EM Preview for the Week Ahead

EM again starts off the week on the back foot, but losses are (for now) concentrated in the commodity currencies.  With commodities (except for iron ore) already under pressure again, this trend looks set to continue.

EM again starts off the week on the back foot, but losses are (for now) concentrated in the commodity currencies.  With commodities (except for iron ore) already under pressure again, this trend looks set to continue.  US jobs data Friday is likely to bring the focus back on Fed liftoff, which is of course EM-negative.  MSCI EM has tried to get some traction, but the bounce was limited and it appears ready to test the cycle low from last week.  

Brazil is especially under pressure, hitting levels not seen since 2003, pressured by the decision of the central bank to stay on the sidelines on FX and signaling the end of the tightening cycle.  The ruble will also come in the spotlight due to the sharp fall in crude oil.  The decision by the central bank to stop its dollar purchase program has been partially offset by its 50 bp rate cut last week.  Lastly, investors should keep an eye on the volatile internal and geopolitical situation in Turkey as we believe that many of the risks have not yet been priced in.

  • Mexico reports July PMI Monday, with manufacturing expected at 52.8 vs. 53.1 in June.  It then reports July CPI Friday, expected to rise 2.75% y/y vs. 2.87% in June.  Banco de Mexico kept rates steady last week and was dovish on the economy.  It noted continued cyclical weakness in the economy, particularly in non-auto manufacturing mining, and building.  Exports and investment have deteriorated compared to H2 2014, it added.  Yet Governor Carstens resumed talking about a rate hike.  We do not think he can follow through on this.
  • Brazil reports July trade Monday, with exports seen at -18.5% y/y and imports at -24% y/y.  It then reports July FIPE inflation (seen 8.75% y/y) and June IP (seen -5.0% y/y) on Tuesday.  COPOM minutes will be released Thursday, along with June unemployment.  COPOM signaled that the tightening cycle has ended for now, but we suspect it may have to continue hiking.  Brazil reports July IPCA inflation Friday, seen rising 9.52% y/y vs. 8.89% in June.  Both IPCA and FIPE inflation are making new cycle highs, as are IGP-M and PPI wholesale inflation measures.
  • Korea reports July CPI Tuesday, expected to remain steady at 0.7% y/y.  This is well below the 2.5-3.5% target range.  Officials have downplayed the need for more rate cuts.  And with the key JPY/KRW cross moving higher, they may feel more confident.  However, we think domestic activity will need a boost soon, and so we see a likelihood that the BOK will cut rates later this year.
  • Reserve Bank of India meets Tuesday and is expected to keep rates steady.  A small handful of analysts expect a 25 bp cut.  However, we think it is unlikely now with CPI inflation picking up, rising to 5.4% y/y in June.  Given uncertainty about the monsoon season, we think the RBI will remain cautious.  Easing is likely later in H2, however, if the monsoon impact is manageable.
  • Taiwan reports July CPI Wednesday, expected at -0.64% y/y vs. -0.56% in June.  July trade will be reported Friday, with exports seen at -10.2% y/y and imports at -12.1% y/y.  Price pressures are non-existent, while the slowing mainland economy has taken a toll on Taiwan.  Q2 GDP growth was much weaker than expected, falling to 0.6% y/y vs. 2.6% expected and 3.4% in Q1.  The central bank has inexplicably remained on hold even as the economy slows, but we expect easing at the next quarterly meeting in September.
  • Philippines reports July CPI Wednesday, headline expected to rise 0.8% y/y vs. 1.2% in June.  This is well below the 2-4% target range.  Core is seen rising 1.9% y/y vs. 2.0% in June.  The economy is still growing nicely at 5.2% y/y in Q1, but is slowing.  For now, policymakers can stay on hold to see how the economy develops, but the central bank has leeway to ease policy if needed in H2.
  • Caixin (formerly HSBC) July services PMI for China will be reported Wednesday.  Over this past weekend, China reported weaker than expected final Caixin (at 47.8) and official (at 50.0) July manufacturing PMIs that were weaker than expected.  This coming weekend, China will report July trade and CPI.  Exports are seen at -1.1% y/y, while imports are seen at -7.9% y/y.  CPI is seen picking up a bit to 1.6% y/y from 1.4% in June.  Markets seem more concerned with the equity market than the macro picture these days.  However, it does seem that some further slowing could be seen in the coming months, along with expectations of more stimulus measures.
  • Indonesia reports Q2 GDP Wednesday, expected to rise 4.6% y/y vs. 4.7% in Q1.  The economy is slowing, but high inflation and the weak rupiah has tied the hands of Bank Indonesia.  CPI rose 7.3% y/y in June, well above the 3-5% target range.
  • Czech Republic reports June retail sales Wednesday, expected to rise 7.6% y/y vs. 7.9% in May.  It reports June trade, construction and industrial output on Thursday.  The central bank meets Thursday too and is expected to keep policy steady.  Given the improvement in the growth and inflation numbers, we do not think the central bank will extend its forward guidance to keep current policies in place until “at least H2 2016.”
  • Hungary reports June retail sales Wednesday, expected to rise 5.3% y/y vs. 5.4% in May.   Central bank minutes will also be released Wednesday.  Hungary then reports June IP Friday, expected to rise 5.5% y/y WDA vs. 6.2% in May.  The improved growth outlook and rising inflation led the central bank to say it was halting its easing cycle at this last meeting.  However, it said rates would stay low for a long time.
  • Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%.  However, a small handful look for a 25 bp cut to 1.25%.  CPI fell -1.05% y/y in July, which is way below the 1-4% target range.  Officials have been downplaying the need for more rate cuts.  However, the economy continues to face headwinds and deflation, so we wouldn’t rule out a dovish surprise this week.  If not, then the likelihood of a rate cut later in Q3 seems to be rising.
  • Chile reports June monthly GDP proxy Wednesday, expected to rise 2.4% y/y vs. 0.8% in May.  If so, GDP growth would be around 1.6% in Q2, down from 2.4% in Q1.  It reports July CPI and trade on Friday.  CPI is seen rising 4.5% y/y vs. 4.4% in June, while a $476 mln trade surplus is expected.  The target range for inflation is 2-4%, and there are upside risks from the weak peso.  We see the central bank on hold for the time being, even though the economy is slowing.
  • Colombia reports July CPI Wednesday, expected to rise 4.35% y/y vs. 4.42% in June.  The target range for inflation is 2-4%.  With USD/COP making multi-year highs and officials seeming to want more weakness, there is a risk of inflation pass-through in the coming months.  As such, we see the central bank on hold for now despite the slowing economy.
  • Turkey reports June IP Friday, expected to rise 3.0% y/y vs. 2.4% in May.  CPI came in a bit lower than expected at 6.81% y/y in July, down from 7.2% and back in the 3-7% target range.  Despite the soft economy, we don’t think a rate cut is imminent, not with USD/TRY near all-time highs and political uncertainty running high.  The central bank is likely to move back to a single rate policy framework after its August meeting, but Governor Basci has stressed not to mistake this for easing (or tightening, for that matter).  Let’s see if the government can continue refraining from its attacks on the central bank.