China Struggles Add to Emerging-Market Risks as Rate Cuts Beckon

(Bloomberg) -- Slowing growth in China is intensifying the focus on the need for interest-rate cuts across emerging markets in the wake of last week’s dovish comments from Federal Reserve Chairman Jerome Powell.

China’s gross domestic product rose 6.2% in the April-June period from a year earlier, the weakest pace since quarterly data began in 1992, underscoring the fallout from the trade war. Investors will now focus on central bank meetings in Indonesia, South Africa and Ukraine, all of which are forecast to cut rates this week. There’s an almost even chance that South Korea may ease too.

Expected swings in developing-nation currencies declined last week to the lowest level in almost two years and the average yield on local-currency emerging-market debt fell to new lows.

“The path of travel toward looser EM monetary policy is pretty clear and we are expecting the global wave of easing to continue,” said Paul Greer, a London-based money manager at Fidelity International, whose emerging-market debt fund has outperformed 97% of peers this year. But “this is not a classic environment for emerging-market currency appreciation as long as growth and trade remain sluggish.”

Idiosyncratic risks are also likely to remain front and center this week, after Moody’s Investors Service lowered the outlook on Argentina’s credit score and Fitch Ratings cut Turkey’s debt deeper into junk territory, just as the U.S. considers imposing sanctions on the country over its purchase of a Russian missile system.

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China Struggles

• Read more: China’s Weakest Growth on Record Set to Endure Amid Trade War
• China’s factory output rose 6.3% in June, retail sales rose 9.8%, while investment gained 5.8% in the first half of the year -- all three beating estimates in further evidence that stimulus measures to curb the slowdown may be feeding through
• “The on-consensus print does lessen the market fears that China’s economy is headed for a hard landing,” Stephen Innes, the managing partner of Vanguard Markets, wrote in a note. Risk assets will respond favorably “but it’s hard to escape the economic realities that the U.S.-China trade war is having on global economies,” he wrote

Rate Cuts Beckon

• Bank Indonesia’s dovish inclinations have been well-telegraphed in advance; Governor Perry Warjiyo said in June that a rate cut is a matter of timing and magnitude. Expectations for more easing by the Bank Indonesia have seen the nation’s benchmark government bonds rally since the end of May
  • Indonesia’s June trade balance came in at $196 million, the second consecutive monthly surplus, though falling short of expectations calling for a $658 million surplus
  • Read more: Bank Indonesia Seen Doing More Than One and Done Cut
• While the consensus of 19 economists is for the South African Reserve Bank to cut the country’s repo rate by 25 basis points to 6.50%, two economists forecast a reduction of 50 basis points and three expect the bank to keep rates on hold
• The majority of economists expect policy makers in Ukraine to lower borrowing costs by 50 basis points
• Economists are divided on the action to be taken by the Bank of Korea. Ten out of 24 who were surveyed by Bloomberg expect the central bank to cut the policy rate from 1.75% Thursday
• Chile’s central bank is expected to keep interest rates unchanged on Thursday after surprising investors with a 50 basis-point cut in June. Chile’s peso has gained almost 2% since that reduction, supported by increased copper prices. Peru’s May monthly economic activity index on Monday is likely to show growth remains weak

Turkey Faces Sanctions

• President Donald Trump’s team has settled on a sanctions package to punish Turkey for receiving parts of a Russian missile-defense system and plans to announce it in the coming days, said people familiar with the matter
  • The administration wants to wait until after Monday’s anniversary of a 2016 coup attempt against Turkey’s President Recep Tayyip Erdogan to avoid fueling speculation that the U.S. was responsible for the uprising, as Erdogan’s loyalists have claimed
• Emerging-market strategists are the most pessimistic on the lira, after the Argentine peso, based on their fourth-quarter forecasts

Brazil’s Progress

• Money managers will watch for further progress on Brazil’s pension overhaul before Congress breaks for a midyear recess until August. Wells Fargo said the bill’s faster-than-expected progress will allow for further savings, prompting the bank to boost its forecast for the real
• May economic activity data in Brazil, to be released on Monday, will probably show an increase from a year earlier. Even if it does, the three-month moving average is set to stay negative, feeding concern of a second quarter of deteriorating growth. Beyond the pension bill, investors want interest-rate cuts that could help fuel a rebound in economic growth

Other Key Data

• India will be releasing its June export figures, while the Philippines will announce its May remittance numbers, both of which have seen eight consecutive months of positive growth. India’s budget announcement, showing an improvement in the deficit, has helped the rupee become the top-performing Asian currency in July after the Indonesian rupiah
• Argentina’s consumer-price inflation probably cooled for a third month in June, a sign the economy may be crawling out of a recession. The Argentine peso outperformed Latin American peers in the past month, trimming its annual loss to less than 10%.

--With assistance from Tomoko Yamazaki, Alex Nicholson, Alec D.B. McCabe and Philip Sanders.

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net;Marcus Wong in Singapore at mwong547@bloomberg.net;Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan

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