EM starts the FOMC week off on a firm footing. Indeed, markets are digesting last week’s Fed lift-off fairly well so far. On the other hand, oil prices are still making new cycle lows. Despite the more constructive price action for EM, we believe that the global backdrop for EM remains negative and we do not see much chance for a sustained rebound next year.
Within EM, the usual idiosyncratic risks remain in play. BRL volatility has been rising, and we think Levy’s exit is a very negative development. Indeed, South Africa, Turkey, and Brazil are all subject to downgrades into sub-investment grade, with poor economic fundamentals compounding heightened political risk. Azerbaijan devalued the manat, the latest victim of low oil prices. More victims will likely be seen in the coming weeks if oil continues to slide.
Turkey’s central bank meets Tuesday and is expected to hike the benchmark rate 50 bp to 8%. The market is truly split, however. Of the 22 analysts polled by Bloomberg, 6 see no change, 4 see a 25 bp hike, 9 see a 50 bp hike, and 3 see a 100 bp hike. We believe the bank will be under great pressure from the government not to hike rates, and so we think there is a risk of a dovish surprise with no hike.
Malaysia reports November CPI Wednesday, and is expected to rise 2.4% y/y vs. 2.5% in October. Price pressures remain under control, but the upside risks from El Nino are likely keeping the central bank cautious for now. If the economy slows, we think the central bank will tilt more dovish in 2016.
Singapore reports November CPI Wednesday, and is expected at -0.7% y/y vs. -0.8% in October. It then reports November IP Thursday, and is expected at -3.0% y/y vs. -5.4% in October. With deflation risks persisting and the economy still slowing, we believe the MAS will loosen policy in 2016 by adjusting its S$NEER trading band.
Taiwan reports November IP Wednesday, and is expected at -5.6% y/y vs. -6.2% in October. Earlier today, November export orders came in weaker than expected at -6.3% y/y. The weak economy and persistent deflation risks led the central bank to cut rates last week. We think easing will continue in 2016.
South Africa reports November budget data Wednesday, and is expected at –ZAR22 bln. If so, the 12-month total would jump to the highest level since February. Even with Gordhan back as Finance Minister, sluggish growth will likely keep pressure on the deficit. We think downgrades to sub-investment grade are likely in 2016.
Brazil reports November central government budget data Wednesday, and the primary balance is expected at –BRL12.1 bln. The recession is likely to keep upward pressure on the budget deficit. The central bank also releases its quarterly inflation report Wednesday. Inflation is still rising, and we believe the tightening cycle will be restarted in Q1.
Mexico reports mid-December CPI Wednesday, and is expected to rise 2.07% y/y vs. 2.26% in mid-November. It also reports the monthly GDP proxy for October that day, and is expected to rise 2.0% y/y vs. 3.1% in September. The ongoing combination of sluggish growth and low inflation should keep the tightening cycle very modest. Mexico reports November trade Thursday.