(from my colleague Dr. Win Thin)
EM assets are starting the week off on a firmer footing. Sentiment has been helped by optimism over a Greek compromise, as well as perceptions of a less hawkish Fed. Both of these factors could turn negative very quickly. Besides the global backdrop, idiosyncratic risks within EM argue for continued differentiation by investors. We remain most optimistic on Asia as a region, while Latin America and EMEA remain most vulnerable in the current environment.
Brazil reports May current account and FDI data Monday. Recession has kept the external accounts from worsening too much, but the current account deficit remains too high at -4.5% of GDP. With the fiscal deficit also too high, our sovereign rating model has moved Brazil into BB+ territory now after it barely hung on to BBB- last quarter. Downgrade risk is rising. The central bank will release its quarterly inflation report Wednesday.
HSBC reports China flash PMI for June Tuesday, expected at 49.5 vs. 49.2 final in May. This is the first snapshot for June, and points to continued softness. While more stimulus is expected, we note that the PBOC is so far not relying on a weaker currency. The PBOC fix for USD/CNY has remained near the year’s low from May just below 6.11.
Singapore reports May CPI Tuesday, expected at -0.4% y/y vs. -0.5% in April. It then reports May IP Friday. Overall, recent data has been mixed and may be why the MAS left policy steady at its April meeting. If softness picks up, the MAS may ease at the next policy meeting in October.
Taiwan reports May export orders Tuesday, expected flat y/y vs. -4% in April. It reports May IP and commercial sales Wednesday, with the former expected to rise 1.2% y/y and the latter expected to contract -1.3% y/y. The central bank then meets Thursday and is expected to keep rates steady at 1.875%. With price pressures so low, the bank could tilt more dovish in the coming months, especially if TWD/JPY cross continues to rise.
South Africa reports Q1 current account data Tuesday, expected at -5.2% of GDP vs. -5.1% in Q4. Slow growth has limited the deterioration in the external accounts. However, the Q1 trade deficit widened over 50% from Q4 and so we think there is risk that the current account gap comes in wider than market is expecting.
Turkey central bank meets Tuesday and is expected to keep rates steady at 7.5%. With inflation still too high and the lira very weak, we think steady policy is warranted. After losing so many seats in the elections, we think Erdogan and the AKP government may now refrain from criticizing the central bank if it keeps policy tight.
Hungary central bank meets Tuesday and is expected to cut rates 15 bp to 1.5%. With CPI inflation moving back into positive territory and likely to move higher due to low base effects, we think this may be the last rate cut in this cycle.
Mexico reports mid-June CPI and April IGAE GDP proxy Wednesday. The former is seen up 2.87% y/y, while the latter is seen up 2.3% y/y. Inflation remains below the 3% target and is likely to remain near that level in H2. Minutes from the last policy meeting suggest no rush to tighten policy, with risks seen in making any sort of pre-emptive hike before the Fed moves. Mexico then reports May trade Friday. External accounts have remained in good shape.
Colombia central bank meets Wednesday and is expected to keep rates steady at 4.5%. GDP growth slowed to 2.8% y/y in Q1, while April retail sales and IP contracted y/y, suggesting Q2 will be even weaker. We think high inflation is keeping the central bank on hold for now, but that it will tilt more dovish in H2.
Philippine central bank meets Thursday and is expected to keep rates steady at 4%. The economy is starting to slow significantly and so the bank may tilt more dovish in H2. Inflation of 1.6% y/y in May is well below the 2-4% target range, but there are upside risks to food inflation from the El Nino effect this year. For now, steady rates seem likely.
Czech central bank meets Thursday and is expected to keep policy steady. With inflation moving higher and the real sector gaining strength, we think the central bank will no longer extend its forward guidance and will instead stick with the current pledge to keep current loose policies in place until “at least H2 2016.”