Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead
Win Thin, Global Head of Emerging Markets, Brown Brothers Harriman & Co.
Published: 2 July 2018 12:57
EM FX ended Friday mixed, capping off a mostly softer week. TRY, MXN, and RUB were the top performers and the only ones up against USD, while ARS, CLP, and BRL were the worst. Looking ahead, US jobs data on Friday pose some risks to EM, coming on the heels of a higher than expected 2% y/y rise in PCE. China will also remain on the market’s radar screen, with the first snapshots of June economic activity just starting to emerge. We remain negative on EM FX.
Caixin reports China manufacturing PMI for June, which is expected to remain steady at 51.1. Over the weekend, the official manufacturing PMI came in at 51.5 vs. 51.6 expected and 51.9 in May. Given the market’s growing concerns about a weaker yuan, China’s macro data will be very important. PBOC has fixed USD/CNY higher for eight straight days, though we think this reflects general EM weakness rather than an official effort to devalue the currency.
Thailand reports June CPI Monday, which is expected to rise 1.53% y/y vs. 1.49% in May. If so, it would be the highest since January 2017 but still near the bottom of the 1-4% target range. BOT has shown no urgency to start the tightening cycle, with rates steady since the last 25 bp cut to 1.5% in April 2015. Next policy meeting is August 8. While a lot can happen between now and then, our base case is steady rates then.
Indonesia reports June CPI Monday, which is expected to rise 3.0% y/y vs. 3.23% in May. If so, it would be the lowest since August 2016 and right at the bottom of the 3-5% target range. Yet Bank Indonesia just delivered a bigger than expected 50- bp hike last week. Governor Warjiyo stressed that it wants to remain ahead of the curve.
Poland reports June CPI Monday, which is expected to rise 2.0% y/y vs. 1.7% in May. If so, it would be the highest since December and nearing the 2.5% target. Still, the central bank has doubled down on its ultra-dovish stance, recently saying rates could be kept steady into 2020. With EUR/PLN weakening, the bank may be forced to shift its stance in the coming weeks, like Hungary did.
Mexico reports June PMI Monday. Banco de Mexico releases its minutes Thursday. At that meeting, it hiked rates 25 bp ahead of the election. If markets react badly to the weekend election results (results unknown as of this writing), Banco de Mexico may be forced to hike intra-meeting as the next scheduled meeting isn’t until August 2.
Korea reports June CPI Tuesday, which is expected to rise 1.7% y/y vs. 1.5% in May. If so, it would be the highest since October and nearing the 2% target. Still, BOK has shown no urgency to hike rates again after its first (and last) move in November. Next policy meeting is July 12, no change is likely then. May current account data will be reported Thursday. Over the weekend, Korea reported June trade data.
Hungary reports May retail sales Tuesday, which are expected to rise 5.3% y/y vs. 6.1% in April. Central bank minutes will be released Wednesday. This should be of interest, as the bank seems to have tilted less dovish in response to HUF weakness. Hungary then reports May IP Friday, which is expected to remain steady at 2.9% y/y WDA.
Turkey reports June CPI Tuesday, which is expected to rise 13.88% y/y vs. 12.15% in May. If so, it would be the highest since November 2003 and further above the 3-7% target range. Next central bank policy meeting is July 24. While the bank should hike, it remains to be seen whether President Erdogan will allow it to happen.
Chile reports June trade and May retail sales Tuesday. Sales are expected to rise 4.0% y/y vs. 7.4% in April. It then reports June CPI Friday, which is expected to rise 2.5% y/y vs. 2.0% in May. If so, it would be the highest rate since May 2017 and nearing the 3% target. The bank has signaled a rate hike towards year-end, and inflation data support this notion.
Czech Republic reports May retail sales Wednesday, which are expected to rise 3.5% y/y vs. 4.7% in April. The central bank just hiked rates 25 bp in light of a firm economy and rising price pressures. Next policy meeting is August 2. Right now, no change is expected so soon after the last hike, but much will depend on the koruna. According to central bank models, each 1% depreciation is equivalent to a 25 bp cut.
Brazil reports May IP Wednesday, which is expected at -12.0% y/y vs. +8.9% in April. It then reports June IPCA inflation Friday, which is expected to rise 4.40% y/y vs. 2.86% in May. If so, this would be the highest since March 2017 and would put inflation just about at the 4.5% target for this year. COPOM meets August 1 and is expected to start the tightening cycle.
Philippines reports June CPI Thursday, which is expected to rise 4.8% y/y vs. 4.6% in May. If so, it would be a new high for the cycle and further above the 2-4% target range. The central bank has hiked 25 bp for two straight meetings. Next policy meeting is August 9, and we expect a third 25 bp hike then.
Taiwan reports June CPI Thursday, which is expected to rise 1.52% y/y vs. 1.64% in May. While the central bank does not have an explicit inflation target, low price pressures should allow it to remain on hold this year. Next quarterly policy meeting will be in September. While a lot can happen between now and then, our base case is steady rates then.
Colombia reports June CPI Thursday, which is expected to rise 3.20% y/y vs. 3.16% in May. If so, it would still be above the 3% target but within the 2-4% target range. The central bank kept rates steady on Friday. Though the economy is sluggish, we think peso weakness has ended the easing cycle.
About the Author
Win Thin is the Global Head of Emerging Markets Strategy and has over 25 years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. Prior to that, Win was a vice president and international economist, covering major emerging markets in Asia and Latin America for Alliance Capital Management
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