EM and other risk assets rallied on Friday after the strong US jobs data. It appears that markets are pricing in a benign backdrop for risk near-term; that is, the US economy is recovering but not by enough to warrant an imminent Fed rate hike. The July 27 meeting seems unlikely, and so the next likely window would be September 21. Yet EM typically weakens in the run-up to FOMC meetings and so investors should be very careful about taking on too much risk.
China has been on the back burner leading up to the Brexit vote and in its aftermath. It reports a slew of data this week, which are all expected to show continued but modest slowing. This benign scenario could be tested, especially if the Chinese equity or FX markets get more volatile. The central banks of Korea, Malaysia, Chile, and Peru all meet this week. No action is expected from any of them, but there are small dovish risks from Korea and Malaysia.
China is likely to report June money and loan data this week, but no date has been set yet. Over the weekend, CPI and PPI came in at 1.9% y/y and -2.6% y/y, respectively. China reports June trade Wednesday, with exports expected at -5.0% y/y and imports at -6.2% y/y. June IP and retail sales will be reported Friday, with the former expected to rise 5.9% y/y and the latter to rise 9.9% y/y. Q2 GDP will also be reported, with growth expected at 6.6% y/y vs. 6.7% in Q1.
Bank of Israel releases minutes from its June policy meeting Monday. At that meeting, it kept rates steady at 0.10%. Israel then reports June trade data on Wednesday. June CPI will be reported Thursday, and is expected to remain steady at -0.8% y/y. Ongoing deflation risks will keep the central bank in dovish mode, but we think it would take a significant hit to the economic outlook to get an unconventional policy response.
Mexico reports June ANTAD retail sales data Monday. It then reports May IP Tuesday, which is expected to rise 0.3% m/m vs. -0.7% in April. Banco de Mexico releases minutes from its June meeting Thursday. At that last meeting, it surprised markets with a larger than expected 50 bp cut and so the minutes will be scrutinized for clues on future moves. With the growth outlook worsening, we think another hike will be hard to justify. Next policy meeting is August 11.
