Emerging Markets: Preview of the Week Ahead

(from my colleagues Dr. Win Thin and Ilan Solot)

The huge reversal last week in the underperforming currencies (BRL and RUB) has put some of the bears on the defensive. In addition, the recent political news (except for Mexico) has been positive: Indonesia's increase in subsidized fuel prices was followed by similar action in Malaysia; Brazil’s financial team looks solid (on paper at least); and the surprise interest rate cut by China sends an important signal of support for EM and commodities.

If markets can now add to the continued rally in equity prices, we should get a supportive environment for EM assets in the near-term. Longer-term, we are not as constructive. The Fed rate hike looms ahead, while we remain skeptical that China growth will respond in any significant manner to the latest rate cut.

Poland reports October retail sales Tuesday, expected to rise 2.2% y/y vs. 1.6% in September. Despite the pause in November, we think the weak economic outlook will lead to another rate cut in December. Inflation expectations will be reported Friday, expected to remain steady at an already low 0.2%. Meanwhile, CPI fell -0.6% y/y in October, and is keeping real interest rates positive.

South Africa reports Q3 GDP Tuesday, expected to rise 1.4% y/y (1.5% SAAR) vs. 1.0% y/y (0.6% SAAR) in Q2. October PPI will be reported Thursday, expected to rise 6.6% y/y vs. 6.9% in September. It then reports October money and credit growth, as well as trade and budget data Friday. With price pressures easing and inflation back within the 3-6% target and the economy remaining sluggish, we see no need for the new SARB Governor to hike rates.

Hungary central bank meets Tuesday and is expected to keep rates steady at 2.10%. With deflation risks continuing, we think the central bank may resume its easing cycle in 2015. Most of its exports go to Western Europe, and so headwinds are growing. Meanwhile, CPI fell -0.4% y/y in October, and is keeping real interest rates positive.

Singapore reports October IP Wednesday, expected to rise 0.6% y/y vs. -1.2% in September. The economy will likely see some negative impact from the weak yen and the China slowdown in the coming months, so it’s possible the MAS moves to a more accommodative stance at its next meeting in April. CPI rose a much lower than expected 0.1% y/y in October, so deflation risks are rising.

Mexico reports October trade Wednesday, expected at -$819 mln vs. +$590 mln in September. The strong US economy should help boost exports, though lower oil prices will be a headwind on growth. Mid-November CPI came in at 4.16% y/y, down from 4.32% in mid-October. Price pressures are easing, which fits in with the central bank’s view that the spike in inflation above the 2-4% target range was temporary. We see steady rates for most of 2015.

Korea reports October current account Thursday. It then reports October IP Friday, expected to rise 0.3% y/y vs. 1.9% in September. Real sector in October won’t reflect the impact of the weak yen, but the economy was already facing headwinds. We think the BOK has a bias to ease in the coming months, especially with JPY/KRW making new lows just below 9.40.

The Philippines reports Q3 GDP Thursday, expected to rise 6.5% y/y vs.6.4% in Q2. The economy is well-positioned to fend off the impact of the weak yen. However, we think with inflation easing (CPI rose 4.3% y/y in October, the lowest since April), the central bank’s tightening cycle has ended. Electronics imports, which are usually processed for re-export, have collapsed double digits since June. This suggests downside risks ahead.

Brazil reports November IGP-M wholesale inflation Thursday, expected to rise 3.61% y/y vs. 2.96% in October. October PPI will also come out Thursday. Brazil then reports Q3 GDP Friday, expected at -0.2% y/y vs.-0.9% in Q2. With the central bank expected to continue hiking into 2015, we see limited scope for GDP growth to gain much traction. Indeed, market consensus for 2014 and 2015 growth is 0.2% and 0.8%, respectively. This will keep upward pressure on the budget deficits, no matter who is the next Finance Minister.

Turkey reports October trade Friday, expected at -$6.55 bln vs. -$6.93 bln in September. We think there is a risk that the external data comes in better than expected, as low energy prices should continue to depress imports. This should also help CPI inflation ease from 8.96% y/y posted in October. While it’s still too early for the central bank to ease, we should see rate cuts in early 2015.

India reports Q3 GDP Friday, expected to rise 5.1% y/y vs. 5.7% in Q2. Modi has inherited an economy that was already in the process of bottoming, and so growth should accelerate in Q4 and into 2015. Price pressures have fallen, but upside risks from recent fuel price hikes remain in play. As such, we see the RBI on hold but with a hawkish bias.

Chile reports October manufacturing index, unemployment, and retail sales on Friday. All three series are expected to show further weakness. With the economy still facing headwinds, we think the central bank may resume easing in 2015. Minutes from the last policy meeting will be released December 3, and should provide some clues about future policy. Above-target inflation is preventing rate cuts right now.

Colombia central bank meets Friday and is expected to keep rates steady at 4.5%. With price pressures easing and the economic headwinds growing, we think the central bank will reverse its tightening cycle next year. Lower oil prices are a serious concern for Colombia, as oil is its top export product.