Emerging Markets Preview: EM Assets Mixed To Start Week

Emerging market assets have started off the week mixed, with few clear signals to follow. The major currencies also appear directionless at the moment, though eurozone flash PMIs on Thursday could help put the spotlight back on weakness there.

As long as the dollar strengthening trend does not resume in earnest, EM currencies should be OK. On the equity side, EM is taking the back seat, constrained to a high-beta status. Lower oil prices, if sustained, will help the likes of India and Turkey, though this is yet to be priced in.

China could help set the tone for EM later this week, with Q3 GDP Tuesday and October HSBC flash PMI for October Thursday. With softer data of late, many are still expecting large-scale stimulus in China, but we downplay this in favor of continued targeted measures. It is also a critical week for Brazil, with elections next Sunday a very difficult one to call.

China reports September retail sales and IP data on Tuesday. The former is expected to rise 11.7% y/y, while the latter is expected to rise 7.5% y/y. Q3 GDP will also be reported on Tuesday, with growth seen at 7.2% y/y vs. 7.5% in Q2. HSBC flash China manufacturing PMI for October will be reported Thursday, and is expected to remain steady at 50.2. We believe the focus for policymakers will remain on boosting growth, with more targeted stimulus to come.

Brazil reports mid-October IPCA inflation Tuesday, expected to rise 6.66% y/y vs. 6.62% in mid-September. The economy remains weak, yet monetary policy is on hold at 11% despite rising inflation. On Friday, it reports September current account data. The deficit is seen at –BRL7.1 bln vs. –BRL5.5 bln in August, and would lead to further widening of the 12-month total to –BRL82.7 bln from –BRL78.4 in August. This would be the highest on record, and would likely add to the negative sentiment on BRL. Slow growth had helped improve the deficit, but that improvement seems to be over now.

South Africa reports September CPI on Wednesday, expected to rise 6.1% vs. 6.4% in August. Core CPI is seen remaining steady at 5.8% y/y. With commodity prices falling and the economy still sluggish, we do not think new SARB Governor Kganyago will hike rates at his first meeting November 20. The government will also present its midterm budget review on Wednesday. The budget gap has widened sharply in July and August, due largely to rising expenditures. The Finance Ministry may acknowledge the worsening situation in its revisions for the current fiscal year.

Mexico reports August INEGI retail sales on Wednesday, expected to rise 2.7% y/y vs. 2.0% in July. It then reports mid-October CPI inflation Thursday, expected to rise 4.29% y/y vs. 4.22% in mid-September. Core inflation is seen steady at 3.35% y/y. With the recent inflation spike seen and temporary and the economy picking up a bit, we do not think Banco de Mexico will move rates either way for most of 2015.

Singapore reports September CPI on Thursday, expected to remain steady at 0.9% y/y. It then reports IP on Friday, expected to rise 0.1% y/y vs. 4.2% in August. The MAS kept policy steady last week, but we think it will lean more dovish in the coming months due to the growing headwinds. Inflation remains low and should continue to run low due to lower commodity prices.

The Philippine central bank meets Thursday and is expected to keep the main policy rates steady at 4.0%. A small handful are looking for either a 25 bp hike to 4.25% or for a 25 bp hike to 2.75% for the Special Deposit Account rate. However, with inflation easing and headwinds to growth rising, we think the tightening cycle is on hold for now after the last 25 bp hike in September.

Taiwan reports September commercial sales and IP on Thursday. IP is expected to rise 6.8% y/y. The economy faces growing headwinds, but we do not expect any monetary policy reaction. Instead, the government is likely to use fiscal stimulus if the economy slows too much.

Poland reports September retail sales on Thursday, expected to rise 2.4% y/y vs. 1.7% in August. Headwinds on the economy are getting stronger. Governor Belka said the bank should be finished cutting rates by year-end. There are two meetings left on November 5 and December 3. Cuts of 25 bp at each would be about right, for a total of 100 bp of easing in Q4. Real rates have risen over the last several months as a result of deflation/disinflation, and so some easing is needed just to offset this.

The Turkish central bank meets Thursday and is expected to keep rates steady at 8.25%. Inflation eased to 8.9% y/y in September, but remains too high to allow for rate cuts at the moment. Of course, government officials will continue to jawbone the bank for lower rates, but with EM sentiment negative and the lira still under pressure, a rate cut now would be taken very badly by the markets.

Korea reports Q3 GDP on Friday, with growth seen at 3.3% y/y vs. 3.5% in Q2. The economy faces headwinds, and the BOK was right to follow up its 25 bp cut in August with another one this month. The JPY/KRW cross has moved back close to 10, but we think more rate cuts are justified given CPI rose a cycle low 1.1% y/y in September.

Chile reports September PPI on Friday. Pipeline price pressures eased a bit in August, and should ease further this year as commodity prices fall. That is probably why, despite CPI inflation spiking to a cycle high 4.9% y/y in October, the central bank cut rates this month and moved to a neutral bias. CPI inflation is well above the 2-4% target, yet the economy remains very weak.