In a still familiar refrain, EM assets are starting the week off on a soft note. The global backdrop remains negative, with Yellen’s speech bringing Fed lift-off back into focus. US jobs data this Friday should support the notion of lift-off by year-end. Chinese data is likely to remain soft, while commodity prices are still struggling to get some traction. MSCI EM is on track to test the low from August near 763, while the EMBI Global spread is on track to test the August high near 474 bp.
As usual, Brazil continues to pose idiosyncratic risks that often set the tone for wider EM. Last week’s sharp recovery in BRL helped other EM currencies get some temporary traction, but we viewed that bounce as a short-covering move and not a fundamentally-drive trend shift. Brazil fiscal data this week poses downside risks. Elsewhere, the RBI is widely expected to cut policy rates 25 bp this Tuesday, and is more representative of EM monetary policy than Colombia’s 25 bp hike last Friday.
Reserve Bank of India meets Tuesday and is expected to cut policy rates by 25 bp. The last move was a 25 bp cut in its policy rates in June. Price pressures remain low, with CPI rising 3.7% y/y in August, in the bottom half of the 2-6% target range. WPI contracted -5% y/y, pointing to no pipeline pressures ahead. Rajan has made it clear that it fiscal discipline is an important element in the reaction function of the RBI, so we expect the easing cycle to be gradual.
Brazil reports September IGP-M wholesale inflation Tuesday, and is expected to rise 8.2% y/y vs. 7.6% in August. Market pricing now suggests several hikes in Q4 and Q1 that would take the SELIC rate to 16% by Q1 2016. That’s very aggressive, and is almost certainly due more to risk aversion pushing up the local yield curve than to expectations for actual hikes. Brazil then reports August consolidated budget data on Wednesday, with the primary balance seen at –BRL12.4 bln. If so, the 12-month total would narrow slightly. Brazil reports September trade Thursday. August IP will be reported Friday, and is expected at -9.6% y/y vs. -8.9% in July. The weak economy is likely to keep upward pressure on the budget deficit.
South Africa reports August money and private sector credit data Wednesday, as well as the trade and budget balances. M3 growth is seen slowing to 10% y/y from 10.25% in July, while credit growth is seen picking up to 8.49% y/y from 8.38% in July. The trade deficit is seen at -ZAR3.4 bln, while the budget deficit is seen at –ZAR9.2 bln. The external accounts continue to improve as imports contract faster than exports (in USD terms), but the fiscal accounts have worsened the last two months.
Turkey reports August trade Wednesday, and is expected at -$4.9 bln vs. -$7 bln in July. If so, the 12-month total would narrow to -$75.3 bln from -$78.6 bln in July. This would be the lowest total since January 2011, and the external accounts should continue to improve near-term. Exports are contracting, but imports have collapsed even more due to the economic slowdown. Yet price pressures remain too high for the central bank to ease.
Poland reports September CPI Wednesday, and is expected at -0.7% y/y vs. -0.6% in August. Deflation remains persistent and should prevent the central bank from tightening until well into 2016. And if the downside risks to the economy increase enough, we would not rule out a resumption of the easing cycle.
Chile reports August manufacturing production and retail sales Wednesday. The former is expected to rise 0.5% y/y vs. 0.7% in July, while the latter is expected to rise 2.4% y/y vs. 2.9% in July. Central bank minutes will be released Thursday, when it kept rates steady but moved from a neutral bias to a tightening bias with a “short-term timeline.” This warns of a potential hike at the next meeting October 15. CPI rose 5% y/y in August, the high for the cycle and above the 2-4% target rate. The last move by the central bank was a 25 bp cut to 3.0% in October 2014. Yet the economy is sluggish and so the tightening cycle is not expected to be an aggressive one.
Colombia reports August unemployment Wednesday. The labor market has been improving steadily. Taken in conjunction with signs that growth is stabilizing after the earlier slowdown, the central bank felt comfortable enough to restart the tightening cycle last Friday with a 25 bp hike to 4.75%. September CPI will be reported next week, and is expected to rise 4.96% y/y vs. 4.74% in August. While more hikes are likely, we think that this cycle will be a modest one.
Mexico will hold its second oil block auction Wednesday. The first auction in July was a flop, and only 2 of the 14 exploration blocks in shallow waters were awarded. Head of Mexico’s National Hydrocarbons Commission Zepeda said it best: “The lessons from the first tender were that the consortium rules were too restrictive, the financial guarantees were too high and there was the issue of the timing of disclosure of the minimum price. The rules are now more flexible, the guarantees lower and the minimum prices were disclosed two weeks before the auction. We did our homework. This was a learning process, and we have learnt.” Mexico reports September PMIs on Thursday.
Korea reports August IP Thursday, and is expected at -1.6% y/y vs. -3.3% in July. It also reports September trade, with exports expected at -13.6% y/y and imports at -21.4% y/y. On Friday, Korea reports August current account data and September CPI. Inflation is seen rising to 0.9% y/y from 0.7% in August, but would still be well below the 2.5-3.5% target range. The next BOK meeting is October 15 and even though they have a dovish bent, it may be too soon to move rates. We suspect the bank will prefer to see the reaction from the first Fed hike before pulling the trigger.
China reports official September PMI Thursday, and is expected to remain steady at the 49.7 August reading. Final Caixin PMI will also be reported Thursday, and is expected to remain steady at the flash 47.0 reading. While the PMIs may be stabilizing, they both remain below the 50 boom/bust level and so the economy is still slowing. Further stimulus measures seem likely.
Thailand reports September CPI Thursday, and is expected at -1.1% y/y vs. -1.2% in August. This is well below the 1-4% target range, yet the BOT kept rates on hold at 1.5% at its last meeting. It seems as if the bank is leaving further stimulus on the hands of the government and the weaker baht. Despite outright deflation, the central bank will probably want to see how the fiscal measures impact the broader economy (and possibly wait for the Fed to move) before committing to further action. The last move was a 25 bp cut to 1.5% in April, and the next policy meeting is November 4.
Indonesia reports September CPI Thursday, and is expected at 7.0% y/y vs. 7.2% in August. While falling a bit, it would still be well above the 3-5% target range. Like the rest of the region, the economy is slowing. However, inflation here is too high to allow for easing, especially with the rupiah weakening steadily. As such, the bank is likely to say on hold for the foreseeable future. The bank is primarily focused in currency stability at the moment and is debating new money market instruments to deal with excess funds. The next policy meeting is October 15, we see steady rates then.
Peru reports September CPI Thursday, and is expected to rise 4.13% y/y vs. 4.04% in August. Next central bank policy meeting is October 15. Because it hiked at its last meeting to start the tightening cycle, another one so soon seems unlikely. Yes, inflation is well above the 1-3% target range and still rising. However, the economy remains sluggish and so an aggressive tightening cycle seems unlikely.
Singapore reports September PMI Thursday. The data have been coming in soft lately, while deflationary pressures are building. For August, IP contracted a larger than expected -7% y/y while CPI fell a greater than expected -0.8% y/y. We think the MAS will loosen policy at its next meeting in October by adjusting its S$NEER trading band.