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June 8, 2015

Emerging Markets This Week

EM has started the week on a weak footing. The results of the Turkish elections knocked the lira down over 3% and the BIST down nearly 6%. More broadly speaking, the uncertainty surrounding the Greek situation along with the risk of another leg higher for yields in Germany and the US will keep EM assets on the defensive. On Wednesday, the Brazilian lower house votes on one of the elements of the fiscal adjustment, and any sign of backtracking there could hurt the government’s credibility.

Several EM currencies are making new all-time lows (MXN, IDR, TRY), while others are trading at multi-year lows (ZAR, MYR). Souring EM sentiment is not limited to FX. MSCI EM is down for the 11th straight day and 15 of the past 16. It is already on track to test the March low near 936, but a break below 968 would set up a test of the December low near 906. News that the DAX is now in corrective territory (down 10%) is also not helping equity sentiment.

MSCI will announce its decision on including China A-shares into its China and EM indices Tuesday. We think this decision is a toss-up, with a strong case to be made both pro and con. China also reports May CPI and PPI Tuesday, expected at 1.3% y/y and -4.5% y/y, respectively. It reports May retail sales and IP Thursday, expected at 10.1% y/y and 6.0% y/y, respectively. China may also report money and new loan data this week, but no date has been set. Overall, low price pressures and a slowing economy are likely to encourage thoughts of further PBOC easing measures.

Czech Republic reports May CPI Tuesday, expected at 0.6% y/y vs. 0.5% in April. Like the rest of the region, deflation risks are easing and the y/y inflation rates should move higher in H2 as low base effects take hold. Taken together with robust real sector data, the central bank is unlikely to move its forward guidance further out at its next meeting June 25. The current guidance is for its unconventional policies to remain in place until at least H2 2016).

Hungary reports May CPI Tuesday, expected at 0.1% y/y vs. -0.3% in April. This would be the first positive reading since August 2014, and low base effects ahead suggest that the y/y gains will move even higher in H2. Central bank minutes will be released Wednesday. With deflation risks easing and the real sector in good shape, we think the easing cycle is nearing an end. One more 15 bp cut to 1.5% this month should be the last move before an extended pause.

Mexico reports May CPI Tuesday, expected at 2.91% y/y vs. 3.06% in April. Banxico recently cut its 2015 GDP growth forecast to 2-3% from 2.5-3.5% previously, and cut its 2016 GDP growth forecast to 2.5-3.5%. Officials continue to highlight slack in the economy. The only thing vaguely hawkish we can see is some focus on the weak peso. Even then, officials note very little inflation pass-through so far. We still think steady rates are likely this year. Mexico also reports May ANTAD retail sales Tuesday. Mexico reports April IP Thursday, expected to rise 1.3% y/y vs. 1.7% in March.

Turkey reports Q1 GDP Wednesday, expected to rise 1.7% y/y vs. 2.6% in Q4. It then reports April current account Thursday, expected at -$2.9 bln vs. -$4.96 bln in March. If so, the 12-month total would fall to -$43.5 bln from -$45.5 bln in March. Slow growth and low energy prices are keeping the external deficits under control, but any reversal in these cyclical trends would exacerbate what we see as structural external imbalances. On top of weak fundamentals, political risk has moved back into the spotlight after AKP was unable to secure the simple majority needed to govern.

Bank of Thailand meets Wednesday and it is expected to keep rates steady at 1.5%. We had thought there was a small chance of a dovish surprise, but recent official comments suggest those chances have gotten even smaller. Last week, Finance Minister Phasee suggested that the current rate stance is already highly accommodative and that further easing is not necessary. This view is in line with recent comments by some central bank officials, including the Deputy Governor. We would not rule out resumed easing in H2 if the outlook worsens, however.

Brazil reports May IPCA inflation Wednesday, expected to rise 8.30% y/y vs. 8.17% in April. COPOM minutes will be released Thursday. After hiking rates last week by the expected 50 bp and leaving the language unchanged, the central bank has left the door open for more tightening. The minutes should provide some more clues about future policy. We see a 25 bp hike to 14% at its July meeting, but then see an extended pause.

Bank of Korea meets Thursday and markets are split. Of the 15 analysts polled by Bloomberg, 8 see a 25 bp cut to 1.5% and 7 see rates kept steady at 1.75%. We lean towards a cut now, but if not, then the next cut will very likely be in Q3. Price pressures are falling, while the real economy is softening. We think the ultimate factor behind the next move will be the exchange rate. This latest leg lower for the yen has pushed the key JPY/KRW cross to new cycle lows near 8.80.

South Africa reports April manufacturing production Thursday, expected to rise 0.7% y/y vs. 3.8% in March. SARB continues to sound hawkish, and with growing concerns about inflation pass-through from the weak rand, the central bank faces a tough decision at its next meeting July 23. A lot can happen between now and then, but signs point to ongoing rand weakness with USD/ZAR likely to test the all-time high from 2001 near 13.84. Late last Friday, Fitch affirmed its BBB rating on South Africa but kept the negative outlook. Government officials said they are addressing the concerns raised by Fitch “at the highest level.”

Chile central bank meets Thursday and it is expected to keep rates steady at 3.0%. On Monday, May CPI was reported at 4.0% y/y vs. 4.1% in April. This is right at the top of the target range of 2-4%. Therefore, despite the slowing economy, we think the central bank is likely to remain on hold until inflation improves further.

Peru central bank meets Thursday and it is expected to keep rates steady at 3.25%. May CPI was reported at 3.37% y/y vs. 3.02% in April. This is the highest since June 2014 and above the target range of 1-3% for three straight months. Therefore, despite the slowing economy, we think the central bank is likely to remain on hold until the inflation trajectory improves.

India reports April IP and May CPI Friday. The RBI cut rates this month by 25 bp, as expected, and has the leeway to continue cutting this year. Biggest risk ahead is food prices from the monsoon season, as the predicted El Nino effect typically leads to lower than usual rainfall in Asia. As it is, the monsoon started almost a week later than forecast.

Courtesy Marc To Market via Economy Watch (Article Archive Here)  

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