Emerging Markets: Week Ahead Preview

(from my colleague Dr. Win Thin)

EM currencies have stabilized after the FOMC meeting last week.  Yet the Fed clearly signaled that it remains on track to start hiking rates around mid-2015.  While Yellen’s guidance was taken as dovish (tightening won’t be at a predictable, “measured” pace), we still feel the looming Fed tightening cycle remains negative for EM.  Furthermore, commodity prices remain soft.  This and the upcoming turn in the US interest rate cycle should maintain downward pressure on EM currencies through H1 2015.

Greater differentiation amongst EM FX is being seen, and this trend should continue in 2015.  The standard deviation of FX changes in 2014 YTD has moved close to 10%, the highest since 2009.  This supports our view that fundamentals will remain a major factor for currency under- and out-performance in the current market conditions.  Equity market returns across EM are showing a similar divergence trend, the greatest since 2009 as well.

Brazil tax collections for November due out Monday, expected to fall -11% y/y vs. +5% in October.  Revenues have slowed sharply.  While expenditures should be curtailed after the October elections, higher interest payment costs will limit the improvement.  The central bank releases its quarterly inflation report Tuesday.  In recent policy statements, the bank has been very dovish.  It has also seemed to rely on the prospects of fiscal tightening to justify “parsimonious” (stingy) tightening ahead.  Market consensus is for rates to top out at 12.5% in 2015, which represents another 75 bp of tightening. 

Colombia reports October imports Monday, seen rising 4% y/y vs. 12.5% in September.  Exports were already reported at -12.6% y/y, with weakness driven largely by lower oil prices.  However, import demand has remained strong, pushing the 12-month total in September to -$4.65 bln, the highest since August 1998.  The current account gap is expected at -4% of GDP this year and nearly -5% next year.

Philippines reports October imports Tuesday, seen rising 9% y/y vs. -2.6% in September. 
Exports were already reported up 2.9% y/y, which was the slowest rate since April.  Slumping electronics imports (down y/y for seven straight months) have flagged downside risks to exports ahead.  Still, the current account surplus should remain near 3% of GDP in both 2014 and 2015.

Singapore reports November CPI Tuesday, expected at -0.2% y/y vs. +0.1% in October.  Core is seen at 1.6% y/y vs. 1.7% in October.  It then reports November IP on Friday, expected to rise 0.3% y/y vs. 0.2% in October.  Weak economy and deflation risks could tip the MAS into a more dovish stance in 2015, with potential for a policy loosening at the next policy meeting in April.

Taiwan reports November commercial sales and IP Tuesday.  The former is expected to rise 2.1% y/y vs. 1.5% in October, while the latter is seen rising 8.7% y/y vs. 9.0% in October.  November export orders were weaker than expected, rising only 6% y/y.  The central bank kept rates steady last week at 1.875%, but we think it will lean more dovish in 2015 if slowing continues.  TWD/JPY is trading at multi-year highs, hurting Taiwan’s competitiveness.

Poland reports November retail sales Tuesday, expected to rise 2.0% y/y vs. 2.3% in October.  Unemployment will also be reported, seen ticking up to 11.4% from 11.3% in October.  The central bank’s November vote to hold rates was a close 6-4, and further weakness in data should push some of the hawks into the dovish camp in 2015. 

Hungary central bank releases minutes Tuesday.  The bank has kept rates steady at 2.1%, but deflation risks remain strong and real rates continue to rise as a result.  We think the bank will start preparing markets for potential easing in 2015.

Mexico reports mid-December CPI Tuesday.  Headline inflation is seen at 4.16% y/y while core is seen at 3.32%, both virtually unchanged from mid-November.  Central bank minutes were on the dovish side last week, highlighting little demand-side pressures.  Mexico also reports October IGAE GDP proxy Tuesday.  Mexico then reports November trade on Friday.  Exports have picked up in recent months, reflecting stronger demand in the US.  Indeed, strong manufactured exports have offset weaker petroleum exports.

Korea reports December consumer confidence Wednesday. 
Confidence has stalled out in recent months after rising most of 2013 and early 2014.  Consumption has held up, but is not particularly robust.  We think the BOK will cut rates again in 2015, especially in light of the weak yen.
Turkey central bank meets Wednesday and is expected to keep rates unchanged.  With the lira looking a bit vulnerable during the most recent EM selloff, we hope that the central bank remains cautious with regards to rate cuts.  We think that inflation remains too high to cut rates anytime soon.

Emerging Markets: Week Ahead Preview Emerging Markets:  Week Ahead Preview Reviewed by Marc Chandler on December 22, 2014 Rating: 5
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