EM ended last week on a soft note. The icing on the cake was Yellen’s speech Friday afternoon, which confirmed the more hawkish stance seen in the FOMC minutes and other recent official comments. We warn that with the FOMC meeting and Brexit vote next month, markets are likely to remain volatile and that risk assets (such as EM) are the most vulnerable. Looking at country-specific EM risk, the Brazilian political outlook remains murky as more reports have surfaced of other PMDB officials being implicated in potential corruption cover-up. We get our first glimpse of the Chinese economy in May with PMI readings, both official and Caixin. Negative impact may be muted by China’s Ministry of Finance suggesting last week that there is more room for stimulus.
Chile reports April manufacturing production and retail sales Monday. The former is expected at -0.3% y/y, while the latter is expected to rise 4.5% y/y. Copper could not sustain its recent recovery, and so the economic outlook remains cloudy. Central bank minutes will be released Wednesday. Next policy meeting is June 16. We think the easing cycle has pretty much ended, with the bank on hold since its last 25 bp hike back in December. Inflation continues to fall and should move back in the 2-4% target range soon.
Korea reports April IP Tuesday, which is expected at -0.9% y/y vs. -1.5% in March. BOK also releases minutes Tuesday. Korea then reports May CPI Wednesday, which is expected to rise 0.9% y/y vs. 1.0% in April. It also reports April current account and May trade data Wednesday. Exports are expected at -1.4% y/y vs. -11.2% in April. Growth remains sluggish, even as inflation remains well below the 2.5-3.5% target range. Next BOK meeting is June 9. No move is seen then, but we think it will tilt more dovish in H2 if the economy continues to slow.
Thailand reports April manufacturing output Tuesday, which is expected to rise 0.5% y/y vs. 1.8% in March. It then reports April CPI, trade, and current account Wednesday. Inflation is seen at 0.3% y/y vs. 0.1% in March. This is well below the 2.5% target as well as the 1-4% target range. Yet the BOT is still relying on fiscal stimulus to boost the economy. Next BOT meeting is June 22, no move seen then.
South Africa reports April money and loan growth, trade Tuesday. Both are expected to slow as the SARB rate hikes are having an impact. Real money and loan growth is slowing even more. Next SARB meeting is July 21, and a lot can happen between now and then. We think the decision to stand pat in May was a pause, not the end of the tightening cycle.
Turkey reports April trade Tuesday, which is expected at -$4.2 bln. It then reports May CPI Friday, which is expected to rise 6.7% y/y vs. 6.6% in April. Inflation finally fell back into the 3-7% target range in April, at 6.6% y/y. This has allowed the central bank to continue narrowing the rates corridor, but it has so far refrained from cutting the benchmark rate. Next policy meeting is June 21, and another cut in the overnight lending rate is likely. A cut in the benchmark rate is likely in the coming months.
Poland reports May CPI Tuesday, which is expected at -0.9% y/y vs. -1.1% in April. Deflation remains persistent, but the new MPC does not seem to be in a hurry to cut rates again. Next policy meeting is June 8, and no change is seen. Incoming Governor Glapinski also seems to prefer steady policy for now. However, if the economy slows in H2, we think easing will back on the table.
India reports Q1 GDP Tuesday, which is expected to grow 7.5% y/y vs. 7.3% in Q4. The growth outlook remains solid. Price pressures have come in higher than expected recently, and so the RBI easing cycle may be on hold for now. Next policy meeting is June 7, no move is expected then.
Brazil reports April PPI and budget data Tuesday. It then reports Q1 GDP Wednesday, which is expected at -5.8% y/y vs. -5.9% in Q4. May trade will also be reported Wednesday, followed by April IP Thursday (expected at -8.5% y/y vs. -11.4% in March). The ongoing recession has really taken a toll on the budget data, with incoming Finance Minister Meirelles saying the fiscal situation was much worse than he thought.
China reports official May PMI readings Wednesday. Manufacturing PMI is seen at 50.0 vs. 50.1 in April. That same day, Caixin reports its manufacturing PMI for May. It is expected at 49.2 vs. 49.4 in April. The economy continues to soften, and the Ministry of Finance said last week that the government still has room to borrow more to finance investment and construction that would boost growth.
Indonesia reports May CPI Wednesday, which rose 3.6% y/y in April. Bank Indonesia is moving to a new policy rate in August. While it seemed like policy was on hold until that shift occurs, official comments after last week’s policy meeting suggest easing could come earlier. Next meeting is June 16, and a dovish surprise is possible then.
Mexico reports May PMI on Wednesday. The real sector data have been coming in on the soft side recently. Indeed, Banco de Mexico downgraded its 2017 growth forecast to 2.3-3.3% from 2.5-3.5% previously. Inflation remains below target, and so we downplay talk of imminent rate hikes. Governor Carstens said that the bank hopes to make policy decisions within the normal meeting calendar, which we think raised the bar on intra-meeting moves.
Malaysia reports April trade Friday. The recovery in oil prices is positive for the economic outlook, but the non-oil economy remains a bit sluggish. Next policy meeting isn’t until July 13, and no change is expected. Political risk is likely to command the most attention from investors, as the recent moves by Swiss and Singaporean authorities suggest overseas investigations of 1MDB are likely to uncover more wrongdoing.
Colombia reports Q1 GDP and April exports Friday. GDP is expected at 2.8% y/y vs. 3.3% in Q4. Growth is forecast by the IMF to grow 2.5% in 2016 and 3.0% in 2017. Given higher oil prices, we see upside risks to the growth forecasts. On Friday, the central bank hiked rates 25 bp to 7.25%, as expected.
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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