EM Preview for the Week Ahead

We continue to see divergences within EM. CLP and TRY underperformed last week, while MXN and ZAR outperformed. Rather than seeing EM-wide buying, investors are being much more discerning and that is a good thing at this stage of the rally. Korea and Taiwan report trade data this week that should support our view that emerging Asia is likely to outperform, pulled up by the recovery in mainland China.

AMERICAS

Chile reports Q2 GDP and current account data Tuesday. The economy is expected to contract -13.1% q/q and -14% y/y. Political risk is rising, as an emboldened opposition submitted a bill that would set a one-time tax on individuals worth more than $22 mln. The government opposes the bill, but it’s worth noting that the opposition was recently able to push through legislation allowing early withdrawal from pension savings.

 

EUROPE/MIDDLE EAST/AFRICA

Russia reports July IP Monday. It is expected to contract -7.9% y/y vs. -9.4% in June. Russia then reports real retail sales Thursday, which are expected to fall -4.5% y/y vs. -7.7% in June. The economy remains weak and so the central bank is likely to continue easing. After its most recent 25 bp cut to 4.25% July 24, Governor Nabiullina said there is still room for more easing. Next policy meeting is September 18 and another 25 bp cut to 4.0% is expected.

Poland reports July industrial output and PPI Thursday. Output is expected to contract -1.5% y/y vs. +0.5% in June, while PPI is expected to fall -0.6% y/y vs. -0.8% in June. Poland then reports real retail sales Friday, which are expected to fall -0.7% y/y vs. -1.3% in June. The economy is slowly recovering, but the central bank is likely to keep policy at its current accommodative stance for the foreseeable future. Next policy meeting is September 9 and no change is expected then.

Turkey central bank meets Thursday and is expected to keep rates steady at 8.25%. A couple of analysts look for a rate hike but we think it’s too soon for that. Rather, the bank will likely attempt more backdoor tightening before eventually being forced to hike rates outright later this year. Recently, the bank has forced banks to obtain funding at rates higher than the policy rate, first at the overnight rate of 9.75% and then later at the so-called “conventional method” via auctions, which resulted in an average rate near 11% last week.

 

ASIA

Singapore reports July trade data Monday. NODX are expected to rise 3.6% y/y vs. 16.1% in June. With the economy taking part in the regional recovery, the MAS may not feel the need to ease further at its October policy meeting even though CPI fell -0.5% y/y in June and has been in deflationary territory for three straight months.

Thailand reports Q2 GDP Monday. The economy is expected to contract -11.2% q/q vs. -2.2% in Q1. In y/y terms, it’s expected to contract -13.0% vs. -1.8% in Q1. CPI fell -1.0% y/y in July, well below the bottom of the 1-4% target range. At its last policy meeting August 5, the bank said it was prepared to use “additional appropriate monetary policy tools” if needed.  He added that “that if the baht strengthens too fast, it may affect the economic recovery.  The central bank should follow the FX market closely and assess the need to take additional measures.”  Next policy meeting is September 23. If the baht continues to gain, we may see some stronger measures then to lean against the wind.

Indonesia reports Q2 current account and July trade Tuesday. Exports are expected to contract -15.1% y/y and imports by -19.5% y/y. Bank Indonesia meets Wednesday and is expected to keep rates steady at 4.0%. A couple of analysts look for a 25 bp cut. CPI rose 1.5% y/y in July, the lowest since May 2000 and below the bottom of the 2.5-4.5% target range. The economy has suffered from the pandemic, with GDP contracting -4.19% q/q in Q2 and -2.41% in Q1. As such, we see scope for a dovish surprise this week.

Philippine central bank meets Thursday and is expected to keep rates steady at 2.25%. CPI rose 2.7% y/y in July, the highest since January but still in the bottom half of the 2-4% target range. The economy has suffered from the pandemic, with GDP contracting -15.2% q/q in Q2 and -5.7% in Q1. While we see scope for further limited easing this year, the bank is running out of room to cut. No wonder the central bank just began QE, buying PHP800 bln of government debt last month.

Taiwan reports July export orders and Q2 current account Thursday. Orders are expected to rise 3.1% y/y vs. 6.5% in June. If so, they will have risen y/y for five straight months, suggesting a solid recovery in exports in H2. The government unveiled plans to ramp up military spending by more than 10% next year in light of increased military drills near Taiwan by mainland China. One drill coincided with US Secretary of Health and Human Services Azar’s recent visit to Taiwan as a show of support.

Korea reports trade data for the first 20 days of August Friday. In the first 10 days, exports fell -23.6% y/y and imports fell -24.3% y/y but we suspect these readings were outliers. Exports fell -7.0% y/y in July and -10.9% y/y in June and we expect further sequential improvement for the full month of August as the regional recovery continues. Still, at its last meeting July 16, BOK Governor Lee warned that “Consumption will improve in the second half but will be dependent on the virus situation, and exports recovery will be delayed.”  The bank said then that the growth outlook had deteriorated since its May forecast of -0.2% in 2020 and will be reflected in updated forecasts at the August 28 meeting.