EM Preview for the Week Ahead

Risk assets came under pressure last week as the virus news stream worsened. It’s clear that large parts of the US will be forced to delay reopening until their virus numbers improve. Markets had gotten too bullish on the US recovery story and so this reality check soured sentiment. This is a very important week for US data, and we think risk sentiment will remain under pressure ahead of what we think will be a likely downside surprise in the US jobs number Thursday. AMERICAS

Brazil reports central government budget data Monday, where a primary deficit of -BRL132.1 bln is expected. Consolidated budget data will then be reported Tuesday, where a primary deficit of -BRL135.0 bln is expected. Fiscal policy will become an increasingly bigger issue, as Lower House Speaker Maia would not rule out the possibility of revising the government spending cap as pandemic costs pile up. June trade data will be reported Wednesday. May IP will be reported Thursday, which is expected to contract -21.9% y/y vs. -27.2% in April.

Chile reports May retail sales, unemployment, and IP Tuesday. Central bank minutes will be released Thursday. The bank left rates steady at 0.5% then but expanded its credit line facility for local banks to $16 bln in order to boost lending. It also announced a plan to buy $8 bln of central bank and bank bonds over the next six months and has hinted that it may eventually buy government debt. As such, these minutes will likely be very important.

Colombia central bank meets Tuesday and is expected to cut rates 50 bp to 2.25%. Minutes will be released Wednesday. June CPI will be reported Saturday, with headline expected to rise 2.48% y/y vs. 2.85% in May. If so, inflation would be the lowest since February 2014 and further below the 3% target. Central bank language after this meeting will be particularly important. Some believe the easing cycle may be ending but we think it will leave the door open for further easing.

EUROPE/MIDDLE EAST/AFRICA

South Africa reports Q1 GDP and May trade, budget, money, and credit data Tuesday. The economy is expected to contract -4.0% SAAR vs. -1.4% in Q4. Last week’s emergency budget was as bad as expected and suggests that fiscal stimulus will be very difficult to enact. As a result, monetary policy will bear most of the load going forward. Next policy meeting is July 23 and another cut is expected then. Q1 current account data will be reported Thursday, where the deficit is expected at -0.2% of GDP vs. -1.3% in Q4.

Turkey reports May trade data Tuesday. A deficit of -$3.4 bln is expected. June CPI will be reported Friday. Headline is expected to accelerate to 12.02% y/y from 11.39% in May. If so, it would be the second straight month of acceleration and the highest since February. No wonder the central bank surprised markets last week with no cut vs. 25 bp expected. It had cut at every meeting since the easing cycle started in July 2019. Next policy meeting is July 23. While rising price pressures may keep the bank on hold near-term, we think it is too early to call an end to the easing cycle.

Poland reports June CPI Tuesday. Headline is expected to rise 2.8% y/y vs. 2.9% in May. If so, inflation would be the lowest since November but remain in the top of the 1.5-3.5% target range. Next policy meeting was pushed back to July 14 from July 8 and no change is expected then. This delay pushed back the release of its inflation projections to July 17 from July 13. The bank just left rates steady this month after delivering a surprise cut in May. We believe the bank is in wait and see mode for the time being.

ASIA

Hong Kong reports May trade data Monday. Exports are expected to contract -5.2% y/y vs. -3.7% in April, while imports are expected to contract -7.0% y/y vs. -6.7% in April. Retail sales will be reported Tuesday. Sales in volume terms are expected to contract -33.7% y/y vs. -37.5% in April. Despite the recovery under way on the mainland, the Hong Kong economy remains depressed. There may be some modest relief in June as some reopening has been seen. However, the lackluster mainland recovery (see below) is likely to keep the Hong Kong recovery modest as well.

Korea reports May IP Tuesday, which is expected to remain steady at -4.5% y/y. June trade data will be reported Wednesday. Exports are expected to contract -7.3% y/y vs. -23.6% in May, while imports are expected to contract -9.4% y/y vs. -21.0% in May. June CPI will be reported Thursday, with headline expected to fall -0.2% y/y vs. -0.3% in May. Bank of Korea last cut rates 25 bp to 0.5% in late May but signaled that this was close to the effective lower bound. Governor Lee has said the bank is considering unconventional policies to support growth but gave no further details. Next policy meeting is July 16 and will be closely watched for clues.

China reports official June PMI readings Tuesday. Manufacturing is expected at 50.5 vs. 50.6 in May, while non-manufacturing is expected at 53.7 vs. 53.6 in May. Caixin manufacturing PMI will be reported Wednesday, which is expected to remain steady at 50.7. Caixin services and composite readings will be reported Friday, with services expected at 53.3 vs. 55.0 in May. If so, this would likely drag the composite lower from 54.5 in May. Despite manufacturing PMI readings moving back above 50 since March, the composite PMI only moved above 50 in May and signs suggest the overall recovery has been lackluster. Further stimulus seems likely.

Indonesia reports June CPI Wednesday. Headline inflation is expected at 1.85% y/y vs. 2.19% in May. If so, inflation would be the lowest since May 2000 and further below the 2.5-4.5% target range. Bank Indonesia just cut rates 25 bp to 4.25% this month. Next policy meeting is July 16 and another 25 bp cut is expected. Last week, the government approved a revised budget that lifted spending to a record $193 bln this year. Revenues are projected to drop and so the deficit is expected to widen to -6.3% of GDP.

Thailand reports June CPI Friday. Headline is expected to fall -3.00% y/y vs. -3.44% in May. If so, inflation would remain far below the 1-4% target range. Bank of Thailand last cut rates 25 bp to 0.50% in May and signaled that further cuts were unlikely. It left policy unchanged last week. Next policy meeting is August 5 and no change in rates is expected, but growing concern about the strong baht may lead to some measures to weaken the currency.