EM assets are starting the week under pressure. Idiosyncratic factors in Brazil (more political noise) and Turkey (election risks and a terrorist attack) meant that these countries are the hardest hit. Still, MXN is making new all-time lows while COP, KRW, and MYR are making multi-year lows, to cite a few. Weaker commodity prices are hurting some, while the re-focusing on the first hike of the Fed brings the dollar-bullish cycle back into focus. We expect the global backdrop to remain EM-negative near-term. LatAm is likely to underperform, while Asia should outperform.
Hungary’s central bank meets Tuesday and is expected to cut rates 10 bp to 1.40%. A small handful of analysts look for a 15 bp cut to 1.35%. Central bank minutes from the June meeting showed a 8-0 vote to cut rates 15 bp to 1.50%, but one MPC member wanted to end the easing cycle right then. All 8 also voted to change the forward guidance to further “slight” easing. We think after this meeting, there will be a pause. The real sector data have been quite robust, so the need for more cuts is limited. CPI rose 0.6% y/y in June, the highest rate since November 2013. Low base effects should see the y/y rate explode in H2, and it could approach the 3% target.
South Africa reports June CPI Wednesday, expected to rise 5.0% y/y vs. 4.6% in May. This would be the highest since December, and is approaching the top of the 3-6% target range. The central bank then meets Thursday and the market is split. Of the 26 analysts, 15 see a 25 bp hike to 6% while the rest see steady rates at 5.5%. We do not think a rate hike is the right call now. Inflation is not coming from the demand side, and will likely be driven by a weak rand and external developments. And now with oil prices coming off again, there is one less argument for early tightening.
Brazil reports mid-July IPCA inflation Wednesday, expected to rise 9.23% y/y vs. 8.80% in mid-June. This would be the highest rate since December 2003, and likely cements a 50 bp hike to 14.25% at the July 29 meeting. Further tightening in September is possible. Brazil also reports June current account and FDI data Wednesday. If the consensus current account gap of -$2.3 bln is met, the 12-month total would fall for the sixth straight month.
Mexico reports May INEGI retail sales Wednesday, expected to rise 4.8% y/y vs. 4.6% in May. ANTAD sales were already reported at 7.3% y/y in May, but they softened to 5% y/y in June. Mexico then reports mid-July CPI Thursday, expected to remain steady at 2.87% y/y. This remains below the 2-4% target range. The monthly GDP proxy for May will come out Friday, expected at 1.15% y/y vs. 2.09% in April. If so, Q2 growth will be tracking around 1.6%, down from 2.5% in Q1. Under these conditions, we do not expect Banco de Mexico to make good on its intent to hike rates this year.
Korea reports Q2 GDP Thursday, expected to rise 2.3% y/y vs. 2.5% in Q1. The economy is clearly slowing, with y/y growth falling for four straight quarters through Q1. The BOK recently cut its growth forecast for 2015 to 2.8%, but this still seems too optimistic. CPI rose 0.7%y/y in June, well below the 2.5-3.5% target. The BOK just left rates steady at 1.5%, but we think it will be forced back into a more dovish stance as the economy weakens.
Singapore reports June CPI Thursday, expected at -0.3% y/y vs. -0.4% in May. It then reports June IP Friday, expected at -0.4% y/y vs. -2.3% in May. With deflation and weak growth continuing, we think the MAS may move to a more expansionary policy at its October meeting by adjusting its S$NEER trading band.
Taiwan reports June commercial sales Thursday, expected at -3.4% y/y vs. -4.3% in May. June IP will also be reported, expected at -3.35% y/y vs. -3.18% in May. The economy is slowing, and yet the central bank has remained on hold. It appears that fiscal stimulus and a weaker TWD will be the main levers of stimulus, but we wouldn’t rule out a more dovish CBC stance if the economy continues to slow.
Turkey central bank meets Thursday and is expected to keep rates steady. With political uncertainty picking up (a government has not been formed yet), we think the central bank will maintain a cautious stance and keep rates steady for now. Inflation has been moderating, but at 7.2% y/y in June, remains above the 3-7% target band. Political risk is rising again, with chances of fresh elections rising as the main parties are failing to form a workable coalition.