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Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM FX ended Friday on a mixed note, with TRY and ARS leading the gains. However, the jobs data supports our view that the Fed is likely to continue hiking rates, which is negative for EM. Furthermore, trade tensions will remain high after the US announced plans to slap tariffs on an additional $267 bln of Chinese imports. This negative backdrop should weigh on EM this week.

China reports August CPI and PPI Monday. CPI is expected to rise 2.1% y/y and PPI by 4.0% y/y. Money and loan data will be reported this week, but no date has been set. Retail sales and IP will be reported Friday. Sales are expected to rise 8.8% y/y while IP is expected to rise 6.2% y/y. We do not any further stimulus for the time being, as the previous measures are still taking effect.

Czech Republic reports August CPI Monday, which is expected to rise 2.4% y/y vs. 2.3% in July. If so, it would above the 2% target but within the 1-3% target range. The central bank should continue its tightening cycle. Next policy meeting is September 26, but three hikes in a row seems to aggressive. Rather, we favor a hike at either the November 1 or December 20 meetings.

Turkey reports Q2 GDP Monday, which is expected to grow 5.3% y/y vs. 7.4% in Q1. Central bank meets Thursday. Expectations are all over the place, with 2 analysts looking for no change and 1 looking for a 725 bp hike to 25%. Median forecast is a 300 bp hike to 20.75%, which would mirror the bare minimum that the bank did back in May. The bank has tended to disappoint at every juncture during this crisis, and we think even a 300 bp hike would be a green light to sell the lira again. July current account data will be reported Friday.

Philippines reports July trade Tuesday. Exports have been contracting this year even as inflation spiked to 6.4%y/y in August. Next policy meeting is September 27 and a 50 bp hike is expected. Governor Espenilla warned that a policy meeting outside of the scheduled six-week cycle is an option.

Hungary reports August CPI Tuesday, which is expected to rise 3.3% y/y vs. 3.4% in July. If so, inflation would remain above the 3% target but within the 2-4% target range. Bloomberg consensus sees a gradual tightening cycle starting in 2019. Next policy meeting is September 18, no change is expected then.

South Africa reports July manufacturing production Tuesday, which is expected to rise 0.9% y/y vs. 0.7% in June. July retail sales will be reported Wednesday, which are expected to rise 1.6% y/y vs. 0.7% in June. The economy remains weak even as inflation is rising. Next policy meeting is September 20, and we expect a hawkish hold. Market sees tightening starting around mid-2019 but we think the weak rand will force SARB to hike sooner than that.

Mexico reports July IP Tuesday, which is expected to rise 1.0% y/y vs. 0.2% in June. The economy has been firming of late, but we think headwinds are building even as inflation remains elevated. Next policy meeting is October 4, and no change is expected then. However, ongoing peso weakness is likely to result in a hawkish hold and we cannot rule out further tightening ahead.

Russia reports July trade Tuesday. Central Bank of Russia meets Friday and is expected to keep rates steady at 7.25%. Governor Nabiullina said the bank will consider a rate hike at next week’s policy meeting, as inflation risks have grown due to the weak ruble. On the other hand, Deputy Governor noted that monetary conditions are already tightening “at a significant pace.” We see risk of a hawkish surprise, especially with USD/RUB making new multi-year highs.

Argentina central bank meets Tuesday and is expected to keep rates steady at 60%. August CPI will be reported Thursday, which is expected to rise 33.9% y/y vs. 31.2% in July. The peso has steadied in September, and so the bank will likely be able to keep rates steady for the time being.

India reports August CPI and July IP Wednesday. CPI is expected to rise 3.79% y/y vs. 4.17% in July, while IP is expected to rise 6.5% y/y vs. 7.0% in June. August WPI will be reported Friday, is expected to rise 4.62% y/y vs. 5.09% in July. If so, inflation data would support the RBI’s view that the inflation spike was temporary. Next policy meeting is October 5, no change is expected then.

Poland reports July trade and current account data Thursday. Poland central bank appears to be moving its forward guidance out further. Officially, the bank sees steady rates through 2019. However, Governor Glapinski said after this week’s policy meeting that it’s “probable” that rates will be steady in 2020 as well. Next policy meeting is October 3, no change is expected then.

Brazil reports July retail sales Thursday, which are expected to rise 1.0% y/y vs. 1.5% in June. markets are trying to gauge the full impact of last week’s horrific stabbing. The knee-jerk reaction was positive due to the notion that Bolsonaro would get the sympathy vote. Polls up until now have shown him leading the first round but losing to virtually all possible candidates (tied with Haddad) In the second. Next round of polls will be very important.

Peru central bank meets Thursday and is expected to keep rates steady at 2.75%. CPI rose 1.1% y/y in August, which is near the bottom of the 1-3% target range. The economy is picking up and Bloomberg consensus sees the first hike in Q4. We concur, though we stress that the cycle is likely to be very modest given the risks to investment stemming from the corruption scandals in the construction industry.

Israel reports August CPI Friday, which is expected to rise 1.3% y/y vs. 1.4% in July. Inflation is finally picking up and so we believe the central bank will hike rates soon. Next policy meeting is October 8, and no change is expected then. Instead, we favour a move at the meeting after that on November 26.

Colombia reports July IP and retail sales Friday. IP is expected to rise 3.4% y/y while sales are expected to rise 5.5% y/y. The economy is picking up steam, and so we believe the next move by the central bank will be a hike. Next policy meeting is September 28, and no change is expected then. Bloomberg consensus sees the first hike in Q1 2019, and we concur.

Check out the EM Preview for the Week Ahead and other musings & insights on Emerging Markets at BBH’s “Mind on the Markets” blog.

Investor Insights Global

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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