Between the “no” in the Greek referendum and a sharp drop in oil and commodity prices, EM is starting the week on a bad note. Therefore, we think this is a week to be defensive. There has been limited contagion so far from Europe, either in FX or fixed income markets, but this can change quickly. MSCI EM is testing the March low, and is on track to eventually test the December low.
Looking at the big stories within EM, China’s somewhat desperate measures to stabilize local equity markets, even if successful short-term, will have little positive spillover so far into other EM markets. Indeed, even China’s markets responded in a mixed manner, with the Shanghai Composite up 2.4% and the Shenzen Composite down 2.7% today. Even the 2.4% gain in Shanghai was uneven, with 71% of the included stocks down on the day. The political situation in Brazil is heating up again, with more voices calling for an impeachment – this is still in the tail risk territory for us, though the tail is growing fatter.
Taiwan reports June CPI Tuesday, expected to remain steady at -0.7% y/y. June trade will also be reported Tuesday, with exports seen -6% y/y and imports seen -18% y/y. Despite a sluggish economy and no price pressures to speak of, the central bank kept rates on hold at its quarterly policy meeting in June.
Philippines reports June CPI Tuesday, expected to rise 1.5% y/y vs. 1.6% in May. Core is seen rising 2.1% y/y vs. 2.2% in May. With inflation at risk of falling further below the 2-4% target range, we think the bank may tilt more dovish in H2. However, it will also be cautious given risks of an El Nino-related spike in food prices.
Czech Republic reports May industrial (3.4% y/y consensus) and construction output as well as retail sales (5.3% y/y consensus) Tuesday. It then reports June CPI Thursday, expected to rise 0.9% y/y vs. 0.7% in May. Inflation could approach the 2% target in H2, and so the bank is unlikely to extend its forward guidance for current policies until “at least H2 2016.”
Hungary reports May IP Tuesday, expected to rise 7.0% y/y vs. 6.3% in April. It reports June CPI Wednesday, expected to rise 0.6% y/y vs. 0.5% in May. Central bank will also release minutes Wednesday. Inflation is still well below the 3% target, and so we could see one more rate cut when the bank next meets July 21. Consensus is for a 10 bp cut to 1.4%. May trade will be reported Thursday.
Chile reports June trade Tuesday, with the surplus expected at $900 mln. It reports June CPI Wednesday, expected to rise 4.2% y/y vs. 4.0% in May. The central bank next meets July 14, and steady rates are expected for the time being. If inflation moves back into the 2-4% target range, the bank could tilt more dovish but we’re not there yet.
Turkey reports May IP Wednesday, expected to rise 2.9% y/y vs. 3.8% in April. May current account will be reported Friday, expected at -$3.5 bln. If so, the 12-month total would narrow slightly. The external accounts remain in decent shape, but the poor inflation and growth outlooks argue for caution with regards to the lira.
Poland central bank meets Wednesday and is expected to keep rates steady at 1.5%. While Poland is still experiencing deflation (-0.9% y/y), we expect it to soon follow Hungary (0.5% y/y) and Czech Republic (0.7% y/y) in moving back to positive inflation. With the economy fairly robust, this argues for steady rate now.
Brazil reports June IPCA inflation Wednesday, expected to rise 8.95% y/y vs. 8.47% in May. If so, this would be the highest rate since December 2003. Right now, markets are pricing in a 50 bp hike in July and another 25 bp hike in September. Market is also starting to price in a potential 25 bp hike in October. If true, this would take the SELIC rate up to 14.75% from 13.75% currently.
China reports June CPI Thursday, expected to rise 1.3% y/y vs. 1.2% in May. PPI will also be reported, seen steady at -4.6% y/y. With little in the way of price pressures, we expect the PBOC to continue easing in H2. However, we do not agree with this weekend’s moves to support the equity markets. Given that policymakers are already targeting growth, inflation, and to some extent the exchange rate, adding another target seems misguided, if not downright desperate.
Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%. BOK’s Moon Woon last week argued that further rate cuts are not the right response to the MERS situation. Now the government is looking to get parliamentary approval for a supplementary budget. News reports suggest the package could be as large as KRW15 trln ($13.3 bln). We think markets would welcome this development if it materializes.
Malaysia central bank meets Thursday and is expected to keep rates steady at 3.25%. It reports May IP Friday, expected to rise 3.1% vs. 4.0% in April. May manufacturing sales will also be reported Friday. Markets breathed a sigh of relief that the country (for now) avoided a downgrade. Our own sovereign ratings model has Malaysia slipping into BBB+ territory and so we thought a one notch downgrade was justified. We don’t think the story is over just yet, especially with political risk picking up in the country. Lower oil prices are also unhelpful.
South Africa reports May manufacturing production Thursday, expected to rise 1% y/y vs. -2% in April. While inflation is rising, the growth outlook remains poor and argues for steady rates. SARB next meets July 23. Market is pricing in several rate hikes starting in July, with Bloomberg consensus expecting a 25 bp cut per quarter pace that takes the policy rate up 100 bp to 6.75% in Q3 2016. We do not think the data will support such an aggressive tightening cycle, though.
Mexico reports June CPI Thursday, expected to rise 2.90% y/y vs. 2.88% in May. June ANTAD retail sales will be reported Thursday, expected to rise 4.9% y/y vs. 7.4% in May. It reports May IP Friday, expected to rise 0.5% y/y vs. 1.1% in April. With inflation below the 3% target and the economy sluggish, Banco de Mexico will be hard-pressed to deliver a rate hike this year. We see steady rates for the time being.
Peru central bank meets Thursday and is expected to keep rates steady at 3.25%. CPI inflation accelerated to 3.54% y/y in June from 3.37% in May, putting it further above the 1-3% target range. So despite the sluggish economy, rising inflation should keep the bank on hold for the time being. Lower copper prices are complicating matters, and appear on track to testing the cycle lows from January.
India reports May IP Friday. The recovery continues, while low price pressures argue for further easing. RBI next meets August 4. If the monsoon season looks OK then and price pressures remain low, we think the easing cycle will continue then with another 25 bp cut in the policy rates.