EM ended last week on a firm note, despite the stronger than expected July jobs report. As we suspected, one strong US data point is not yet enough to derail the dovish Fed outlook. With the RBA and BOE cutting last week and the RBNZ expected to cut this week, the global liquidity backdrop remains supportive for EM and risk.
Looking at individual country risk, we note that investors must remain discerning. We think Turkey and South Africa fundamentals remain poor even as political risk remains heightened. China data this week is expected to be benign for markets. The central banks of Chile, Mexico, Peru, India, Korea, and the Philippines all meet. None are expected to move on rates.
China
China reports July trade data Monday. Exports are expected at -3.5% y/y and imports at -7.0% y/y. China then reports CPI and PPI Tuesday. The former is expected to rise 1.8% y/y while the latter is expected to fall -2.0% y/y. It then reports July IP and retail sales Friday. The former is expected to rise 6.2% y/y while the latter is expected to rise 10.5% y/y. Money and new loan data could come out this week, but no date has been set.
Czech Republic
Czech Republic reports June trade, industrial and construction output, and unemployment Monday. It then reports July CPI Tuesday, which is expected to rise 0.3% y/y vs. 0.1% in June. This is still well below the 1-3% target range. For now, we see steady policy but if the real sector softens more, the bank may lean more dovish. The next policy meeting is September 29, and no action is seen then.
Turkey
Turkey reports June IP Monday, which is expected to rise 3.7% y/y vs. 5.6% in May. It then reports June current account data Thursday, which is expected at -$4.3 bln. If so, the 12-month total would rise for the first time since July 2015. The external accounts had been improving steadily but may have topped out now.
Taiwan
Taiwan reports July trade Monday. Exports are expected at -2% y/y and imports at -5% y/y. The economy remains weak even as price pressures remain low. CPI rose 1.2% y/y in July. While the central bank does not have an explicit inflation target, low readings will allow it to cut rates by another 12.5 bp in September.
Chile
Chile reports July CPI and trade Monday. Inflation is expected to ease to 3.9% y/y from 4.2% in June. This would put it within the 2-4% target range. The central bank meets Thursday and is expected to keep rates steady at 3.5%. However, if the current disinflation continues, we think it will likely cut rates near year-end or early 2017.
India
Reserve Bank of India meets Tuesday and is expected to keep rates steady at 6.5%. This will be Governor Rajan’s final meeting. Prime Minister Modi is likely to replace him with someone more dovish. If so, rates could be cut at the next meeting October 4. India reports July CPI and June IP on Friday. The former is expected to rise 5.9% y/y while the latter is expected to rise 1.5% y/y.
Hungary
Hungary reports July CPI Tuesday, which is expected to remain steady at -0.2% y/y. This is still well below the 2-4% target range. Central bank minutes will be released Wednesday. It then reports Q2 GDP on Friday, which is expected to grow 2.0% y/y vs. 0.9% in Q1. Part of this is due to a low basis for comparison in 2015. For now, the central bank is likely to remain on hold since the real sector remains fairly robust. The next policy meeting is August 23, and no action is seen then.
Brazil
Brazil reports June retail sales Tuesday, which are expected at -6.4% y/y vs. -9.0% in May. It then reports July IPCA inflation Wednesday, which is expected to rise 8.67% y/y vs. 8.84% in June. This is still well above the 2.5-6.5% target range. Brazil also reports June GDP proxy and the first August preview of IGP-M wholesale inflation on Wednesday. COPOM next meets August 31, and no move is seen then given its hawkish stance. Rather, rate cuts are likely to start at the meeting after that on October 19.
Mexico
Mexico reports July CPI Tuesday, which is expected to rise 2.72% y/y vs. 2.54% in June. This is still in the bottom half of the 2-4% target range, but inflation has been accelerating. Core CPI and PPI also suggest rising price pressures. Banco de Mexico meets Thursday and is expected to keep rates steady at 4.25%. Ahead of that on Thursday, Mexico reports June IP, which is expected to remain steady at 0.4% y/y.
Philippines
The Philippine central bank meets Thursday and is expected to keep rates steady at 3.0%. July CPI was steady at 1.9% y/y, and is still below the 2-4% target range. Ahead of that, June exports will be reported Wednesday and are expected at -14.9% y/y vs. -3.8% in May. For now, the bank is on hold but if the economy continues to soften, we think it will lean more dovish.
Korea
Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%. July CPI rose a lower than expected 0.7% y/y vs. 0.8% in June. This is still well below the 2.5-3.5% target range. We do not think the 25 bp rate cut in June was “one and done” and so there is risk of a dovish surprise here.
South Africa
South Africa reports June manufacturing production Thursday, which is expected to rise 3% y/y vs. 4% in May. Official election results show that support for the ruling ANC fell below 60% for the first time ever. Pushing painful structural reforms probably isn’t the first thing that an unpopular government is going to do. The knee-jerk reaction would more likely be to boost spending and handouts, which would pressure the country’s ratings.
Peru
Peruvian central bank meets Thursday and is expected to keep rates steady at 4.25%. CPI rose a lower than expected 2.96% y/y in July. This brings inflation back within its 1-3% target range. If the current disinflation continues, we think it will likely cut rates near year-end or early 2017.
Poland
Poland reports Q2 GDP on Friday, which is expected to grow 3.3% y/y vs. 3.0% in Q1. Part of this is due to a low basis for comparison in 2015. For now, the central bank is likely to remain on hold since the real sector remains robust. The next policy meeting is September 7, and no action is seen then. Poland also reports June trade and current account data Friday.
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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