last meeting, and so a hawkish surprise is possible this week.