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EM Preview for the Week Ahead

EM has been able to get some traction as markets basically shrugged off the risk-off sentiment after the Iran attacks. This week’s planned signing of the Phase One trade deal should help boost EM further, but we remain cautious. The Iran situation is by no means solved, and we see periodic bouts of risk-off sentiment coming from smaller skirmishes. The World Bank also sounded a warning bell last week with its downward revisions to its global growth forecasts.

AMERICAS

Brazil reports November retail sales Wednesday, which are expected to rise 3.7% y/y vs. 4.2% in October. The economy is showing some signs of life, but then so too is inflation. IPCA inflation was 4.31% y/y, the highest since May and above the 4.25% target but still well within the 2.75-5.75% target range. Note that the target drops to 4% +/- 1.5 percentage points in 2020. Next COPOM meeting is February 5 and no change is expected then as we believe rates have bottomed at the current 4.5%.

Argentina reports December CPI Wednesday. Inflation was 52.1% y/y in November and appears to have peaked in May at 57.30%. This has allowed the central bank to push the LELIQ rate lower over the last few months. At 55%, rates are barely positive but strict capital controls have prevented the peso from weakening as a result.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports November current account data Monday. A deficit of -$40 mln is expected.  If so, it would be the first deficit since June and would pull the 12-month total down to $3.25 bln. November IP will be reported Tuesday, which is expected to rise 5.5% y/y vs. 3.8% in October. The central bank meets Thursday and is expected to cut rates 50 bp to 11.50%. As usual, expectations are all over the place with analysts looking for cuts of 25, 50, 75, 100, and 150 bp as well as no cut whatsoever. If anything, the bank is likely to err on the side of dovishness.

Czech Republic reports December CPI and November retail sales Monday. Inflation is seen remaining steady at 3.1% y/y, while sales are expected to rise 1.9% y/y vs. 2.4% in October. If so, inflation would remain at the highest level since October 2012 and above the top of the 1-3% target range. However, the economy is clearly slowing. Next central bank meeting is February 6 and no change is expected then.

Israel reports December trade Monday. December CPI will be reported Wednesday, which is expected to rise 0.6% y/y vs. 0.3% in November. If so, inflation would be the highest since August but still well below the 1-3% target range. Bank of Israel just left rates steady at 0.25% and delivered a dovish message by cutting its growth and inflation forecasts. It noted that the strong shekel is making it hard to meet the inflation target.  Next central bank meeting is February 24 and no change is expected then, as policymakers for now are focusing on weakening the currency.

Hungary reports December CPI Tuesday, which is expected to rise 4.0% y/y vs. 3.4% in November. If so, inflation would be the highest since December 2012 and right at the top of the 2-4% target range. However, the economy is slowing and so policymakers are likely to maintain loose monetary policy for now.  Next central bank meeting is January 28 and no change is expected then.

South Africa reports November retail sales Wednesday, which are expected to rise 0.8% y/y vs. 0.3% in October. SARB meets Thursday and is expected to keep rates steady at 6.5%. However, a small handful of analysts look for a 25 bp cut to 6.25%. CPI rose 3.6% y/y in November, the lowest since February 2011 and near the bottom of the 3-6% target range. We see risks of a dovish surprise, especially if the rand remains firm ahead of that meeting.

ASIA

China reports December money and loan data sometime this week. Trade data will be reported Tuesday, with exports expected to rise 2.5% y/y and imports by 9.6% y/y. Retail sales and IP as well as Q4 GDP will be reported Friday. Sales are expected to slow to 7.9% y/y, IP to slow to 5.9% y/y, and GDP growth to remain steady at 6.0% y/y. After the recent cut in reserve requirements, it’s clear that the focus remains on boosting growth this year.

India reports December CPI Monday, which is expected to rise 6.70% y/y vs. 5.54% in November. If so, inflation would be the highest since August 2014 and above the 2-6% target range. WPI will be reported Tuesday, which is expected to rise 2.42% y/y vs. 0.58% in November. While Modi would like further easing, inflation has risen too much to justify a cut near-term. Next central bank meeting is February 6 and no change is expected then.

Bank of Korea meets Friday and is expected to keep rates steady at 1.25%. CPI rose 0.7% y/y in December, the highest since June but still well below the 2% target. Press reports suggest the US has reached out to North Korea to restart nuclear talks that have been stalled since October. If true, this would likely be positive for South Korean assets.

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About Win Thin
Win Thin
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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