EM is starting the week with a weak tone, though the panic of last week has abated for now. The bounce in commodity prices seems to have run out of steam, which isn’t helping market sentiment. Fed Vice Chair Fischer’s comments from Jackson Hole have put the September FOMC meeting back into play, and firm US jobs data Friday would support notions of a Fed liftoff then. We remain bearish on EM assets for now given the negative global backdrop.
Within EM, the idiosyncratic risks all seem biased to the downside as well. China has kept the yuan fairly stable since the mid-month devaluation. However, mainland equity markets remain under pressure and the Shanghai Composite is now down about 1% YTD. China reports PMI readings Tuesday (both official and Caixin) and both are expected to be below 50. While more stimulus is expected, the economic outlook is still dimming. Brazil and Turkey continue to face mounting political risk, and both are facing stronger rating downgrade risks too.
Korea reports August CPI Tuesday, and is expected to remain steady at 0.7% y/y. This is well below the 2.5-3.5% target range. Core CPI is seen rising 2.1% y/y vs. 2.0% in July. BOK’s last move was a 25 bp cut to 1.5% back in June, and could cut again this year. However, recent weakness in the won is taking some pressure off the BOK to cut imminently. Next policy meeting is September 11, and steady policy is expected then. Korea also reports August trade Tuesday, with exports seen at -6% y/y and imports at -15% y/y. Korea reports July current account data on Wednesday. The external accounts have improved despite weak exports, as imports have been contracting even more.
China reports official August PMI Tuesday. Manufacturing component is expected at 49.7 vs. 50.0 in July. Final Caixin August PMI will also be reported Tuesday, and the manufacturing component is expected to remain steady at the 47.1 flash reading. Both measures have not been below 50 simultaneously since January, and that was only for that one month. We expect further weakness in the economy and also further stimulus measures ahead.
Thailand reports August CPI Tuesday, and headline is expected at -1.0% y/y vs. -1.05% in July. This is well below the 1-4% target range. The last move by the BOT was a 25 bp cut to 1.5% back in April, and we think easing will continue this year as the economy remains weak. Next policy meeting is September 16. While no change in policy is expected then, we think there is a chance of a dovish surprise in light of continued weakness in the economy.
Indonesia reports August CPI Tuesday, and headline is expected to rise 7.37% y/y vs. 7.26% in July. This is well above the 3-5% target range. Bank Indonesia has thus been unable to respond to the weak growth outlook due to high inflation, as its last move was a 25 bp cut to 7.5% back in February. Next policy meeting is September 17, and no change in policy is expected then.
Peru reports August CPI Tuesday, and is expected at 3.94% y/y vs. 3.56% in July. This is well above the 1-3% target range. The central bank next meets September 10. With inflation above target, we think the chances of a hawkish move then are rising even though our base case is steady rates. At its August meeting, the central bank adopted a hawkish bias while leaving rates steady at 3.25%.
Mexico reports August PMI Tuesday. Manufacturing component is expected at 53.1 vs. 52.7 in July. It then reports August consumer confidence on Friday, which is expected at 92.3 vs. 92.2 in July. The recovery remains weak, and so we do not think the central bank will be able to justify a rate hike this year, no matter what the Fed does.
Brazil reports August trade Tuesday, with exports seen at -24% y/y and imports -34% y/y. Brazil then reports July IP Wednesday, expected at -6.3% y/y vs. -3.2% in June. COPOM meets Wednesday and is expected to keep rates steady at 14.25%. A very small minority looks for a 25 bp hike. The last move was a 50 bp hike in July, and it has hiked at every meeting since last October. Fiscal outlook continues to darken, and we think the case for Brazil losing its investment grade rating keeps getting stronger and stronger
Singapore reports August PMI Wednesday, and is expected at 49.4 vs. 49.7 in July. Data have been coming in on the weak side, supporting our view that the MAS will loosen monetary policy at its October meeting with an adjustment to its S$NEER trading band. Meanwhile, Prime Minister Lee has called for general elections on September 11, hoping to capitalize on an expected surge in good will stemming from the celebrations surrounding the 50th anniversary of independence.
Polish central bank meets Wednesday and is expected to keep rates steady at 1.5%. Policy has been steady since the last 50 bp cut in March, and the bank has said rates would remain low for some time. We think mid-2016 is likely for the start of the tightening cycle. The economic recovery remains robust, but inflation pressures remain low for now and should allow the bank to stand pat for the time being.
Czech Republic reports July retail sales Thursday, and is expected to rise 7.2% y/y vs. 11.1% in June. With the economic recovery gaining strength, we expect the central bank to maintain steady policy until mid-2016. That is what current forward guidance from the central bank currently states, and we see no need to adjust that again.
Hungary reports July retail sales Thursday, and is expected to rise 5.8% y/y vs. 6.2% in June. The economy remains robust, and so the easing cycle has clearly ended. However, we do not think tightening will be seen until H1 2016 as price pressures remain low.
Turkey reports August CPI Thursday, and is expected to rise 6.82% y/y vs. 6.81% in July. While this would still be within the 3-7% target range, core CPI is seen rising 7.5% y/y vs. 7.3% in July. As it is, political uncertainty and the weak lira will likely keep the bank on hold until at least the November 1 elections. The next policy meeting is September 22, and no change then is expected.
Philippines reports August CPI Friday, and headline is expected to rise 0.7% y/y vs. 0.8% in July. This is well below the 2-4% target range. Despite the softening economy, the central bank has kept rates on hold since September 2014, when it last hiked rates 25 bp to 4.0%. The next policy meeting is September 24. While policy is likely to be left steady then, we think a rate cut is possible in Q4 if current economic trends continue.
Colombia central bank releases minutes on Friday. We know that the decision to keep rates steady at 4.5% was not unanimous, with dissenters wanting to hike rates by 25 bp in order to help re-anchor inflation expectations. However, officials are so far showing little concern about the weak peso. The next policy meeting is September 25. July exports will also be reported Friday, and another weak showing is expected due to low oil prices. Colombia then reports August CPI on Saturday, and is expected to rise 4.45% y/y vs. 4.46% in July. This remains above the 2-4% target, and further acceleration could push more members of the central bank board into the hawkish camp.