EM FX was mixed last week, reflecting the fact that the dollar continues to search for direction. PEN, BRL, and IDR outperformed while COP, ARS, and ZAR underperformed. This week is likely to see further tightening of global monetary condition, with the Fed, ECB, and Norges Bank all expected to deliver 25 bp hikes. Furthermore, official China PMI readings this weekend show that the reopening story leaves much to be desired, which adds to the headwinds for EM.
AMERICAS
Peru reports April CPI Monday. Headline is expected at 7.80% y/y vs. 8.40% in March. If so, it would be the lowest since last March but still above the 1-3% target range. The central bank has kept rates steady at 7.75% for three straight meetings. At the last meeting April 13, it said that the tightening cycle was not necessarily over and reiterated that inflation would fall to the target range by Q4. Next policy meeting is May 11 and rates are likely to be kept steady. However, if price pressures continue to ease, the bank may signal an explicit end to the tightening cycle.
Brazil reports April trade data Tuesday. COPOM meets Wednesday and is expected to keep rates steady at 13.75%. At the last meeting March 22, the bank delivered a hawkish hold by noting “additional deterioration” in inflation expectations. This triggered ongoing criticism from government officials, including President Lula. Last week, BCB chief Campos Neto held firm in testimony before Congress and noted “It’s obvious that we want to have low rates and that the central bank wants to see borrowing costs fall. You need to have correct timing and the correct credibility because we want a sustainable decline in rates.” Given this hawkish stance, we believe a rate cut is unlikely until Q3. The June 21 meeting seems too soon but August 2 is quite possible if inflation and inflation expectations ease.
Colombia central bank releases its quarterly inflation report Tuesday. Central bank minutes will be released Wednesday. Last Friday, the bank hiked rates 25 bp to 13.25%. At the start of last week, it was a toss-up but once the peso sold off from rising political risk, a hike became unavoidable. The vote was split, with 4 in favor of the hike, 2 in favor of holding, and 1 in favor of a larger 50 bp move. Governor Villar said there are signs that inflation is starting to ease. April CPI will be reported Friday. Headline is expected at 12.97% y/y vs. 13.34% in March. If so, it would be the first deceleration since last May but would still be well above the 2-4% target range. Next policy meeting is June 30 and what happens then will depend in large part on whether the government has regained market confidence or not.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports April CPI Wednesday. Headline is expected at 44.25% y/y vs. 50.51% in March while core is expected at 45.40% y/y vs. 47.36% in March. If so, headline would be the lowest since December 2021 but this is due in large part to high base effects. The expected m/m headline gain of 2.65% would mark an acceleration from 2.29% in March and suggests that inflation pressures remain high. The central bank just left rates steady at 8.5% last week. While we saw risks of a dovish surprise, it appears that policymakers opted for stability ahead of the May 14 elections. Reports suggest the central bank has been selling off its gold reserves in order to meet a spike in local demand ahead of the vote.
Czech National Bank meets Wednesday and is expected to keep rates steady at 7.0%. At the last meeting March 29, the bank signaled that rates may not have peaked yet and that market bets on rate cuts were premature. Governor Michl noted that the strong koruna is tightening monetary conditions and added that it “could be even stronger than it is.” The bank has kept rates steady since the last 125 bp hike last June. Since then, EUR/CZK has fallen over 5%. The bank’s model suggests that each percentage point gain in the koruna is equivalent to 25 bp of tightening. March retail sales will be reported Friday. Sales ex-auto are expected at -6.6% y/y vs. -6.4% in February
ASIA
Korea reports April trade data Monday. Exports are expected at -12.2% y/y vs. -13.6% in March while imports are expected at -12.0% y/y vs. -6.4% in March. CPI will be reported Tuesday. Headline is expected at 3.7% y/y vs. 4.2% in March. If so, it would be the lowest since last February but still well above the 2% target. At the last policy meeting April 11, the Bank of Korea kept rates steady at 3.5% and said it will judge whether a further hike is needed but stressed that a restrictive stance is warranted for a considerable time. Governor Rhee stressed that rate cut talk is unlikely until CPI is to hit its 2% target and that most BOK policymakers see market easing expectations as “excessive.” The market is pricing in a peak policy rate near 3.5% but it really will depend on the data going forward. Next policy meeting is May 25 and rates are likely to be kept steady again.
Indonesia reports April CPI Tuesday. Headline is expected at 4.37% y/y vs. 4.97% in March while core is expected at 2.90% y/y vs. 2.94% in March. At the last policy meeting April 18, Bank Indonesia kept rates steady at 5.75% and saw inflation returning to its 2-4% target range by August vs. September previously. Governor Warjiyo said he expects the rupiah to strengthen further due to foreign inflows driven by attractive yields and robust growth. We believe that the tightening cycle has ended and so talk now turns to the start of an easing cycle. Bloomberg consensus currently sees Q1 2024 but we think Q4 is more likely. We cannot rule out Q3 but much will depend on how the data come in over the course of Q2. Next policy meeting is May 24 and no change is expected. Q1 GDP data will be reported Friday. GDP is expected at -0.97% q/q vs. 0.36% in Q4, while the y/y rate is expected at 4.99% vs. 5.01% in Q4.
Thailand reports April CPI Wednesday. Headline is expected at 2.70% y/y vs. 2.83% in March while core is expected at 1.70% y/y vs. 1.75% in March. If so, headline would be the lowest since December 2021 and within the 1-3% target range for the second straight month. At the last policy meeting March 29, the Bank of Thailand hiked rates 25 bp to 1.75% and signaled further hikes as Assistant Governor Piti said “With all the data that we have now, we think the rate normalization should continue.” The market is pricing in a policy rate peak near 2.0% over the next three months and then remaining there over the next two years. Next policy meeting is May 31 and another 25 bp hike to 2.0% seems likely.
Bank Negara meets Wednesday and is expected to keep rates steady at 2.75%. At the last policy meeting March 9, the bank kept rates steady at 2.75% and said it “will continue to calibrate the monetary policy settings that balance the risks to domestic inflation and sustainable growth.” It expected both headline and core inflation to moderate over the course of this year but still remain elevated. Since then, headline inflation eased to 3.4% y/y in March, the lowest since last June. While the bank does not have an explicit inflation target, falling price pressures should allow it to keep policy steady for the time being. It seems we have seen the end of the cycle after only 100 bp of tightening. The market is pricing in steady rates over the next six months, followed by the start of an easing cycle over the subsequent six months.
Caixin reports manufacturing PMI Thursday. Headline is expected at 50.3 vs. 50.0 in March. Services and composite PMIs will be reported Friday, with services expected at 57.3 vs. 57.8 in March. This past weekend, official PMI readings came in much weaker than expected. Manufacturing came in at 49.2 vs. 51.4 expected and 51.9 in March, while non-manufacturing came in at 56.4 vs. 57.0 expected and 58.2 in March. As a result, the composite fell to 54.4 vs. 57.0 in March to the lowest since January. Of note, this was the first sub-50 manufacturing reading since December. All in all, the data (both domestic and global) continue to show that the impact of reopening continues to underwhelm and so more stimulus seems likely.
Philippines reports April CPI Friday. Headline is expected at 7.0% y/y vs. 7.6% in March. If so, headline would be the lowest since September but still well above the 2-4% target range. At the last policy meeting March 23, the central bank hiked rates 25 bp to 6.25% and Governor Medalla said “Our action will be almost completely driven by our outlook on inflation” and added that if prices decline on a m/m basis, “then we might actually not increase next meeting.” Of note, CPI was flat m/m in March on a seasonally adjusted basis and -0.2% m/m unadjusted. Next policy meeting is May 18 and will depend in large part on the April CPI data.
