A Dark Cloud Still Hangs Over Emerging Markets

EM starts the week off on softer footing, as Friday’s jobs report supports the notion of December Fed lift-off.  USD/ZAR is making new all-time highs, and we expect most of EM to revisit the lows from August and September as the lift-off approaches.  Barring a disastrous November jobs report, we believe a rate hike will happen on December 16.  As such, we remain negative on EM near-term.

EM starts the week off on softer footing, as Friday’s jobs report supports the notion of December Fed lift-off.  USD/ZAR is making new all-time highs, and we expect most of EM to revisit the lows from August and September as the lift-off approaches.  Barring a disastrous November jobs report, we believe a rate hike will happen on December 16.  As such, we remain negative on EM near-term.

Recent China data suggest downside risks to regional growth, but the likelihood of further PBOC easing may help limit negative spillover into wider EM sentiment.  Confidence in India was dented by the ruling BJP loss in the Bihar state elections this weekend (see today’s report “India Election Results Sours the Mood”).  Political risk remains high in Brazil, but it has fallen in Turkey.

Mexico reports October CPI later today, and expects to 2.48% y/y vs. 2.52% in September.  This would be another all-time low, and there are simply no price pressures.  September IP and October ANTAD retail sales will report Wednesday.  IP expects to rise 1.2% y/y vs. 1.0% in August, while sales expect to rise 8.1% y/y vs. 8.0% in September.  Central bank minutes will release Thursday.  The tone of the statement was very dovish, and so we would expect the minutes to show a similar tone as well.  Earlier today, Mexico reported

China reports October CPI and PPI Tuesday.  The former expects to rise 1.5% y/y, while the latter expects to fall -5.9% y/y.  New money and loan data expect sometime this week.  October retail sales and IP will report Wednesday.  The former expects to rise 10.9% y/y, while the latter expects to rise 5.8% y/y.  Data should in general support the notion that the economy is stabilizing, but we still look for further PBOC easing.

Hungary reports October CPI Tuesday, and expects to be flat y/y vs. -0.4% in September.  Hungary reports Q3 GDP Friday, and expects to rise 2.5% y/y vs. 2.7% in Q2.  With deflation risks still high and the economy slowing, central bank officials have turned more dovish recently.  Forward guidance extends to 2017 (perhaps even longer) and they raised the possibility of unconventional measures.

Brazil reports the first preview of November IGP-M wholesale inflation Tuesday, and expects to rise 1.16% m/m.  If sustained for the month, the y/y would rise to 10.3% from 10.3% in October.  September retail sales will report Thursday, and expect at -7.3% y/y vs. -6.9% in August.  The economy remains too weak to hike rates any further, though it remains to see how markets react to steadily climbing inflation.

South Africa reports September manufacturing production Tuesday, and expects to contract -2.5% y/y vs. -0.2% in August.  SARB next meets on November 19.  With the economy still weak, we think the central bank will find it hard to continue its tightening cycle after restarting it with a 25 bp hike to 6% back in July.  We believe that political realities (unemployment above 25%) and social unrest will prevent this scenario from unfolding.  Fiscal policy is also tightening, putting more headwinds on the economy.

Turkey reports September current account data Wednesday, and expects at -$80 mln vs. -$163 mln in August.  If so, the 12-month total would fall sharply to -$40.8 bln from -$43 bln in August.  The external accounts continue to improve, but more from collapsing imports than strong exports.  We think that with the election over, the central bank may come under more pressure to cut rates.

Bank of Korea meets Thursday and expects to keep rates steady at 1.5%.  Although core CPI remains elevated at 2.1% y/y, headline is running at a relatively benign 0.9% y/y in October, and is below the 2.5-3.5% target range.  We suspect the bank will prefer to see the reaction from the first Fed hike before pulling the trigger.  The BOK will gauge the effects of fiscal stimulus before it acts again.  The last move was a 25 bp cut to 1.5% in June.

The Philippine central bank meets Thursday and expects to keep rates steady at 4%.  Data has come in on the firm side recently, despite the external headwinds.  Inflation remains very subdued at 0.4% y/y in October, well below the 2-4% target range.  However, upside risks are present due to the El Nino effect and its pass-through.  Monetary policy seems to be roughly in balance.  The last move was a 25 bp hike in its policy rates in September 2014.

India reports September IP and October CPI Thursday.  The former expects to rise 4.9% y/y, while the latter expects to rise 4.85% y/y.  The next policy meeting for India is on December 1.  Price pressures appear to be picking up, with CPI inflation moving toward the top of the 2-6% target range.  WPI contracted -4.5% y/y, however, pointing to no pipeline pressures.  The last move was a 50 bp cut in its policy rates in September.

Chile central bank meets Thursday and expects to keep rates steady at 3.25%.  The market is mixed, however.  Of the 20 analysts polled by Bloomberg, 6 see a 25 bp hike and 14 see no change.  CPI rose 4.0% y/y in October, and is right at the top of the 2-4% target range.  The last move by the central bank was a 25 bp hike to 3.25% in October that started the tightening cycle, but we know that they also discussed no hike.  With the economy sluggish and inflation falling, do not expect the tightening cycle to be an aggressive one.  Earlier today, Chile reported October trade.

Peru central bank meets Thursday and expects to keep rates steady at 3.5%.  The last move was a 25 bp hike to 3.5% in September that started the tightening cycle.  Inflation was 3.66% y/y in September, still above the 1-3% target range.  However, it has fallen from the 4% y/y peak in August and disinflation should continue.  The economy remains sluggish and so an aggressive tightening cycle seems unlikely.

Malaysia reports Q3 GDP and current account data Friday.  Growth expects to ease to 4.7% y/y from 4.9% in Q2.  The central bank left rates steady last week, but it noted, “Downside risks to growth remain high.  The performance of the Malaysian economy continues to be affected by the weak external environment” and it added that private consumption expects to moderate.  We think it will lean more dovish and perhaps ease in 2016 if the slowdown continues.  The weak ringgit is a constraint on cutting rates near-term.  The last move was a 25 bp hike to 3.25% in July 2014.

Czech Republic reports Q3 GDP Friday, and expects to rise 4.2% y/y vs. 4.6% in Q2.  Last week, the central bank left policy steady but altered its forward guidance slightly.  It now sees current policies maintained until “around” the end of 2016.  Previously, it said until “at least” H2 2016.  Deflation risks continue, with October CPI coming in earlier today at 0.2% y/y vs. 0.4% expected.  If the data turn down again, we would not rule out an adjustment to the floor itself, rather than just the forward guidance.

Poland reports Q3 GDP Friday, and growth expects to remain steady at 3.3% y/y.  It also reports September trade and current account data Friday.  Like the rest of the CEE region, Poland is facing continued deflation risks and headwinds to the economy.  We see the central bank on hold through the end of 2015, but expect easing to resume when incoming Law and Justice will replace virtually the entire MPC.

Emerging Markets: Week Ahead Preview is republished with permission from Marc to Market