EM ended the week on a soft note. Volatility is likely to remain high as markets are jittery and choppy ahead of the BOJ/FOMC meetings on Thursday. Dollar gains were broad-based last week, but EM certainly underperformed. China markets will reopen after a two-day holiday, but good news out of the mainland is doing little to help EM.
Oil prices continue to slide.
MXN is likely to be a focal point this week after plunging to record lows Friday. Markets were thin with Mexico on holiday, and we warn of potential Banxico FX intervention this week if peso weakness persists. Central bank meetings in Indonesia and Turkey this week will be of interest with potential easing seen, while meetings in Hungary, South Africa, and the Philippines should see steady policy.
Brazil reports July GDP proxy Monday, which is expected at -4.2% y/y vs. -3.1% in June. The economy is bottoming, but a recovery remains elusive. Mid-September IPCA inflation will be reported Thursday, which is expected to remain steady at 8.95%. Inflation remains stubbornly high, and above the 3-7% target range since. The next COPOM meeting isOctober 19. If price pressures do not ease more, a rate cut then will be difficult to justify. August tax collections should be reported sometime this week.
Poland reports August retail sales, industrial and construction output, and PPI Monday. Most see a bounce-back from July weakness. July real sector data came in weaker than expected, and so the August readings will be very important in order to determine if the slowing trend is significant. The central bank releases its minutes Thursday. For now, the central bank is on hold but we think it would tilt more dovish if the outlook worsens. CPI came in at -0.8% y/y in August.
Hungarian central bank meets Tuesday and is expected to keep rates steady at 0.90%. CPI came in at -0.1% y/y in August, even as July real sector data (retail sales, IP, etc) have come in much weaker than expected. While the central bank feel that it has completed the rate cut cycle, we think some further unconventional measures are possible if the data continue to come in weak.
Malaysia reports August CPI Wednesday, which is expected to rise 1.3% y/y vs. 1.1% in July. The central bank does not have an implicit inflation target. However, the lack of significant price pressures should allow it to continue easing after its surprise 25 bp cut back in July. The next policy meeting is November 23, and another 25 bp cut then seems likely.
South Africa reports August CPI Wednesday, which is expected to remains steady at 6.0% y/y. That would keep it right at the top of the 3-6% target range. The South African Reserve Bank then meets Thursday and is expected to keep rates steady at 7.0%. With the economic outlook so poor, we think the central bank would prefer not to tighten any more. The rand is the wild card.
Philippine central bank meets Thursday and is expected to keep rates steady at 3.0%. CPI rose only 1.8% y/y in August, below the 2-4% target range. The economy remains robust, but low price pressures will allow the central bank to ease if needed in the coming months. Officials have said that reserve requirement cuts have been discussed, but we think it would be premature to move now.
Taiwan reports August export orders Thursday, which are expected to rise 0.6% y/y vs. -3.4% in July. August trade data from the Asian region were largely stronger than expected, but it remains to be seen if this can be sustained. With the economy still sluggish, the central bank is likely to cut rates another 12.5 bp to 1.25% at its quarterly policy meeting on September 29.
Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 5.0%. A couple of analysts see steady rates. CPI rose 2.8% y/y in August, below the 3-5% target range. BI has been on hold since its last 25 bp cut in June, but the sluggish economy should lead to several more rate cuts before the cycle ends.
Turkish central bank meets Thursday and is expected to cut the overnight lending rate 25 bp to 8.25%. No change in the 7.5% benchmark rate is expected. CPI rose 8.1% y/y in August, above the 3-7% target range. However, the economy remains sluggish and so the bank will likely be under pressure to ease more aggressively.
Mexico reports mid-September CPI Thursday, which is expected to rise 2.68% y/y vs. 2.80% in mid-August. Inflation remains below the 3% target. However, there have been signs of rising price pressures even before latest bout of peso weakness. The central bank will be concerned about the second round inflation impact of the weak peso, but we do not think it should hike rates at this juncture. Next policy meeting is September 29. Much will depend on how the peso trades between now and then.
Singapore reports August CPI Friday. Trade and retail sales data came in stronger than expected last week. Coming after the strong China data for August, it seems that the EM Asia outlook is stabilizing, if not improving. It’s a tough call for the MAS meeting next month. Most see no move then, but we see a chance of a dovish surprise.
Win Thin is the Global Head of Emerging Markets Strategy at Brown Brothers Harriman & Co.