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EM Preview for the Week Ahead

EM and other risk assets stabilized to end the week after Thursday’s selloff, but remain vulnerable. The risks ahead are the same as before, which include a second wave of infections as well as a longer and shallower than expected recovery in global growth. The Fed’s message of low rates as far as the eye can see was balanced by Powell’s grim outlook for unemployment. The liquidity story should remain positive for EM, with the BOE expected to increase its QE this week, but that may not be enough to sustain continued gains in risk assets.

AMERICAS

Chile central bank meets Tuesday and is expected to keep policy unchanged. The bank quickly cut rates 125 bp in March to the current 0.5%. This is considered the lower bound and so further easing, if needed, would likely be with expanded QE. The central bank is already buying bank bonds in the secondary market but could expand that to include other securities. For now, however, we think the bank remains in wait and see mode. The recent recovery in copper prices should help the economic outlook once the lockdowns end.

Brazil reports April retail sales Tuesday, which are expected to fall -13.9% y/y vs. -1.2% in March. COPOM meets Wednesday and is expected to cut rates 75 bp to a record low 2.25%. IPCA inflation fell to 1.88% y/y in May, the lowest since January 1999 and further below the 2.5-5.5% target range. CDI market is pricing in a 25 bp cut to 2.0% at the August 5 meeting.

EUROPE/MIDDLE EAST/AFRICA

Poland reports April trade and current account data Monday. The central bank meets Tuesday and is expected to keep policy unchanged. The bank surprised markets with a 40 bp cut to 0.1% at the May 28 meeting. As such, we expect policymakers to take a wait and see approach for now, especially as Europe starts to reopen. Minutes will be released Thursday. May industrial output and PPI will be reported Friday. They are expected at -18.0% y/y and -1.5% y/y, respectively.

Israel reports May CPI Monday, which is expected to fall -1.2% y/y vs. -0.6% in April. If so, deflation would be the deepest since May 2007 and fall further below the 1-3% target range. The bank left rate steady at its May 25 meeting. However, it warned that the strong shekel may impact the economy and inflation just as the country reopens. Next policy meeting is July 6 and no change is expected then. Instead, the bank is likely to reaffirm its commitment to intervene in the FX markets to prevent excessive currency appreciation. Q1 GDP will be reported Tuesday.

Russia reports May IP Tuesday, which is expected to contract -8.3% y/y vs. -6.6% in April. Q1 GDP data will be reported Wednesday, with growth expected to remain steady at 1.6% y/y. The central bank then meets Friday and is expected to cut rates 75 bp to 4.75%. However, markets are split as most analysts see either a 50 or 100 bp cut. May real retail sales will also be reported Friday and are expected to contract -16.6% y/y vs. -23.4% in April.

ASIA

China reports May IP and retail sales Monday. The former is expected to rise 5.0% y/y vs. 3.9% in April, while the later is expected to fall -2.3% y/y vs. -7.5% in April. This dichotomy between the manufacturing sector and consumption highlights the problems every country faces when the lockdowns end. That is, the factories may be up and running but consumers are not returning to normal spending patterns as long as the risk of infection remains. Furthermore, an outbreak in Beijing has shown how difficult it to contain the virus even in the face of draconian lockdowns.

India reports May WPI Monday, which is expected to fall -1.2% y/y. Last week, May CPI was not reported as scheduled due to data collections issues due to the pandemic lockdowns. However, food inflation was reported at 9.28% y/y vs. 8.76% in April. The Reserve Bank of India last cut rates 40 bp May 22. Next policy meeting is August 6 and another cut is expected then, if not sooner. May trade will be reported Monday as well.

Taiwan central bank meets Thursday and is expected to cut rates 12.5 bp to 1.0%. However, analysts are pretty much evenly split between no cut, 12.5 bp, and 25 bp. We see risks of a dovish surprise. Despite the modest recovery in the mainland economy, nations in the greater China supply chain have yet to feel much positive impact. May exports orders will be reported Saturday.

Bank Indonesia meets Thursday and is expected to cut rates 25 bp. CPI rose 2.2% y/y in May, the lowest since June 2000 and below the 2.5-4.5% target range. Furthermore, BI estimates June inflation will fall to 1.79% y/y. The bank has been easing very cautiously but low inflation and the strong rupiah suggests a chance of a dovish surprise.

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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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