EM Preview for the Week Ahead

  • It’s hard to imagine either stabilization or meaningful differentiation in EM until asset prices in major markets find a bottom.
  • The second leg down in commodity prices will keep fundamental pressure elevated for the exporters. Russia, Malaysia, Mexico, South Africa, and Brazil will be the barometers for this.
  • Some have noted the break above the USD/CNY 6.40 level as meaningful, but we don’t read too much into it.
  • The Chinese yuan is doing what officials said it would do: there is more volatility but no large moves.
  • While the price action is starting to look exaggerated, the risk-reward for betting on a reversal looks better in the DM space than in EM.

Poland releases its unemployment rate on Tuesday, and it is expected to tick lower to 10.1% in July. Recent data has come in on the weaker side, and many are now discussing deflation risks. Last week, PPI contracted by 1.7% and has been in negative territory since late 2012. Retail sales were considerably weaker than expected. Still, the minutes to the last central bank meeting stated that inflation is expected to gradually rise towards the 2.0% target. On Friday, Poland also releases its final Q2 GDP print. The preliminary GDP released in the middle of the month came in at 3.3% y/y, down from 3.6% in Q1. All in all, rates will probably be on hold for some time, but the risk of a cut is growing.

South Africa’s Q2 GDP will be released on Tuesday, and is expected to fall to 2.0% y/y and 0.8% q/q. If confirmed, it would continue the gradual – albeit uneven – trend of slowing of the economy. The cycle high for GDP was seen in Q4 of 2010, at 3.4%. The biggest downside risk for the South African economy is the ongoing energy crisis with rolling blackouts. Production of electricity, gas and water are expected to continue declining.

The central bank of Hungary meets on Tuesday and is expected to keep rates steady at 1.35%. This will be the first pause after the bank brought rates down from 2.1% in clips of 15 bps. Data out of Hungary has been mixed. GDP for Q2 fell a lot more than expected to 2.7% y/y, but the latest industrial production and retail sales data have been more upbeat. CPI is running around 0.4% after rising for most of 2015 from a low of -1.4% in January.

Brazil releases current account data on Thursday.  The trade balance has been improving gradually and has flipped back to a surplus in early 2015 and so has the current account, though this is largely a reflection of lower imports. The current account deficit has shrunk from -$12.6 bln to -$2.5 bln in June. Also of note, FDI has held up relatively well despite all the negative news out of Brazil. FDI for June amounted to $-5.4 bln.

On Wednesday, Singapore releases its July industrial production data. IP is expected to contract by -3.7% y/y, less than the -4.4% reading for June. Since the sharp drop of in 2010-11, industrial production in Singapore never really recovered. Its average since the start of 2011 has been just 2.7%.

Philippines releases its Q2 GDP on Thursday and is expected to rise to 5.7% y/y, from 5.2% in Q1. Growth in the Philippines has been relatively steady since the start of 2014, roughly around 6.0%. Data out of the country has not been particularly bad. Overseas remittances for June posted a sizable upside surprise (up 6.1% vs. exp. For 5.4%). In addition, the trade balance for June, released on Tuesday, is expected to rise to $858 bln, from $509 mln in May. This is as the rate of contraction of imports decelerates as markets expect.

South Africa publishes its July PPI figures on Thursday. PPI is expected to stay roughly at the same level, around 3.8% y/y. This is considerably higher than the low of 2.6% in February, but well below the high of 2014 of 8.8%.

July trade balance for Mexico will be reported on Thursday. It is expected to nearly double to a deficit of -$1.3 bln on the back of both falling imports and exports. The dramatic depreciation of the peso is yet to show any signs of improving Mexico’s external accounts. So far, the focus has been squarely on the negative terms of trade shock from the decline in oil prices.

On Friday, the Czech Republic releases its preliminary Q2 GDP. GDP is unlikely to deviate much from the advance reading released earlier in the month, which surprised on the upside at 4.4% y/y. All in all, data out of the Czech Republic has held up well with the last readings for retail sales and manufacturing PMI surprising on the upside.