EM FX was largely firmer last week, taking advantage of broad-based dollar weakness. COP, CLP, and MXN outperformed while ARS, ZAR, and TRY underperformed. While the Fed seemed to suggest a pause after hiking rates 25 bp last week, the jobs data will make that pause much more difficult to justify. CPI and PPI data this week are expected to show stubbornly high price pressures and so markets will have to rethink the Fed pause and pivot story. If and when the three rate cuts by year-end are priced out, that is likely to lead to renewed dollar strength as well as further volatility across all markets.
Chile reports April CPI and trade data Monday. Headline is expected at 9.9% y/y vs. 11.1% in March. If so, it would be the lowest since March 2022 but still well above the 2-4% target range. The central bank meets Friday and is expected to keep rates steady at 11.25%. The bank has been on hold since its last 50 bp hike back in October. At the last meeting April 4, the bank said that inflation convergence to the target will take longer than expected and that it will keep rates steady until the drop in CPI consolidates. The market is pricing in the start of an easing cycle over the next three months but that seems too soon in light of its somewhat hawkish stance.
Brazil central bank minutes will be released Tuesday. Last week, it delivered a dovish hold. Despite complaints from President Lula and his administration, the bank unanimously kept rates at a sky-high 13.75%. However, it softened its language as “Copom emphasizes that, although a less likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.” Next policy meeting is June 21 and a cut then seems too soon. However, the August 2 meeting is looking quite possible if inflation and inflation expectations ease. March IP will be reported Wednesday and is expected at 0.3% y/y vs. -2.4% in February. April IPCA inflation will be reported Friday and headline is expected at 4.11% y/y vs. 4.65% in March. If so, it would be the lowest since October 2020 and within the 1.75-4.75% target range for the second straight month.
Mexico reports April CPI Tuesday. Headline is expected at 6.20% y/y vs. 6.85% in March while core is expected at 7.69% y/y vs. 8.09% in March. If so, headline would be the lowest since September 2021 but still well above the 2-4% target range. At the last policy meeting March 30, the bank downshifted to a 25 bp hike and signaled that the cycle is nearing an end as “Since the last monetary policy meeting, annual headline inflation has decreased more than expected. For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained.” Next meeting is May 18 and markets are evenly split between no hike and a 25 bp hike. March IP will be reported Friday.
Peru central bank meets Thursday and is expected to keep rates steady at 7.75%. The bank has been on hold since its last 25 bp hike back in February. At the last meeting April 13, the bank said the tightening cycle was not necessarily over but reiterated that inflation would fall to the 1-3% target range by Q4. CPI rose 7.97&% y/y in April, the lowest since April 2022 but still well above the target range. The market expects the easing cycle to begin in Q3 but that may be too soon.
Turkey reports April budget balance Monday. March IP will be reported Wednesday and is expected at -0.3% y/y vs. -8.2% in February. Current account data will be reported Thursday and is expected at -$5.30 bln vs. -$8.78 bln in February. If so, the 12-month total would fall to -$55.1 bln vs. -$55.4 bln in February and would be the first drop since December 2021. However, it’s way too early to say that the nation’s twin deficit problems are over. March retail trade will be reported Friday. The nation goes to the polls next Sunday May 14.
Hungary reports March trade data Tuesday. April CPI will be reported Wednesday and headline is expected at 24.0% y/y vs. 25.2% in March. If so, it would be the lowest since November but still way above the 2-4% target range. Central bank minutes will also be released Wednesday. At the April 25 meeting, the bank lowered the ceiling of its interest corridor to 20.5% vs. 25.0% previously and noted that inflation risks have improved significantly and that inflation will slow at an accelerating pace. This was a very dovish tilt and so Hungary will likely join Poland and Czech in easing prematurely. It's clearly looking to cut rates even as CPI is running at 25.2% y/y. The market is pricing in the start of an easing cycle over the next 3-6 months, which seems too soon to us. For now, markets are giving CEE central banks the benefit of the doubt when they should instead be questioning the commitment to fighting inflation.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. The bank has been on hold since its last 25 bp hike back in September. Minutes for the April 5 meeting will be released Friday. At that meeting, the bank said inflation has started its steep decline. Of note, inflation came in at 14.7% y/y in April, the lowest since May 2022 but still well above the 1.5-3.5% target range. The market is pricing in the start of an easing cycle over the next 3-6 months, which seems too soon to us.
Czech Republic reports March industrial and construction output and trade data Tuesday. IP is expected at 1.8% y/y vs. 2.0% in February. April CPI will be reported Thursday and headline is expected at 13.3% y/y vs. 15.0% in March. If so, it would be the lowest since March 2022 but still well above the 1-3% target range. The bank has been on hold since its last 125 bp hike back in June 2022. At the last meeting March 29, Governor Michl warned that the bank is still prepared to hike rates if needed, adding that “From this point of view, market expectations that rates have already reached their peak may not materialize. Also, we consider market expectations about the timing of the first rate reduction as premature.” The market is pricing in the start of an easing cycle over the next 3-6 months, which seems too soon to us.
China reports new loan data sometime this week. New loans are expected at CNY1.4 trln vs. CNY3.9 trln in March, while aggregate financing is expected at CNY2.0 trln vs. CN5.4 trln in March. Trade data will be reported Tuesday. Exports are expected at 7.5% y/y vs. 14.8% in March while imports are expected at -0.1% y/y vs. -1.4% in March. April CPI and PPI will be reported Thursday. CPI is expected at 0.3% y/y vs. 0.7% in March while PPI is expected at -3.2% y/y vs. -2.5% in March. Q1 current account data will be reported Friday.
Taiwan reports April trade data Monday. Exports are expected at -19.4% y/y vs. -19.1% in March, while imports are expected at -19.9% y/y vs. -20.1% in March. Orders are still contracting y/y and suggest little relief to shipments in the next six months.
India reports March IP and April CPI Friday. IP is expected at 3.2% y/y vs. 5.6% in February, while headline inflation is expected at 4.80% y/y vs. 5.66% in March. If so, inflation would be the lowest since October 2021 and within the 2-6% target range for the second straight month. At the last policy meeting April 6, the RBI delivered a dovish surprise and kept rates steady vs. an expected 25 bp hike. The decision was unanimous but the bank flagged risks of further tightening by keeping its bias towards “removal of accommodation.” Governor Das stressed “Our job is not yet finished and the war against inflation has to continue. The MPC will not hesitate to take further action as may be required in its future meetings.” Das said that the bank felt it necessary to evaluate the cumulative impact of 250 bp of tightening already seen, adding that the decision is a “pause, not a pivot.” The market says otherwise and is pricing in no more hikes and a potential easing cycle in the next 3-6 months.