The Mexican economy expanded by 4.1% y/y in Q2, down from 4.5% in Q1

DATA REVIEW

• Indian wholesale price inflation fell below 7% y/y for the first time since November 2009. The fuel component moderated by more than expected, while food prices were surprisingly stable. However, we do not expect these trends to sustain given the recent increase in global energy prices and poor monsoon. The RBI will continue to err on the side of caution before delivering another interest rate cut later this year as growth concerns eventually win out.

• The Hungarian economy slipped back into recession in Q2, with GDP down by 0.2%, after contracting by 1% in Q1. Falling retail sales volumes suggest personal spending declined further in Q2, while a deteriorating business climate may have weighed on investment. Against this weak backdrop we increasingly look for the central bank to cut interest rates once some meaningful headway with the IMF/EU has been made on Hungary’s standing credit line.

• As expected, the Central Bank of Turkey (CBT) left its official interest rates unchanged, maintaining the corridor between the benchmark rate (5.75%) and overnight lending rate (11.5%). However, the CBT gave a strong signal that the interest rate corridor would be reduced in the future. It also raised the FX reserve requirement to 60% (from 55%) and to 30% (from 25%) for gold to bolster lira liquidity.

• The Mexican economy expanded by 4.1% y/y in Q2, down from 4.5% in Q1. Lower oil prices and subdued US activity are likely to have played a significant part in the slowdown but the economy should sustain relatively solid growth in H2 despite the global headwinds. However, prospects are not as favourable and some policy stimulus cannot be discounted.

• The Brazilian economic activity indicator, a proxy for monthly GDP, rose 0.75% in June, following a flat reading in May. However, this only translates to a 1.4% rise on the year. Retail sales rose by 1.5% m/m in June, after a 0.8% drop in May.

THE WEEK AHEAD

• Recent data for South Africa have been mixed. On the one hand, the sharp 2.4% m/m fall in manufacturing production in June highlights the risks to the economy from weaker external demand, while on the other, retail sales volumes rose by a stronger than expected 1.9% m/m in June. While the external risks are likely to persist, the retail sales data complicate the argument for another interest rate cut. We also believe risks to inflation outlook are not benign. Recent downward surprises to consumer price inflation supported the decision to cut interest rates by 50bp to 5% in July. We forecast consumer price inflation to moderate further in July, slowing to 5.1% y/y, from 5.5% in June. This primarily reflects a sharp fall in fuel prices and favourable base effects. However, the recent upturn in global food prices could see inflation back above the 3% to 6% target range in the coming months. While we have tentatively pencilled in a further rate cut in September, the next round of production, spending and consumer price inflation data could hold the key. Developments in the mining sector need to be watched closely as an escalation in tensions could further weigh on the ZAR.

• Russian GDP growth slowed to 4% y/y in Q2, from 4.9% in Q1. Although a detailed breakdown is not yet available, household spending is likely to have remained the main driver, as robust wage growth and low unemployment underpinned solid consumer confidence. Monthly data suggest faltering external demand, was behind the slowdown, as reflected in softer exports and investment spending. Next week’s releases will provide guidance for Q3 and how the domestic economy is holding up against a fragile global backdrop and European recession. Following the sharp deceleration in investment growth in June, we look for a modest recovery to 5.2% y/y in July. However, this is well below the double digit growth rates seen in Q1. Retail sales growth is forecast to slow to 6.1% y/y in July, from 6.9% previously. Still, the data points to another healthy contribution from the household sector, which should sustain, given solid real wages growth for the rest of 2012. Real wages growth is forecast at 11.3% y/y in July, down from 12.9% y/y in June.

• The HSBC flash manufacturing PMI survey is the first indicator for Chinese activity for August. We look a modest increase to 49.8 from 49.3 in July. The outturn will draw considerable interest, but recently both the official and HSBC PMI surveys have been poor predictors of Chinese industrial production.