EM Preview for the Week Ahead

Broad-based dollar weakness led to EM FX gains last week. While the dollar should remain under pressure, the outlook for risk assets remains uncertain. EM equities have traded lower along with DM markets that have become increasingly concerned about the growth outlook, especially in the US. For now, we think economic strength in Europe and China should outweigh weakness in the US, but markets are likely to remain nervous near-term and EM will likely be subject to bouts of selling.


Mexico reports June trade Monday. Q2 GDP will be reported Thursday, which is expected to contract -21.2% y/y vs. -1.4% in Q1. The economy remains weak and so further easing is expected despite the uptick in inflation to 3.59% y/y in mid-July. Next policy meeting is August 13 and another 50 bp cut to 4.5% is expected. The relatively firm peso should give the bank confidence to maintain its pace of easing.

Brazil reports June current account and FDI data Tuesday. The current account gap has been narrowing due to the sharp economic slowdown, with FDI easily covering the deficit. However, the fiscal deficit is more concerning as the 12-month nominal consolidated deficit rose to -8.8% of GDP in May. June central government budget data will be reported Thursday, followed by consolidated budget data Friday. Next COPOM meeting is August 5 and the CDI market is pricing in good odds of another 25 bp cut to 2.0%.

Chile reports June retail sales and IP Friday. The central bank also releases its minutes that day. It has kept rates steady for three straight meetings after the last 50 bp cut to 0.5% in March. At the last meeting, bank said it would keep rates at the technical lower bound for the forecast period and will continue with its current asset purchase program. The proposal to allow citizens to withdraw funds from their pension savings could lead to some volatility in local asset markets, though the peso has potential to strengthen as off-shore investments are sold and repatriated.

Colombia central bank meets Friday and is expected to cut rates 25 bp to 2.25%. After three straight months of 50 bp cuts, the bank slowed the pace to 25 bp in June due to concerns about risks to the financial system from large-scale capital outflows. Despite the relatively firm peso, the bank likely to maintain that slower pace this week.


Turkey central bank releases its quarterly inflation report Wednesday. The bank has remained on hold for two straight meetings as inflation has moved higher to 12.62% y/y in June, the highest since August 2019. The updated inflation forecasts will be an important indicator of whether the bank intends to resume its easing cycle. In the previous report in April, the bank cut its 2020 forecast from 8.2% to 7.4% and kept its 2021 forecast steady at 5.4%. We think both will have to be revised higher. June trade will also be reported that day, where a -$2.95 bln is expected.

South Africa reports June CPI, money, and private sector credit data Wednesday. Headline inflation is expected to pick up a tick to 2.2% y/y. Last week, SARB cut rates 25 bp and suggested it would remain on hold for now. Next policy meeting is September 17. A lot can happen between now and then so it’s too early to make a call. That said, low inflation and a firm rand could get them to cut again then. June PPI and budget data will be reported Thursday. Trade data will be reported Friday.

Poland reports July CPI Friday, which is expected to rise 3.1% y/y vs. 3.3% in June. If so, inflation would move back toward the 3% target. The central bank has remained on hold since the last cut to 0.10% back in May. At the last meeting July 14, the bank cut its growth outlook and signaled it would maintain current rates and continue with its asset purchases. Next policy meeting is September 9 and no change is expected then.


Hong Kong reports June trade Monday. Exports are expected to rise 4.2% y/y while imports are expected to fall -5.5% y/y. The recovery in the mainland economy has not yet translated into one in Hong Kong. Q2 GDP will be reported Wednesday, which is expected to contract -7.7% y/y vs. -8.9% in Q1. June retail sales will be reported Thursday. While some modest improvement is likely, the rising virus numbers in Hong Kong have led to some limited roll-backs of the reopening efforts. If this picks up, the recovery will likely become more uneven.

Korea reports June IP Friday, which is expected to contract -2.7% y/y vs. -9.6% in May. July trade data will be reported Saturday morning local time, with exports expected to contract -11.1% y/y and imports by -12.2% y/y. This will be the first full snapshot for the month and will likely that the recovery in China has yet to translate into stronger regional trade and economic activity. BOK kept rates at 0.5% at its meeting this month but implied that it stands ready to use unconventional measures if needed. Next policy meeting is August 27. If the economy hasn’t picked up more, the bank may have to be more explicit about its policy intentions.

China reports official June PMI readings Friday. Manufacturing is expected to fall a tick to 50.8, while non-manufacturing is expected to rise a tick to 54.5. This could keep the composite reading steady at 54.2. These will be the first snapshots of the mainland economy for July. It’s a bit surprising that the recovery hasn’t translated into stronger spillover to the rest of the region. Tensions with the US are likely to remain high after it ordered the closure of the US consulate in Chengdu, though we do not yet think it will spill back over into an outright trade war.