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Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

We saw a significant EM positioning washout last week, with weak longs getting punished. Anyone lulled into jumping aboard the EM train recently is getting crushed by sharply higher US rates. ARS and BRL bucked the trend and gained last week, but all others were weaker and were led by ZAR, CLP, and COP. MSCI fell 4.5%, while EM bond yields surged. With US rates still marching higher, EM is likely to remain under pressure this week.

China returns from holiday and will report September foreign reserves Monday. Ahead of the holiday, PMI survey readings suggest further slowing in the economy. Money and new loan data could be reported this week, but no date has been set. September trade will be reported Friday, with exports expected to rise 8.7% y/y and imports by 14.5% y/y.

Czech Republic reports August industrial and construction output as well as retail sales Monday. Data are expected to slow from July. It reports September CPI Tuesday, with inflation expected to remain steady at 2.5% y/y. After delivering three straight hikes, we believe that the central bank is likely to pause at the next meeting on November 1.

Taiwan reports September trade Monday. Export growth has slowed sharply in recent months. Export orders have picked up, offering some hope of an improvement in exports in the coming months. Low inflation and downside growth risks led the central bank to keep rates steady last month, and this is likely at the December policy meeting too.

Chile reports September CPI and trade Monday. CPI is expected to rise 3.2% y/y vs. 2.6% in August, while a -$7 mln trade deficit is expected. If so, inflation would be the highest since August 2016 and above the 3% target. This supports the notion that the central bank will hike rates in Q4. Next policy meeting is October 18. While a hike then is possible, it’s possible that it will wait another month.

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. CPI rose 1.2% y/y in August, which is near the bottom of the 1-3% target range. Governor Flug’s term ends November 12 and the next policy meeting will be held November 26. Her replacement has not been named yet but will preside over that meeting. September trade will be reported Thursday.

Hungary reports September CPI Tuesday, with inflation expected at 3.5% y/y vs. 3.4% in August. If so, this would be the highest since January 2013 and nearing the top of the 2-4% target range. The central bank has started to talk about exiting unconventional policies, but we expect it will remain cautious. Next policy meeting is October 16, no change is expected then.

Mexico reports September CPI Tuesday, with inflation expected at 5.0% y/y vs. 4.9% in August. Banco de Mexico delivered a hawkish hold last week, with one voting for an immediate hike. The next policy meetings are November 15 and December 20, and what happens then will depend in large part on how the peso is trading. August IP will be reported Friday, which is expected to rise 0.9% y/y vs. 1.3% in July.

Korea reports August current account data Thursday.The external accounts remain strong and won-supportive. Inflation picked up to 1.9% y/y in September, just below the 2% target. As such, markets are debating the timing of the next hike. Next policy meeting is October 18, and we think it is too soon to hike then given the regional headwinds.

Malaysia reports August IP and manufacturing sales Thursday. IP is seen rising 2.5% y/y vs. 2.6% in July. The economy is in solid shape, but policymakers are likely to remain cautious in light of China’s slowdown and heightened trade tensions. Bank Negara next meets November 8 and no change is expected then.

Turkey reports August current account data Thursday, where a -$2.5 bln deficit is expected. As the economy slows sharply, imports are collapsing and so the external accounts are improving. On the other hand, real rates are negative again after the much higher than expected September CPI print. Next policy meeting is October 25, and what happens then will depend in large part on the lira.

South Africa reports August manufacturing production Thursday, which is expected to rise 1.0% y/y vs. 2.9% in July. The economy remains weak, but SARB appears to be moving closer to a rate hike. Moody’s is scheduled to review South Africa’s rating Friday. Of the three major agencies, Moody’s is the most generous with its Baa3 rating. Our model views South Africa as BB, which lines up with S&P but not with Fitch’s BB+.

Brazil reports August retail sales Thursday, which are expected to rise 1.4% y/y vs. -1.0% in July. The first-round elections are being held today. Brazil assets have rallied on prospects for a first-round win by Bolsonaro, but we remain skeptical. If there is no first-round winner, markets are likely to remain nervous ahead of the second-round vote on October 28.

Peru central bank meets Thursday and is expected to keep rates steady at 2.75%. CPI rose 1.3% y/y. While it remains within the 1-3% target range, inflation is creeping higher even as the economy picks up. We believe that the central bank is likely to start the tightening cycle in Q1.

Singapore reports Q3 GDP Friday, which is expected to grow 2.6% y/y vs. 3.9% in Q2. The MAS typically holds its semiannual policy meeting on the same day as the GDP report. CPI rose 0.7% y/y in August. While the MAS does not have an explicit inflation target, we think low price pressures will keep it on hold this week after it tightened modestly in April. August retail sales will be reported Friday, which are expected to contract -1.5% y/y vs. -2.6% in July.

India reports September CPI and August IP Friday. RBI delivered a dovish surprise and kept rates steady. Most, including us, thought that they would hike 25 bp. INR weakened after the decision but has since recouped some of its losses. RBI sent a bad signal to the markets and we expect further rupee underperformance.

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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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