The week starts off subdued for EM, but selling pressures continue for the most part. The dollar is mixed against majors and with the decision about the timing of the first Fed hike still up in the air, it’s hard to see how investors will commit a lot of capital into year end. The softer tone in commodity price is also not helping EM. Still, it seems like the panic sentiment towards EM has subsided, opening the door for more differentiation amongst markets and bottom picking in assets that have been aggressively sold.
China’s weekend data deluge was mixed, but we think it was the right kind of mix to avoid roiling markets. The PBOC likely has some easing left to do, and so we would characterize China as neutral/positive risk for global markets. Brazil offers the usual mix of negative news headlines, which we would characterize as posing mostly negative risk for global markets.
Taiwan reports September export orders Tuesday, and are expected at -11.4% y/y vs. -8.3% in August. It then reports September commercial sales (-4% y/y expected) and IP (-5.4% y/y expected) on Friday. The economy is slowing, and so policymakers are likely to continue stimulus measures. The central bank should continue easing at its quarterly policy meeting in December, while the government will likely use fiscal stimulus ahead of the January elections. The ruling KMT party replaced its presidential candidate over the weekend.
Hungary central bank meets Tuesday and is expected to keep rates steady at 1.35%. Deflation risks are persistent, with CPI at -0.4% y/y in September. If the economy continues to slow, we think the easing cycle could be restarted. The bank has been on hold since the last 15 bp cut to 1.35% back in July, but real interest rates have been rising since June. Minutes to this meeting will be released November 4.
South Africa reports September CPI Wednesday, and is expected to rise 4.7% y/y vs. 4.6% in August. It also reports August retail sales, which are expected to rise 2.8% y/y vs. 3.3% in July. The government will also release its medium-term budget policy statement Wednesday. The sluggish economy prevented the SARB from hiking rates in September, and another low inflation reading could keep it on hold at its next meeting on November 19.
Turkey central bank meets Wednesday and is expected to keep rates steady at 7.5%. CPI rose 8% y/y in September, well above the 3-7% target range. With the lira vulnerable ahead of November 1 elections, we think the central bank is on hold for the time being. Latest polls show the ruling AKP with 40.5% support, barely changed from the 40.9% support it saw in the June vote. As such, political uncertainty may continue well past November 1.
Brazil central bank meets Wednesday and is expected to keep rates steady at 14.25%. Earlier that day, Brazil reports mid-October IPCA inflation, which is expected to rise 9.78% y/y vs. 9.57% in mid-September. Analyst expectations are universally seeing steady policy this month, but market pricing shows some tightening expected at the November and January meetings. Current account and FDI data for September will be reported Friday. The current account is expected at -$2.2 bln, which would see the 12-month total fall to around -4% of GDP.
Mexico reports August INEGI retail sales Wednesday, which are expected to rise 4.8% y/y vs. 5.8% in July. On Thursday, Mexico reports mid-October CPI, with headline inflation expected at 2.51% y/y vs. 2.53% in mid-September. With inflation well below the 3% target, the central bank is finding it hard to justify its tightening bias from earlier this year.
Poland central bank releases its minutes on Thursday. The central bank has been on hold since its last bp cut to 1.5% back in March. Deflation risks remain high, with CPI at -0.8% y/y in September. If the economy continues to slow, we would not rule out resumption in the easing cycle. However, this may be more of a 2016 story, when most of the MPC will be replaced as their terms end.
Korea reports Q3 GDP on Friday, and is expected to rise 2.4% y/y vs. 2.2% in Q2. The Bank of Korea just cut its 2015 and 2016 growth forecasts to 2.7% and 3.2%, respectively. In light of recent data, this seems too optimistic. Inflation of 0.6% y/y in September is well below the 2.5-3.5% target range, and BOK forecasts it at 0.7% this year and 1.7% next year. We think downside risks will move the BOK to a more dovish stance in 2016.
Malaysia reports September CPI Friday, and is expected to rise 2.9%y/y vs. 3.1% in August. Despite falling inflation risks and a sluggish economy, Bank Negara has kept rates steady since its last 25 bp hike to 3.25% in July 2014. Political risk is rising as Prime Minister Najib faces a possible no confidence vote as parliament reconvenes after a 4-month hiatus. The government will present its 2016 budget on Friday, with Najib treading a delicate balance between austerity (to lessen downgrade risks) and spending (to shore up popular support).
Singapore reports September CPI Friday, and is expected at -0.6%y/y vs. -0.8% in August. Despite persistent deflation risks and a sluggish economy, the MAS move last week was timid. We expect further easing in 2016.