EM Preview for the Week of March 19, 2023

March 19, 2023

EM FX was mixed last week despite the broad risk-off impulses stemming from banking sector concerns. THB, KRW, and TWD outperformed while CLP, HUF, and COP underperformed. We do not think the weekend deal for UBS to buy CS will resolve those concerns and so we see EM and other risk assets coming under pressure this week. The Fed debate continues but we believe it will hike rates 25 bp this Wednesday, adding to the pressure on risk assets.


Chile reports Q4 GDP and current account data Monday. Growth is expected at 0.6% q/q vs. -1.2% in Q3, while the y/y is expected at -1.6% vs. 0.3% in Q3. If so, it would be the first y/y contraction since Q1 2021 and the deepest since Q3 2020. Elsewhere, the current account deficit is expected at -$2.7 bln vs. -$9.4 bln in Q3. If so, it would be the smallest deficit since Q1 2021 and is to be expected given the slowing economy. The deepening slowdown has markets looking for an easing cycle to start over the next three months. At the last policy meeting January 26, the central bank warned that rate cuts won’t be seen until the process of inflation returning to target “has been consolidated.” Next policy meeting is April 4 and we look for no change.

Brazil COPOM meets Wednesday and is expected to keep rates steady at 13.75%. At the last meeting February 1, COPOM left rates steady but the statement warned of rising inflation expectations due to uncertainty regarding fiscal policy. This fanned the tensions with the Lula government, although things have quieted down in recent weeks. Indeed, Lula’s cabinet is working on a new fiscal rule that would address market concerns about excessive spending but it has reportedly been delayed by in-fighting. Mid-March IPCA inflation will be reported Friday and is expected at 5.26% y/y vs. 5.63% in mid-February. If so, it would be the lowest since February 2021 and would move closer to the 1.75-4.75% target range for this year. Markets are pricing in the start of an easing cycle in June, which is quite possible if inflation continues to move toward the target. Next policy meeting after this week is May 3, followed by June 21.

Mexico reports mid-March CPI Thursday. Headline is expected at 7.26% y/y vs. 7.76% in mid-February while core is expected at 8.14% y/y vs. 8.38% in mid-February. If so, headline would be the lowest since February 2022 and core the lowest since August 2022 but still well above the 2-4% target range. At the last policy meeting February 9, Banco de Mexico delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected. The bank “deemed that, given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment. Given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude.” Next meeting is March 30 and a 25 bp hike seems likely given this forward guidance. The market is now pricing in a peak policy rate near 11.25% but we see upside risks. January GDP proxy will be reported Friday.


Poland reports February IP and PPI Monday. IP is expected at 0.8% y/y vs. 2.6% in January while PPI is expected at 17.7% y/y vs. 18.5% in January. Real retail sales will be reported Tuesday and are expected at -1.5% y/y vs. -0.3% in January. The economy has clearly slowed, which is why the central bank has been on hold since the last 25 bp hike in September. The market is pricing in the start of an easing cycle over the next three months but we believe that will be very difficult with CPI inflation running at a cycle high 18.4% y/y in February, well above the 1.5-3.5% target range. Next policy meeting is April 5 and no change is expected then.

South Africa reports February CPI Wednesday. Headline is expected to fall a tick to 6.8% y/y while core is expected to pick up a tick to 5.0% y/y. At the last policy meeting January 26, the SARB delivered a dovish surprise with a 25 bp hike to 7.25% vs. 50 bp expected. Governor Kganyago said that the outlook for economic growth appear even more uncertain than normal even as the bank cut its forecast for this year to 0.3% vs. 1.1% previously. He estimated that ongoing power blackouts will shave an estimated 2 percentage points off of growth this year. Next policy meeting is March 30 and no change is expected. However, with inflation likely to remain above the 3-6% target range near-term, we see risks of a hawkish surprise.

Turkey central bank meets Thursday and is expected to keep rates steady at 8.5%. At the last policy meeting February 23, the bank cut rates 50 bp to 8.5% after keeping them steady since the last 150 bp cut in November. The recent earthquakes have forced policymakers back into easing mode as the bank said “It has become even more important to keep financial conditions supportive to preserve the growth momentum in industrial production and the positive trend in employment after the earthquake.” However, it hinted at steady policy for now by noting that rates are now “adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.” Rebuilding efforts will provide a boost and President Erdogan will be keen to add stimulus ahead of the planned May elections. It remains to be seen whether the earthquake response will cost Erdogan at the polls.


Malaysia reports February trade data Monday. Exports are expected at 4.5% y/y vs. 1.6% in January while imports are expected at 6.4% y/y vs. 2.3% in January. February CPI will be reported Friday and headline is expected at 3.6% y/y vs. 3.7% in January. If so, it would be the lowest since June 2022. At its last policy meeting March 9, Bank Negara 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 said then that it expects both headline and core inflation to moderate over the course of this year but still remain elevated. The bank surprised the markets with a pause back in January and so it seems we have seen the end of the cycle after only 100 bp of tightening. Next policy meeting is May 3 and no change is expected then.

Taiwan reports February export orders Monday. Orders are expected at -16.4% y/y vs. -19.3% in January. So far, China reopening has had very little impact on regional trade and activity. The central bank meets Thursday and is expected to keep rates steady at 1.75%. At the last policy meeting December 15, the bank hiked rates 12.5 bp to 1.75% and cut its 2022 growth forecast to 2.91% vs. 3.51% previously and cut its 2023 growth forecast to 2.53% vs. 2.9% previously. It also cut its 2022 inflation forecast to 2.93% vs. 2.95% previously but left its 2023 inflation forecast unchanged at 1.88%. Governor Yang said “We will be careful of the risks of a slowing economy, but our key focus remains on stabilizing the cost of living.” The market is pricing in steady rates going forward but much will depend on the global economic outlook, especially China. IP will also be reported Thursday and is expected at -13.30% y/y vs. -20.5% in January.

Korea reports trade data for the first twenty days of March Tuesday. So far, China reopening has had little impact on regional trade and activity. Recent yen strength has pushed the JPY/KRW cross back near the key 10 level that is beneficial for Korean exporters.

Singapore reports February CPI Thursday. Headline is expected at 6.5% y/y vs. 6.6% in January, while core is expected at 5.8% y/y vs. 5.5% in January. Even though the Monetary Authority of Singapore does not have an explicit inflation target, falling price pressures should allow it to leave policy steady at its next policy meeting in April. IP will be reported Friday and is expected at -1.5% y/y vs. -2.7% in January. Here too, China reopening has had very little impact on the economy.

Philippine central bank meets Thursday and is expected to hike rates 25 bp to 6.25%. At the last meeting February 16, the bank hiked rates 50 bp to 6.0% and Governor Medalla signaled further hikes ahead, noting that he personally is ruling out steady rates as well as 75 bp hikes. He added that a pause is feasible in H1. The bank raised its inflation forecast for 2023 to 6.1% y/y vs. 4.5% previously and for 2024 to 3.1% y/y vs. 2.8% previously. The bank added “The Monetary Board also reiterates its encouragement and support for timely and more aggressive whole-of-government actions to mitigate the impact of persistent supply-side pressures on food prices.” CPI rose 8.7% y/y in January, the highest since November 2008 and further above the 2-4% target range, before edging lower to 8.6% in February.

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