Emerging Markets: Week Ahead Preview

EM ended last week on a soft note. Perhaps it was the North Korean nuclear test (see below). Perhaps it was disappointment in the ECB or rising Fed tightening odds. Whatever the trigger was, EM FX weakness persisted and appears likely to carry over into this week.

Indeed, as the September 21 FOMC meeting approaches, markets are likely to get even more jittery and choppy. Just to keep things in perspective, after Friday's drop, SPX has retraced less than 38% of the big post-Brexit bounce and so this correction in “risk” could go on for a bit longer.

China reports August money and new loan data sometime this week but no date has been set. August IP and retail sales will be reported Tuesday. The former is expected to rise 6.2% y/y while the latter is expected to rise 10.2% y/y. For now, markets appear to have put China on the back burner. However, it may become more of a factor now that markets are on the defensive.

India reports August CPI and July IP Monday. The former is expected to rise 5.2% y/y vs. 6.1% in July, while the latter is expected to rise 1.5% y/y vs. 2.1% in June. India reports August WPI Wednesday, which is expected to rise 4.0% y/y vs. 3.55% in July. Price pressures remain high, though CPI could be returning to the 2-6% target range. Yet it would be premature for new RBI Governor to cut rates at his first meeting October 4.

Bank of Israel publishes its minutes Monday. Rates have been kept steady since the last 15 bp cut back in February 2015. August trade will be reported Tuesday. Exports are still contracting y/y, while imports are rising and so the external accounts have been worsening. Q2 current account data will be reported Wednesday. August CPI will be reported Thursday, and is expected to come in at -0.4% y/y vs. -0.6% in July.

South Africa reports Q2 current account data Tuesday. The deficit is expected to narrow to -3.2% of GDP from -5.0% in Q1. It reports July retail sales Wednesday, which are expected to rise 2.0% y/y vs. 1.7% in June. The economy remains weak, and so the SARB is likely to keep policy on hold for now. Next SARB meeting is September 22, and rates are likely to be kept steady at 7.0%. The rand is the wild card going forward, as weakness could feed into higher inflation.

Poland reports July trade and current account data Tuesday. The external accounts remain in good shape. However, Germany is Poland’s largest export market and recent data there have come in very weak. July data from Poland is showing signs of weakness already, much as the rest of the CEE region is too. For now, the central bank is on hold but it may have to tilt more dovish if the economy continues to slow.

Brazil reports July retail sales Tuesday, which are expected at -5.7% y/y vs. -5.3% in June. The economy remains weak, but inflation may be too high to start the easing cycle at the next COPOM meeting October 19. With fiscal and monetary policies remaining tight, the economic outlook is not so good near-term.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%. Inflation was 0.3% y/y in August, well below the 1.0-4.0% target range. However, the central bank is likely to take a wait and see approach for now. Officials had been getting concerned about baht strength, and so recent weakness is likely to be welcomed.

Singapore reports July retail sales Thursday, which are expected to rise 1.5% y/y vs. 0.9% in June. It then reports August trade data Friday, with NODX expected to come in at -2.2% y/y vs. -10.6% in July. The MAS meets next month, and many expect it to remain on hold. The data have been coming in very soft, and so we see a decent chance that it eases again by adjusting its S$NEER trading band.

Colombia reports July retail sales and IP Thursday. The former is expected to rise 2.0% y/y while the latter is expected to rise 3.5% y/y. Central bank minutes and July imports will come out Friday. At that meeting, it kept rates steady at 7.75% for the first time since it restarted the tightening cycle in September 2015. Over that period, it hiked 11 times for a total of 325 bp. Inflation appears to have topped out (for now) and so the bank will likely keep rates steady near-term, with potential easing in 2017.

Central Bank of Chile meets Thursday and is expected to keep rates steady at 3.5%. Inflation eased to 3.4% y/y in August, as expected but still the lowest since February 2014. It’s also back in the 2-4% target range. The tightening cycle is clearly over, and with the economy weak, we think markets should start thinking about potential easing in early 2017.

Central Bank of Russia meets Friday and is expected to cut rates 50 bp to 10%. A small handful of analysts see steady rates. With inflation falling to 6.9% y/y, it gives the bank room to ease further in order to help boost the economy. It’s been on hold since the last 50 bp cut in June. The one wild card is the ruble. If the EM selloff continues this week and hits the ruble badly, the central bank may be cautious and hold off.