With the all the euphoria about the Chinese currency depreciation apparently behind us, we can again focus on other drivers for EM assets. And these are developments in G10, commodity prices and idiosyncratic factors. We don’t expect any barriers for Greece to finalize its bailout, with the German parliament likely to endorse the agreement soon. Markets will continue to debate the timing for the Fed hike, with a September move likely the more negative outcome for EM.
Separately, lower oil prices continue to weigh on energy produces, but also contributing to negative sentiment more broadly in EM. Lastly, idiosyncratic factors in EM, especially political ones, will be watched closely, especially in Turkey, Malaysia and Brazil. All in all, it’s an unfavourable outlook, but not disastrous.
The Turkish central bank meets on Thursday and while most expect no change in the policy rate, there has been some recent speculation that they may do something to contain the falling lira. Turkey’s benchmark main policy rate is 7.50% and despite the government’s pressure for further cuts, high inflation (just under 7%) and the risk of pass-through will keep policymakers at bay. One possibility is that the bank begins its process of simplification of monetary policy tools, with a narrowing of the corridor.
The central bank of Indonesia also meets on Thursday and is expected to leave rates unchanged. The reference rate is set at 7.5% since its one off rate cut in February. This should be an uneventful decision. The Indonesia economy is lukewarm with growth at 4.6% and CPI still elevated at 7.26% y/y. The central bank has shown no intentions to use its policy rates to contain the weakening rupiah.
Chile published its Q2 GDP figures on Tuesday and is expected to show a small q/q contraction of -0.2%. This would be the first negative quarterly print since Q2 2014. The y/y rate is expected to fall to 1.7% from 2.4%, justifying the central bank’s dovish stand.
Poland releases July employment data on Wednesday. Expectations are for a steady growth of employment of 0.9%. In addition, wage growth is expected to pick up to 3.4% y/y from 2.5% y/y in June. This would be welcome news after the unexpected decline in the Q2 GDP preview which showed growth falling from 3.6% y/y to 3.3%.
Indonesia releases its July trade balance on Wednesday, and a modest increase from last month is expected to $602 mln. Still, this number would be in middle of the years range. The break down between import and export will probably be more important. Markets are expecting exports to fall 8.75% (after falling 12.78% in June) and imports to fall 13.25% (from falling 17.42% in June).
July CPI for Malaysia will be released on Wednesday and is expected to rise to 2.9% y/y from 2.5% in June. If confirmed, this will be the fifth consecutive increase and a new high for the year. Given the magnitude of the ringgit’s depreciation, upside risks to inflation will continue to rise, creating yet another problem for the growing list of negatives weighing on Malaysia’s asset prices.
South Africa’s CPI for July will also be released on Wednesday, and is expected to rise to 5.0% y/y, from 4.7% in June. If confirmed, this will be the fifth consecutive increase in inflation since the recent low of 3.9% in February. These recent inflation trends justify the growing hawkish outlook of the SARB and the 25 bp rate hike last month and expectations for further tightening down the line. Retail sales for June will be released the same day and is expected to rise to 3.3% y/y from 2.4%.
Poland reports several data points on Wednesday. July industrial output on Thursday and it is seen moderating to 4.6% y/y from 7.6% in the previous month. Meanwhile, PPI for July is forecast to stay stable at -1.6% y/y. But retail sales should garner the most attention, expected to fall to 2.8% from 3.8%. All in all, this should show a picture of relative balance for the Polish economy. Despite CPI in negative territory, we don’t think the central bank is about to change rates either way. Q2 GDP disappointed, but at 3.3% y/y it is still doing relatively well.
Russia’s July retail sales will be released on Wednesday and is expected to contract 9.8% y/y. This comes after a 9.4% contraction in the previous month. Since last December, every retail sales print has been negative, and if the -9.8% figure is confirmed, it will match the lowest level since late 2009. The deceleration of the Russian economy is no surprise, but the pace is exceeding what many had expected. And now with oil prices plunging further, it’s hard to see a bright spot anywhere in the horizon.
On Thursday, Taiwan’s export orders will be released and it is expected to fall 4.1% y/y in July, a small improvement over the 5.8% decline in June. Export orders have been gradually trending lower since late 2014, when they were running at about 13% growth.
Brazil’s unemployment rate for July will be released on Thursday. Unemployment is expected to increase to 7.1% from 6.9%. If confirmed, it will be the highest rate since mid-2010, adding to the country’s already dire economic situation. Although political sentiment seems to be improving slightly, the economic situation is not. We are not yet near the bottom for Brazil, and asset prices will continue to reflect this outlook.
Mexico’s Q2 GDP will be released on Thursday and is expected to fall to 2.1% y/y, from 2.5% in the previous quarter. This would be roughly around the level of growth over the last few quarters. Despite the increased vigilance by the central bank towards the start of the Fed hiking cycle and the weakness of the peso, we doubt that this number will do much to change the outlook. We think the bank will stay put for the time being. Then on Friday, we get June retail sales. Markets are expecting a light pick up to 4.6% y/y, compared with 4.1% in the previous month.
China reports its Caixing manufacturing PMI preview for August on Friday, and it is expected to tick higher to 48.0. The July print came in at 47.8. This data point has trended lower since the 2014 high of 52.3 last July, staying below 50.0 since March. If confirmed, the number will just confirm that China is still slowing, but not at a dramatic pace.
Brazil reports its mid-month inflation readings on Friday. IPCA-15 for August is expected to tick higher to 9.57% y/y, compared with 9.25% previously. This will be the highest print since early 2004. Inflation continues to rise in Brazil, but it is likely to start peaking soon. The continued weakness in the currency does create some upside risks, but this is mitigated by the downside risk to economic growth, along with crippling interest rates and political uncertainty.
The Colombian central bank announces its decision on Friday. Although last meeting’s decision to hold rates at 4.50% was not unanimous, the bank is widely expected to keep rates at the same level. Pass-through inflation is now a big concern for policy members after the Colombian peso lost nearly 40% of its value over the last 12 months. Still, it doesn’t seem as if we are at the breaking point yet for a majority of board members. Separately, the trade balance for June will be released. Markets are forecasting a relatively unchanged figure of -$900 mln. Note that the trade deficit bottomed in January at $1.8 bln.