Is the Tone in Emerging Markets Taking a Positive Turn?

EM is starting the week on a positive footing.  Aside from the recovery in global risk appetite, the uptick in commodity prices and the broader weaker tone in the dollar, we think the price action in Brazil has helped EM more generally.  In our view, the (relatively) positive news flows and the subsequent strong rally in all asset classes has helped to change the tone for EM.  The question is whether it can last (a question we will address in an upcoming report).  While it is far too early to say that EM has turned a corner, it looks as if we are reaching a more mature s

EM is starting the week on a positive footing.  Aside from the recovery in global risk appetite, the uptick in commodity prices and the broader weaker tone in the dollar, we think the price action in Brazil has helped EM more generally.  In our view, the (relatively) positive news flows and the subsequent strong rally in all asset classes has helped to change the tone for EM.  The question is whether it can last (a question we will address in an upcoming report).  While it is far too early to say that EM has turned a corner, it looks as if we are reaching a more mature stage of the re-pricing, where 2-way risk become more prevalent.

Mexico central bank will release minutes from its September meeting on today at 15:00 GMT.  The statement then was suitably dovish, and so would expect the minutes to have a similar tone.  Mexico reports September consumer confidence Tuesday, and expects at 91.4 vs. 90.4 in August.  It then reports September CPI Thursday, and expects to rise 2.56% y/y vs. 2.59% in August.  With inflation below the 3% target (but within the 2-4% target range) and growth sluggish, there is no need for the central bank to consider tightening policy.  Next policy meeting is October 29 and we see no change.

Colombia reports September CPI later today, and expects to rise 5.0% y/y vs. 4.74% in August.  Though inflation is moving further above the 2-4% target range, we do not expect an aggressive tightening cycle after the recent surprise 25 bp hike.  Peru, who also hiked last month, has already said it sees no need to moving again for a couple of meetings.  We suspect Colombia will take a similar approach.  Next policy meeting is October 30, and we think a move then is unlikely.

Philippines reports September CPI Tuesday, and expects to remain steady at 0.6% y/y.  Despite being well below the 2-4% target range, it has been on hold since the last 25 bp hike back in September 2014.  August exports will report Friday, and expect to contract -2.9% y/y vs. -1.8% in July.  The economy is holding up relatively well but is still slowing a bit.  If these macro trends continue, we think the central bank will tilt more dovish.  Next policy meeting is November 12, and no change expects then.

Czech Republic reports August trade Tuesday, and expects at CZK2.1 bln vs. CZK6.8 bln in July.  It then reports August retail sales (7.5% y/y consensus) as well as construction and industrial output (9.1% y/y consensus) Wednesday.  Lastly, it reports September CPI Friday and expects to remain steady at 0.3% y/y.  With deflation risks still present, we expect the CZK floor to hold until at least H2 2016.  However, officials are hinting of the need for further moves.

Poland central bank meets Tuesday and expects to keep rates steady at 1.5%.  The bank has been on hold since March.  September CPI came in lower than expected at -0.8% y/y vs. -0.6% in August.  Deflation remains persistent and it should prevent the central bank from tightening until well into 2016.   In addition, if the downside risks to the economy increase enough, we would not rule out a resumption of the easing cycle.

Taiwan reports September CPI Wednesday, and expects at -0.5% y/y vs. -0.45% in August.  It also reports September trade Wednesday, with exports expected at -11.2% y/y and imports at -13.5% y/y.  With deflation persistent and the economy sluggish, the recent 12.5 bp cut in policy rates was not a surprise.  We expect easing to continue in the coming quarters.  We also think we will see fiscal stimulus.

Malaysia reports August trade Wednesday.  In MYR terms, exports expect to rise 1.2% y/y and imports expect to rise 1.7% y/y.  However, in USD, both would contract -24% y/y.  The World Bank just warned that Malaysia’s growth outlook tilts to the downside, and noted that political risk is weighing on the country’s financial markets.  Next central bank policy meeting is November 5, keeping rates at 3.25% since the last 25 bp hike in July 2014.  If the growth outlook worsens, we think the bank will tilt more dovish.  However, this may be a 2016 story.

Hungary reports August IP Wednesday, and expects to rise 8.3% y/y vs. 3.4% in July.  IP data for August was weaker than expected, rising only 4.7% y/y.  Central bank minutes come on Wednesday.  Hungary then reports September CPI Thursday, and expects at -0.1% y/y vs. flat y/y in August.  With deflation risks building, we would not rule out resumption in the easing cycle.  However, the next meeting on October 20 is too soon.  August trade reports Friday.

Chile reports September trade Wednesday, with exports expected at -12% y/y and imports at -5% y/y.  It then reports September CPI Thursday, and expects to rise 4.9% y/y vs. 5.0% in August.  Like Peru and Colombia, Chile’s central bank has tilted more hawkish and appears likely to hike rates too.  Next policy meeting is October 15, and markets are looking for a 25 bp hike to 3.25% then.

Brazil reports September IPCA inflation Wednesday, and expects to rise 9.48% y/y vs. 9.53% in August.  Higher fuel prices recently announced by Petrobras should put upward pressure on inflation, and so there may be a need for further tightening.  The first preview for October IGP-M wholesale inflation will be released Friday, and expects to rise 9.1% y/y vs. 8.4% in September.  While the panic has abated a bit, markets are still pricing in several rate hikes ahead that would take the SELIC rate up to 15.75% from 14.25% currently.  Next policy meeting is October 21, but a move then seems too soon.

Turkey reports August IP Thursday, and expects to rise 2.1% y/y vs. 0.3% in July.  September CPI came in higher than expected, rising 7.95% and moving further above the target range.  Yet the central bank is under pressure not to tighten due to the sluggish economy.  Next policy meeting is October 21.  If inflation pressures continue to rise, we think there is a need for more conventional measures.

South Africa reports August manufacturing production Thursday, and expects to rise 1.4% y/y vs. 5.6% in July.  September CPI will not report until October 21, but inflation could fall further from 4.6% y/y in August.  The SARB kept rates steady in September after resuming the tightening cycle in July.  The sluggish economy is likely to keep this cycle a mild one.  The next policy meeting is November 19, and the decision then will depend on upcoming data and the performance of the rand.

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