Emerging Markets: Preview of the Week Ahead

EM remains a mixed bag. Despite the negative connotations of a rising US rate environment, EM gathered an element of stability last week as the dollar consolidated its recent gains. Rising commodity prices are also helping EM at the margin, with RUB and COP amongst the best last week on higher oil and CLP on higher copper.

The tone for markets this week will likely be set by political developments in Europe today, which could result in a resumption of risk off activity.

Yet country risk still matters. BRL and TRY were amongst the worst EM performers last week due to negative political risk. On the other hand, ZAR was amongst the best due to perceived positive political developments (prospects of a Zuma exit and S&P maintaining its BBB- rating). We think divergences will continue within EM, but that the asset class as a whole is likely to remain under pressure over the next year.

China Caixin services and composite PMI readings will be reported Monday. November trade will be reported Thursday. Exports are seen at -5% y/y and imports at -1.8% y/y. CPI and PPI will be reported Friday, with the former seen rising 2.2% y/y and the latter seen rising 2.2% y/y. For now, markets are comfortable with the stabilizing mainland economy. We see CNY trading mainly in line with the rest of EM for now.

Turkey reports November CPI Monday, which is expected to rise 7.4% y/y vs. 7.2% in October. October IP will be reported Thursday, which is expected to rise 1.5% y/y vs. -3.1% in September. Markets remain in edge after President Erdogan’s comments on interest rates last week, which he continued over the weekend. The weak lira is likely to continue feeding into higher inflation, and the central bank will clearly be under pressure not to hike again. Next policy meeting is December 20.

Hungary reports October retail sales Monday, which is expected to rise 4.4% y/y vs. 5.1% in September. October IP will be reported Tuesday, which is expected flat y/y vs. -3.7% in September. Central bank minutes will be released Wednesday. November CPI will be reported Thursday, which is expected to rise 1.2% y/y vs. 1.0% in October. We think further easing will be difficult as inflation rises towards the 2-4% target range. October trade will also be reported Thursday.

Colombia reports November CPI Monday, which is expected to rise 5.96% y/y vs.6.48% in October. If so, this would be the lowest rate since October 2015 but still above the 2-4% target range. Central bank minutes will be released Friday. We think the bank would like to ease rates next year, but will find it difficult to do so in an environment of rising US rates. Next policy meeting is December 16, and rates are expected to remain steady at 7.75%.

Taiwan reports November CPI Tuesday, which is expected to rise 1.5% y/y vs. 1.7% in October. While the central bank does not have an explicit inflation target, low inflation should allow it to ease further if needed. The next quarterly policy meeting is December 22, and it will be a close call. November trade data will be reported Wednesday. Exports and imports are expected to rise 9.9% and 5.5% y/y, respectively.

The Philippines reports November CPI Tuesday, which is expected to rise 2.2% y/y vs. 2.3% in October. If so, this would still be in the lower half of the 2-4% target range. This should allow the central bank to remain on hold for now. Next policy meeting is December 22, and rates are expected to remain steady at 3.0%. October trade will be reported Friday.

South Africa reports Q3 GDP Tuesday, which is expected to grow 0.7% y/y vs. 0.6% in Q2. October manufacturing production will be reported Thursday, which is expected to rise 0.7% y/y after a flat reading in September. Q3 current account data will be reported Friday, and the deficit is expected to widen to -3.7% of GDP from -3.1% in Q2. A wider deficit despite sluggish growth would be negative for the rand. S&P maintained its BBB- rating with negative outlook on Friday, but we still expect an eventual cut to sub-investment grade by at least one of the agencies in the coming months.

Brazil central bank releases minutes from last week’s meeting Tuesday. COPOM was cautious and cut rates 25 bp to 13.75% then, as expected. November IPCA inflation will be reported Friday, which is expected to rise 7.09% y/y vs. 7.87% in October. The weaker real may limit the fall in inflation going forward, and so we think COPOM will remain on a very cautious easing path. Next policy meeting is January 11, and another 25 bp cut then seems likely.

Reserve Bank of India meets Wednesday and is expected to keep rates steady. CPI remains near the middle of the 2-6% target range, but recent rupee weakness is likely to keep the RBI cautious and on hold for now. The RBI surprised markets with a 25 bp cut at the last meeting in October, but we think two cuts in a row would be too aggressive in this current environment.

Chile reports November CPI Wednesday, which is expected to rise 2.9% y/y vs. 2.8% in October. November trade will also be reported that day. While inflation is below the 3% target, it remains within the 2-4% target range. We think the central bank would like to ease in 2017, but will find it difficult to do so if the Fed is raising rates. The next policy meeting is December 13, and rates are expected to remain steady at 3.5%.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.5%. Inflation is back on the radar, with CPI coming in flat y/y in November. This is the first non-negative reading since June 2014, and base effects are likely to see positive readings in the coming months. For now, the central bank is likely to remain on hold whilst maintaining a bias towards higher rates eventually.

Mexico reports November CPI Thursday, which is expected to rise 3.33% y/y vs. 3.06% in October. If so, this would be the highest since December 2014. While it is still within the 2-4% target range, we think Banco de Mexico will likely hike rates 50 bp at its next policy meeting December 15, especially if the Fed hikes December 14. The weak peso is apparently feeding into rising price pressures. News of Governor Carstens leaving the bank to head up the BIS couldn’t have come at a worse time.