EM Preview for the Week Ahead

Risk-off sentiment intensified last week.  Near-term, we think EM is likely to remain under pressure until the full impact of the coronavirus is better known.  On top of this, there is broad-based dollar strength.  Besides the safe haven flows, the US outlook remains very strong.  Taken in conjunction with the recent weak data out of Germany, France, and Japan, it’s clear that the US economy continues to outperform. 

AMERICAS

Mexico reports December IP Tuesday, which is expected to contract -0.6% y/y vs. -2.1% in November.  Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 7.0%.  CPI rose 3.24% y/y in January, slightly lower than expected but still the highest since July.  Regardless of inflation growth concerns are likely to drive the policy rate lower this year.

Brazil reports December retail sales Wednesday, which are expected to rise 3.6% y/y vs. 2.9% in November.  COPOM just cut rates 25 bp to 4.25% last week but deemed it “appropriate to interrupt the monetary easing process.”   IPCA inflation was 4.19% y/y in January, slightly lower than expected but still in the upper half of the 2.5-5.5% target range.  While the central bank signaled a pause, growth concerns could drive the policy rate lower this year.

Peru central bank meets Thursday and is expected to keep rates steady at 2.25%.  CPI rose 1.9% y/y in January, the lowest since September 2018 and in the lower half of the 1-3% target range.  The bank last cut rates 25 bp in November.  If the impact of the coronavirus intensifies, we look for another cut this year.

 

EUROPE/MIDDLE EAST/AFRICA

South Africa reports Q4 unemployment and December manufacturing production Tuesday.  Unemployment is seen steady at 29.1%, while manufacturing production is seen contracting -3.9% y/y vs. -3.6% in November.  December retail sales will be reported Wednesday, which are expected to rise 2.0% y/y vs. 2.6% in November.  The economy remains weak and so further easing is likely.  Next SARB meeting is March 19 and another 25 bp cut is possible then.  Much depends on the rand as well as a potential Moody’s downgrade.

Turkey reports December IP Thursday, which is expected to rise 6.8% y/y vs. 5.1% in November.  December current account data will be reported Friday, where a -$3 bln deficit is expected.  If so, the 12-month total would drop to $1.25 bln, the lowest since June.  The lira weakened after state banks pared back USD sales, as reserves have dropped to the lowest since July.  We think markets have forgotten how volatile the lira can be.  Historical 1- and 3-month TRY vols have been abnormally low and now starting to go the other way.

Hungary reports January CPI Thursday, which is expected to rise 4.4% y/y vs. 4.0% in December.  Q4 GDP will be reported Friday, with growth expected to slow to 4.3% y/y vs. 5.0% in Q3.  Growth is clearly slowing but with inflation above the 2-4% target range, we do not see any rate cuts in the near-term.  Next policy meeting is February 25 and no change is expected then.

Poland reports December trade and current account data Thursday.  January CPI and Q4 GDP will be reported Friday.  Inflation is expected to accelerate to 4.1% y/y from 3.4% in December, while growth is expected to slow to 3.0% y/y vs. 3.9% in Q3.  Growth is clearly slowing but with inflation moving further above the 1.5-3.5% target range, we do not see any rate cuts in the near-term.  Next policy meeting is March 4 and no change is expected then.

Czech Republic reports January CPI and Q4 GDP Friday.  Inflation is expected to slow a tick to 3.1% y/y, while growth is expected to slow to 2.0% y/y vs. 2.5% in Q3.  Yet the central bank surprised markets with a 25 bp hike to 2.25% last week.  Governor Rusnok said the decision was difficult but added that the bank doesn’t assume further escalation of price pressures that would require further hikes.

 

ASIA

China will report January money and loan data this week, but no date has been set.  Big jumps in both new loans and aggregate financing are expected as stimulus efforts ramp up.  China reports January CPI and PPI Monday.  The former is expected to rise 4.9% y/y vs. 4.5% in December, while the latter is expected flat y/y vs. -0.5% in December.  Inflation is not the concern for policymakers, but growth is.  We expect further stimulus measures as the impact of the coronavirus drags on.

Malaysia reports Q4 GDP and current account data Wednesday.  Growth is expected to slow to 4.1% y/y from 4.4% in Q3.  CPI rose 1.0% y/y in December.  While Bank Negara does not have an explicit inflation target, low price pressures will allow it to ease again this year if the impact of the coronavirus slows growth too much.  Next policy meeting is March 3 and no change is expected then.

Singapore reports December retail sales Wednesday, which are expected to contract -2.0% y/y vs. -4.0% in November.  MAS sent a dovish signal to the markets last week, noting “There is sufficient room within the policy band to accommodate an easing of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) in line with the weakening of economic conditions” due to the coronavirus outbreak.  It maintained its policy outlook and said it will hold its regular semiannual policy meeting in April.  Obviously, there is a risk that the MAS adjusts its policy band weaker then.

India reports January CPI and December IP Wednesday.  Inflation is expected at 7.50% y/y vs. 7.35% in December, while IP is expected to rise 1.9% y/y vs. 1.8% in November.  January WPI will be reported Friday, which is expected to rise 2.83% y/y vs. 2.59% in December.  The RBI just left rates steady last week.  However, it took some steps to boost liquidity in the system by offering up to $14 bln of 1- and 3-year funding operations and by easing some reserve requirements.