Emerging Markets: Preview of the Week Ahead

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

It is a mixed start of the week for EM, though the short-term outlook is constructive.  The rebound in commodity prices has changed relative risk perception across the producer-importer spectrum.  Iron ore, for example, is up some 25% since the start of the month while oil is up nearly 18% over the same time period.  This has added confidence to the recovery of currencies such as BRL and RUB, to the point where measures to counter further appreciation are now being discussed or (in the case of Russia and Taiwan) implemented. 

In China, equity-positive news continues to come in in the form of talk of unconventional measures and mergers of state-owned enterprises, coming on the heels of PBOC easing last week.  All this is helping to set a better tone for EM assets, especially with the broad dollar rally sidelined for the time being.  Barring any hawkish surprises out of the FOMC this week, we don’t see any major challenges for this this short-term recovery in EM sentiment.  The next challenge for EM will likely come from the April US jobs data due out May 8. 

Brazil’s COPOM meets Wednesday and is expected to hike rates 50 bp to 13.25%.  A small handful is looking for a 25 bp hike.  In light of recent BRL firmness and signs that inflation may be topping out, we suspect that COPOM will signal that a pause is then likely.  Brazil reports March consolidated budget data on Thursday, with the primary balance seen at BRL5.4 bln.  February budget data was simply awful, and so markets will be watching March readings closely for signs that fiscal tightening is having a positive impact on the deficits.  Brazil reports March tax collections Monday, expected to rise 9% y/y.  If so, this would be the strongest gain since August and would support a more optimistic fiscal outlook. 

Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.75%.
  A small handful is looking for another 25 bp cut, but this seems too soon after the BOT cut 25 bp at its last meeting in March.  Further easing seems likely this year, but at a cautious pace.  The next meeting on June 10 is possible, though it will depend on the data.  Thailand reports April CPI Friday, with headline expected at -0.8% y/y vs. -0.6% in March.  Core is seen easing to 1.1% from 1.3% in March.  This is nearing the bottom of the 0.5-3.0% target range for core inflation.

Korea reports March IP Thursday, expected at -1.6% y/y vs. -4.7% in February.
  Korea then reports April CPI on Friday, with headline expected to remain steady at 0.4% y/y.  This is well below the 2.5-3.5% target range.  April trade will also come out Friday, with exports seen -6.6% y/y vs. -4.3% in March.  Overall, the economy remains weak even as price pressures are non-existent.  We think more easing will be seen from the BOK after its 25 bp cut in March.  It stood pat in April, suggesting that the pace of cuts will be modest.  Won gains may be a major factor, with JPY/KRW and USD/KRW both falling to near cycle lows.

Taiwan reports Q1 GDP Thursday, expected to grow 3.5% y/y vs. 3.35% in Q4.  Yet, export orders have slowed sharply in recent months and points to potential weakness in the economy ahead.  The central bank won’t hold its next policy until June.  If the mainland economy continues to slow, we believe Taiwan policymakers will take a more active stance with stimulus.  We know policymakers are already concerned about the strong TWD, which acts like monetary tightening.

South Africa reports March money and private sector credit growth Thursday.  Both are expected to slow modestly.  SARB next meets May 21 and markets will be watching to see if it softens its hawkish stance in light of low inflation and weak growth.  South Africa also reports March trade and budget data on Thursday.  Exports have been very weak, but imports have weakened too and so the trade gap has not widened out too much.  Still, Q1 has seen an overall worsening of the external accounts.

Turkey reports March trade Thursday, expected at -$6.2 bln vs. -$4.7 bln in February.  If so, this would be the first widening of the 12-month total in a few months and could signal a turnaround in the external accounts.  Low energy prices and a slowing economy have led to improved trade numbers in recent months, but the best readings may be behind us now that oil prices are rebounding a bit.  The lira is expected to continue weakening ahead of the June elections, with markets likely to test the central bank’s resolve after it refrained from hiking the main policy rate this month.
Central Bank of Russia meets Thursday and is expected to cut rates 100 bp to 13%.  However, the market is split.  Of the 36 analysts polled by Bloomberg, 7 see a 150 bp cut and 5 see a 200 bp cut.  The remaining 24 see a 100 bp cut.  Inflation remains high, but the strong ruble may push the central bank into delivering a bigger than expected dovish surprise. 

Banco de Mexico meets Thursday and is expected to keep rates steady at 3.0%.  Despite hawkish official comments, CPI remains near the 3% target and core inflation is falling to cycle lows.  Barring a huge collapse in the US and/or Mexican economy, we do not believe the central bank can justify a rate hike this year.  The weak peso is not an issue, as there has been no inflation pass-through yet.

China reports official April manufacturing PMI Friday, expected at 50.0 vs. 50.1 in March.  However, we see downside risk here after the HSBC flash reading slumped to 49.2 from 49.6 final in March.  The two series don’t always line up, as the HSBC reading apparently puts more weight on small- to medium-sized companies.  The trend of a softening Chinese economy seems well priced is, as are the prospects of more stimulus measures.  Despite some weakening of spot yuan, we do not believe policymakers are embarking on an effort to use the currency as a stimulus lever.  The PBOC fix for USD/CNY Monday was the lowest since January.

Peru reports April CPI Friday, expected to remain steady at 3% y/y.  This is right at the top of the 1-3% target range.  The next policy meeting is May 14, and rates are expected to remain steady at 3.25%.  The economic outlook remains soft, and so the central bank may resume easing once inflation moves back into the target range.  Last move was a 25 bp cut in January.   

Emerging Markets: Preview of the Week Ahead Emerging Markets:  Preview of the Week Ahead Reviewed by Marc Chandler on April 27, 2015 Rating: 5
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