(from my colleagues Dr. Win Thin and Ilan Solot)
It will be a busy week for EM with elections in Indonesia, the first budget by India’s new government and the decision by the Malaysian central bank for which markets are split about the prospects of a hike.
IDR seems to have already partially priced a victory by Widodo (market positive) but we think there may be more to go after the election results. Similarly, markets are expecting a positive outcome from India’s budget, but we suspect we could still see INR and local assets benefiting if Modi delivers.
Beyond that, we don’t seen a big catalyst for a large move in EM asset prices this week, especially since many major currencies have been trapped in tight ranges, and the most important economic and monetary policy events (ECB, US employment report) are now behind us.
Turkey reports May IP on Tuesday, expected at 4.0% yy. It then reports May current account on Friday, expected at -$4.0 bln vs. -$4.8 bln in April. If so, the 12-month total would drop to -$53.2 bln from $56.8 bln in April. This would be the smallest total since April 2013, though most of the improvement is coming from the import side.
Brazil reports June IPCA inflation Tuesday and is seen rising to 6.5% y/y from 6.37% in May. It then reports the first July preview for IGP-M on Thursday. Even though wholesale/PPI inflation measures have turned lower, targeted IPCA has not yet. This, along with deteriorating fiscal numbers and a rebound in Dilma’s popularity could keep BRL on the defensive.
Chile reports June CPI inflation Tuesday, expected at 4.5% vs. 4.7% in May. That would still be above the 2-4% target range, and should prevent a rate cut at the July 15 central bank meeting.
Indonesia holds presidential elections on Wednesday. It looks to be a tight race between Joke Widodo (a businessman and governor of Jakarta) against the former army general Prabowo Subianto. Widodo has 47.8% support and Subianto has 44.2% according to the latest poll. Widodo is the preferred candidate for markets, being more business friendly and pledging to boost productivity. Subianto position appears more interventionist, looking to strengthen the government’s control over the economy and of foreign investment. Separately, Indonesia central bank meets Thursday and is expected to keep rates steady at 7.5%. Price pressures are easing, and could give the central bank leeway to cut rates later in the year. CPI rose 6.7% in June, the lowest since Jun 2013. High base effects from 2013 should see the y/y fall back towards the 3.5-5.5% target range in July and August.
China data deluge begins Wednesday with the release of June CPI and PPI, expected at 2.5% y/y and -1.0% y/y, respectively. Real sector data are stabilizing, but inflation is not going to be a focus for policymakers.
Czech Republic reports June CPI Wednesday, expected to rise 0.2% y/y vs. 0.4% in May. Deflation risks persist, and recent real sector data have been coming in soft. As such, we expect the central bank to maintain the EUR/CZK floor well into 2015.
Hungary central bank releases minutes from its meeting on Wednesday. It then reports June CPI on Friday, expected to remain steady at -0.1% y/y. Deflation risks persist here too, and should keep the central bank in easing mode for the next couple of months.
Korea central bank meets Thursday and is expected to keep rates steady at 2.5%. The strong won is a big concern for policymakers, but we do not expect an interest rate response. Rather, jawboning and FX intervention are likely to be relied upon.
Malaysia central bank meets Thursday and contrary to the majority of market participants calling for a 25 bp hike to 3.25%, we expect them to stay on hold for now. Recall that the bank shifted the tone in the last policy meeting to suggest that the “degree of monetary accommodation may need to be adjusted,” so tightening in coming. Indeed, the economic recovery continues and CPI is elevated at 3.4% y/y, but we don’t think it is enough to suggest urgency in tightening. May IP will be reported on Thursday as well, and is expected to rise 3.5% y/y vs. 4.2% in April.
Indian Prime Minister Modi will present his first budget on Thursday. Given his landslide victory, we expect him to use his honeymoon period to try to improve the fiscal deficit by aggressively phase out costly subsidies. The problem is the forecasts for a poor monsoon season and elevated oil prices will not help. Still, this budget will be watched closely for reform efforts and as a major policy signal. We are hopeful of a strong effort by Modi. Separately, May IP will be reported Friday.
South Africa reports May manufacturing production Thursday, expected to remain steady at -1.5% y/y. The new metalworkers strike will likely impact growth in Q3, just as the effects of the platinum strike are ebbing. Overall, the weak economic outlook should prevent the SARB from hiking rates in 2014.
Peru central bank meets Thursday and is expected to keep rates steady at 4.0%. However, there is a risk of a dovish surprise, according to some analysts. We disagree, and believe that inflation of 3.5% is too far above the 1-3% target range to allow for easing now.
Mexico’s central bank meets Friday and is expected to keep rates steady at 3.0%. Barring another leg lower in the economy, we do not think the central bank will be cutting rates again. Improving US growth should pull Mexico higher, and so we remain cautiously optimistic for the economy in H2. Separately, Mexico reports June CPI Wednesday and May IP on Friday.
This piece is cross-posted from Marc to Market with permission.