(from my colleague Dr. Win Thin)
In a familiar refrain, EM assets are starting off the week on a soft note, with markets picking up where the left off on Friday. With China markets reopening after a two-day holiday, the Shanghai dropped -2.5% and has fed into wider EM equity losses. MSCI EM is down two straight days and five of the past six. The strong US jobs report Friday also brings the Fed lift-off back into focus. Many EM currencies are either making new multi-year lows (IDR, MYR) or making new all-time lows (BRL, TRY). We see more and more currencies following suit in the coming weeks.
Besides the negative global backdrop, idiosyncratic risks remain in play for some of the major EM countries. Political risk is elevated in Turkey, for instance, after another PKK bombing killed several Turkish soldiers. Concerns about Finance Minister Levy resigning are also likely to continue weighing on Brazil markets. All in all, we remain negative on EM due to the perfect storm of negative global developments.
Taiwan reports August CPI Tuesday, and is expected at -0.8% y/y vs. -0.66% in July. August trade came in weaker than expected, with exports contracting -16.7% y/y. The central bank has kept its policy rate at 1.875% since the last 12.5 bp hike back in Q2 2011. The weak economic outlook supports our view that the central bank could embark on an easing cycle at its September 24 quarterly meeting.
China reports August trade Tuesday. Exports are expected at -6.6% y/y while imports are expected at -7.9% y/y. Trade data from other EM countries so far has been very weak, so there are downside risks to the China data. China then reports August CPI and PPI Thursday. The former is expected to rise 1.8% y/y vs. 1.6% in July, while the latter is expected to fall -5.6% y/y vs. -5.4% in July. Markets reopened this week after a two-day holiday.
Hungary reports August CPI Tuesday, and is expected to rise 0.2% y/y vs. 0.4% in July. It also reports July IP, which is expected to rise 5.3% y/y vs. 6.0% in June. The central bank will release its minutes on Wednesday. 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 July IP Tuesday, and is expected to rise 3.7% y/y vs. 5.5% in June. It then reports July current account (-$3.55 bln consensus) and Q2 GDP (3.0% y/y consensus) on Thursday. CPI moved above the 3-7% target range in August. Combined with political uncertainty and the weak lira, the central bank will likely be on hold until at least the November 1 elections. The next policy meeting is September 22, and no change then is expected.
Chile reports August CPI Tuesday, and is expected to rise 4.8% y/y vs. 4.6% in July. With inflation well above the 2-4% target range, a hawkish bias is developing at the central bank. A hike at the next policy meeting September 15 seems too soon, but a hike in Q4 is possible is inflation continues to accelerate.
Czech Republic reports August CPI Wednesday, and is expected to rise 0.4% y/y vs. 0.5% in July. With the economic recovery gaining strength, we expect the central bank to maintain steady policy until “at least” H2 2016. That is what current forward guidance from the central bank currently states, and we see no need to adjust that again.
Brazil reports its first preview of September IGP-M wholesale inflation Wednesday, and is expected to accelerate to 7.8%y/y from 7.6% in August. COPOM minutes will be released Thursday, when it kept rates steady at 14.25%. August IPCA inflation will also be reported Thursday, and is expected to remain steady at 9.56% y/y. With price pressures and inflation expectations still high and rising, we are skeptical that the tightening cycle has ended.
Mexico reports August CPI Wednesday, and is expected to rise 2.62% y/y vs. 2.74% in July. If so, inflation would move further below the 3% target. 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. ANTAD retail sales for August will also be reported Wednesday, and is expected to rise 6.0% y/y vs. 6.8% in July. It then reports July IP Friday, and is expected to rise 0.5% y/y vs. 1.4% in June.
Malaysia reports July IP Thursday, and is expected to rise 4.9% y/y vs. 4.3% in June. The central bank then meets Friday and is expected to keep rates steady at 3.25%. CPI rose 3.3% y/y in July. The central bank has no explicit inflation target. While inflation is on the high side, the bank is likely to remain on hold to see how bad the regional slowdown will get before moving on rates.
South Africa reports manufacturing production Thursday, and is expected to rise 1.4% y/y vs. -0.4% y/y in June. With the economy still weak, we think the SARB will find it hard to continue its tightening cycle after restarting it with a 25 bp hike to 6% back in July. Next policy meeting is September 23.
Peru central bank meets Thursday and is expected to keep rates steady at 3.25%. However, a small handful looks for a 25 hike. August CPI rose 4.0% y/y vs. 3.56% in July. This is well above the 1-3% target range. With inflation moving further above target, we think the chances of a hawkish surprise is possible, 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%.
Bank of Korea meets Friday and is expected to keep rates steady at 1.5%. However, a small minority sees a 25 bp cut to 1.25%. CPI rose 0.7% y/y in August, well below the 2.5-3.5% target range. 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.
Russia central bank meets Friday and is expected to keep rates steady at 11.0%. However, a small handful sees a 50 bp cut to 10.5%. CPI inflation has accelerated two straight months to 15.8% y/y in August, and so we think steady rates are warranted. Russia also reports July trade Friday. Exports are expected at -36% y/y while imports are expected at -44% y/y.
Colombia reports Q2 GDP Friday, and growth is expected to rise 2.9% y/y vs. 2.8% in Q1. We know that the last 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, and there are growing risks of a hawkish surprise then.