EM Preview for the Week Ahead

Once again, EM assets are starting the week off on a soft note. This isn’t just any week, however, not with the FOMC looming.  The Fed’s decision will likely set market sentiment for Q4, if not longer.  And yet we feel that the timing of the lift-off is somewhat immaterial for EM.  Whether the Fed hikes in September, October, or December (or even early 2016), there is simply no doubt that US rates are headed higher.  The other headwinds to EM (slow global growth, low commodity prices, a strong dollar) aren’t going away anytime soon either, so the outlook near-term for EM remains negative.

The usual idiosyncratic risks in the big EM countries remain in play too.  Turkey and Brazil both continue to struggle with weak fundamentals and heightened political risks.  China economic data continues to come in soft, feeding into more equity market volatility, while Russia continues to struggle with low oil prices.

Indonesia reports August trade Tuesday.  Exports are seen at -17.7% y/y, while imports are seen at -23% y/y.  Bank Indonesia meets Thursday and is expected to keep rates steady at 7.5%.  CPI rose 7.2% y/y in August, well above the 3-5% target range.  BI has been on hold since February, when it cut rates 25 bp to 7.5%.  We think it is likely to remain on hold until price pressures abate.

Singapore reports July retail sales Tuesday, and is expected to rise 5.0% y/y vs. 6.9% in June.  It then reports August trade data on Thursday, with NODX expected at -3.5% y/y vs. -0.8% in July.  Overall, the data have been coming in on the weak side recently.  This supports our view that the MAS will loosen policy at its October policy meeting by adjusting its S$NEER trading band.

South Africa reports Q2 current account, and is expected at -3.7% of GDP vs. -4.8% in Q1.  July retail sales will be reported on Wednesday, and is expected to rise 2.5% y/y vs. 3.5% in June.  Sluggish growth has helped narrow the external deficits despite weak exports.  Inflation is rising, and so the SARB may hike rates again.  This is on top of fiscal tightening under way.

Poland reports August CPI on Tuesday, and is expected to remain steady at -0.7% y/y.  August industrial output (6.4% y/y consensus), PPI (-2.4% y/y consensus), and retail sales (1.5% y/y consensus) will be reported on Thursday, and the central bank will release minutes from its last meeting.  Despite the robust recovery, Poland still faces deflationary risks and so the central bank is likely to keep rates low until at least mid-2016.

Chile central bank meets on Tuesday and is expected to keep rates steady at 3.0%.  A small handful looks for a 25 bp hike to 3.25%.  Like neighboring Peru (who just hiked rates), Chile is facing inflation that’s above target and still rising.  It is also struggling with a sluggish economy, and so any tightening ahead is likely to be modest.

Colombia reports July retail sales and IP on Tuesday.  The former is expected to rise 3.0% y/y, while the latter is expected to contract -0.4% y/y.  July imports will be reported on Friday.  The economic outlook is mixed, but GDP growth picked up to 3.0% y/y in Q2 from 2.8% in Q1.  This may give the central bank more confidence to hike rates this year if inflation continues to rise.

Bank of Thailand meets on Wednesday and is expected to keep rates steady at 1.5%.  A small handful look for a 25 bp cut to 1.25%.  CPI fell -1.2% y/y in August, well below the 1-4% target range.  BOT has been on hold since April, when it cut rates 25 bp to 1.5%.   We are surprised it has remained on hold since then, as price pressures are non-existent and the economy remains weak.  We see a chance of a dovish surprise here.

Brazil reports July retail sales on Wednesday, and is expected at -4.0% y/y vs. -2.7% in June.  The second preview of September IGP-M wholesale inflation will be released on Thursday, and is expected to rise 8.0% y/y vs. 7.6% in August.  Lastly, monthly GDP proxy for July will be reported on Friday, and is expected at -4.6% y/y vs. -1.2% in June.  The economic outlook is worsening, which will keep pressure on the fiscal outlook.  We see more downgrades ahead.

Russia reports August retail sales on Thursday, and is expected at -8.9% y/y vs. -9.2% in July.  We know the economy remains weak, but high inflation and the weak ruble kept the central bank from cutting rates last week.  This is the first time it stood pat all year after 600 bp of easing.  We do not think it can cut rates again until the ruble stabilizes and price pressures abate.  That seems unlikely until 2016.

Peru central bank releases its quarterly inflation report on Friday.  This will be very important after the bank hiked rates unexpectedly last week.  The report will hopefully shed some light on what sort of tightening cycle the bank expects to unfold.  Growth is starting to pick up, which clearly gave the bank confidence to hike rates.