This article got first published by Marc Chandler on marctomarket.com
EM remains caught in global crosscurrents that are mostly negative. If risk off sentiment ebbs as Greek and Chinese tail risks fall, then that simply brings the focus back on the looming Fed lift-off. We expect EM to remain under pressure in Q3. We also see continued pressure on industrial metals and oil, which spells out differentiation in the EM asset class.
The good news is that EM inflation trends are fairly subdued, with a few notable exceptions such as Brazil and Russia, and a resolution of the Greek drama could improve the global growth outlook. We also expect more stimulus measures from China. The big new tail risk to watch now is the increased probability of an impeachment process getting started in Brazil. This is still a small chance in our view, but it’s growing.
Singapore reports advance Q2 GDP Tuesday, expected to rise 2.4% y/y vs. 2.6% in Q1. It reports May retail sales Wednesday, expected to rise 3.0% y/y vs. 5.0% in April. It then reports June trade Thursday, with NODX expected to rise 2.0% y/y vs. -0.2% in May. The economy is losing momentum, which could push the MAS into a more dovish stance at its next policy meeting in October.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.5%. With inflation at 7.3% y/y well above the 3-5% target range, we think steady rates are likely for the time being even though the real sector is slowing. Indonesia reports June trade Wednesday, with exports expected at -16.5% y/y and imports at -20.3% y/y.
India reports June WPI, expected at -2.3% y/y vs. -2.4% in May. June CPI was reported at a higher than expected 5.4% y/y (up from 5.0% in May). Price pressures appear to be picking up as the monsoon season unfolds, and so we expect the RBI to remain cautious in H2. The Indian weather bureau predicts that the June-September monsoon season this year will be 88% of the 50-year average, so there are upward risks to food inflation.
Poland reports May trade and current account data Tuesday, with both surpluses expected to narrow from April. It then reports June CPI Wednesday, expected at -0.8% y/y vs. -0.9% in May. Low base effects should see the y/y rate return to positive territory in H2. It then reports June real retail sales and IP Friday. They are seen rising 5.7% and 7.0%, respectively. Real sector remains robust, so we see steady rates for now.
Brazil reports May retail sales Tuesday, expected at -3.7% y/y vs. -3.5% in April. It reports monthly GDP proxy for May Wednesday, expected at -3.8% y/y vs. -3.1% in April. The economy continues to contract, and appears to have fared worse in Q2. With interest rates still rising, we do not think the worst is behind us yet. Brazil is planning to export more iron ore in H2, which is negative for prices.
Chile central bank meets Tuesday and is expected to keep rates steady at 3.0%. With inflation at 4.4% y/y well above the 2-4% target range, we think steady rates are likely for the time being even though the real sector is slowing. Policymakers are under pressure to do something, as President Bachelet’s popularity is hitting all-time lows.
China reports Q2 GDP and June retail sales, IP Wednesday. GDP is expected to grow 6.8% y/y vs. 7.0% in Q1, while sales and IP are seen rising 10.2% and 6.0%, respectively. June trade data suggest the economy may be stabilizing, but it’s too early to sound the all clear. Recent selling curbs have stabilized mainland equity markets for now, but over a third of the stocks are still not trading.
Malaysia reports June CPI Wednesday, expected to rise 2.4% y/y vs. 2.1% in May. The central bank left rates steady at 3.25% last week, signaling comfort with the current macro backdrop. Real sector data have been mixed recently, and so we think a more dovish stance may develop as H2 progresses. Political uncertainty is rising as the 1MDB investigation continues.
South Africa reports May retail sales Wednesday, expected to rise 2.5% y/y vs. 3.4% in April. May manufacturing production contracted -1.4% y/y, continuing a string of weak data. We think it will be very hard for the SARB to hike rates at the July 23 meeting. Labor tensions are likely to rise as unions negotiate with the gold producers, demanding higher wages even as commodity prices sink.
Israel reports June CPI Wednesday, expected steady at -0.4% y/y. With deflationary conditions persisting, officials are unhappy with the firmer shekel and are likely to continue intervening to weaken it. We think the risk of unconventional easing policies has lessened, however. Political risk is rising ahead of the 2015/16 budget debate, with coalition members balking at proposed spending cuts.
Colombia reports May retail sales and IP Wednesday. Sales and IP are seen +1.5% y/y and -2.0% y/y, respectively. With inflation at 4.4% y/y well above the 2-4% target range, we think steady rates are likely for the time being even though the real sector is slowing. Officials appear to be fine with the weak peso, with Finance Minister Cardenas noting that it will help narrow the current account gap and boost growth.