EM FX was mostly firmer last week, taking advantage of broad-based dollar weakness. BRL, COP, and MXN outperformed while ARS, KRW, and TRY underperformed. U.S. data this week should underscore the ongoing momentum in the economy as well as the ongoing need for further tightening by the Fed. It may take some time but eventual repricing of Fed tightening should eventually boost the dollar at the expense of EM FX and other risk assets.
AMERICAS
Chile reports February GDP proxy Monday. The central bank meets Tuesday and is expected to keep rates steady at 11.25%. At the last policy meeting January 26, the bank warned that rate cuts won’t be seen until the process of inflation returning to target “has been consolidated.” March CPI will be reported Thursday. Headline is expected at 11.1% y/y vs. 11.9% in February. If so, it would be the fourth straight month of deceleration to the lowest since last April but still well above the 2-4% target range. That is why we believe the market is wrong to price in the start of an easing cycle in the next three months.
Colombia central bank releases its minutes Tuesday. At last week’s meeting, the bank hiked rates 25 bp to 13.0%, as expected. Governor Villar said inflation data will determine if the tightening cycle has ended and added that it would maintain a restrictive policy for some time and that it’s unclear if it will cut rates this year. March CPI will be reported Wednesday. Headline is expected at 13.25% y/y vs. 13.28% in February. If so, it would be the first deceleration since last May and would remain well above the 2-4% target range. Next policy meeting is April 28 and one last 25 bp hike to 13.25% seems likely. However, we think the market is wrong to price in the start of an easing cycle in the next six months.
Mexico reports March CPI Wednesday. Headline is expected at 6.90% y/y vs. 7.62% in February, while core is expected at 8.07% y/y vs. 8.29% in February. If so, headline would be the lowest since October 2021 but would remain well above the 2-4% target range. Last week, Banco de Mexico hiked rates 25 bp to 11.25% and said that the balance of risks for inflation are still biased to the upside and due especially to energy prices. The bank said it will consider the inflation outlook at the next meeting May 18 and added that inflation has slowed more than expected. We see risks of one more 25 bp hike than that would see the policy rate peak near 11.50%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports March CPI Monday. Headline is expected at 51.67% y/y vs. 55.18% in February, while core is expected at 48.10% y/y vs. 50.58% in February. If so, headline would decelerate for the fifth straight month to the lowest since January 2022 but not even close to the 3-7% target range. At the last policy meeting March 23, the central bank kept rates steady at 8.5% after it delivered a “hawkish” surprise February 23 with a 50 bp cut vs. 100 bp expected. Next policy meeting is April 27 and another cut seems likely as President Erdogan tries to inject some stimulus ahead of the May 14 election. According to the final election list, Erdogan will face off against Kemal Kilicdaroglu, Muharrem Ince, and Sinan Ogan. Kilicdaroglu has been the leader of the main opposition Republican People's Party (CHP) since 2010. Ince broke off from the CHP in 2021 and established the Homeland Party. One recent poll showed Kilicdaroglu winning 53.1% of the vote in the first round vs. 42.3% for Erdogan. The two other candidates may not make much of an impact, with Ince winning 3.1% and Ogan winning 1.5%. The ORC poll was conducted between March 11-15 with 4,540 respondents across 42 provinces.
Bank of Israel meets Monday and is expected to hike rates 25 bp to 4.5%. At the previous meeting February 20, the bank delivered a hawkish surprise with a 50 bp hike to 4.25% vs. 25 bp expected. Deputy Governor Abir said future policy will be “very data-dependent” but took a hawkish tone, noting that recent data suggest inflation is “pretty sticky, particularly in the services sector.” Abir said the weak shekel, strong growth, and accelerating inflation were behind the hawkish surprise. Lastly, Abir said the bank was unsure of how much further it needs to tighten monetary policy since “it works with lags.” Of note, CPI rose 5.2% y/y in February, the first deceleration since last August but still well above the 1-3% target range. Lastly, protests against the proposed judicial reforms continue as Prime Minister Netanyahu’s pause suggests he will still push ahead rather than compromise.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. Minutes of the previous meeting March 8 will be released Friday. At that meeting, the bank tilted dovish as Governor Glapinski said he expects inflation to fall to 6% by year-end and that current rates are appropriate to get inflation back to the 1.5-3.5% target range. He also said the zloty was strong and saw no need for further appreciation. Since then, inflation first accelerated to 18.4% y/y in February before falling back to 16.2% in March. Much of the improvement was due to high base effects from last year after Russian invaded Ukraine. As such, we think it will be very difficult for inflation to fall to 6% by year-end with current policy settings. However, the market is pricing in steady rates over the next six months, followed by the start of an easing cycle in the subsequent six months.
ASIA
Caixin reports its March manufacturing PMI Monday. It is expected at 51.4 vs. 51.6 in February. Caixin then reports its services and composite PMI readings Thursday. Services is expected to remain steady at 55.0. Last week, China reported strong official March PMI readings and so we see upside risks to the Caixin readings. Official manufacturing came in at 51.9 vs. 51.6 expected and 52.6 in February while non-manufacturing came in at 58.2 vs. 55.0 expected and 56.3 in February. As a result, the official composite PMI rose to 57.0 vs. 56.4 in February. Still, the impact of China reopening has yet to make a significant impact on regional trade and activity.
Indonesia reports March CPI Monday. Headline is expected at 5.05% y/y vs. 5.47% in February, while core is expected at 3.04% y/y vs. 3.09% in February. If so, headline would be the lowest since last August but will well above the 2-4% target range. At the last policy meeting March 16, the central bank kept rates steady at 5.75% and Governor Warjiyo said again that there’s no need to raise interest rates further to fight inflation, just as he said at the last meeting in February. Warjiyo stressed that “BI’s interest rate policy is based on expectations and projections of inflation, balanced with economic growth,” adding that current rates are “enough.” His comments support our view that the tightening cycle has likely ended. Next policy meeting is April 18 and no change is expected.
Korea reports March CPI Tuesday. Headline is expected at 4.3% y/y vs. 4.8% in February, while core is expected at XX% y/y vs. 4.8% in February. At the last meeting February 23, Bank of Korea kept rates steady at 3.5% and was the first pause since the bank started the tightening cycle back in April 2022. However, Governor Rhee signaled further hikes are likely by saying “I hope the hold this time isn’t going to be seen as meaning the rate hike stance is over.” He noted that there was one dissent in favor of a 25 bp hike, adding that five of the six board members were open to a peak policy rate of 3.75%. This was a hawkish tilt from the last meeting January 13, when three board members saw 3.5% as the terminal rate while three others saw the terminal rate at 3.75%. Next policy meeting is April 13 and is the inflation data continue to ease, another hold seems likely. The market is pricing in a peak policy rate near 3.5%. February current account data will be reported Friday.
Philippines reports March CPI Wednesday. Headline is expected at 8.1% y/y vs. 8.6% in February. If so, it would be the lowest since December 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%, which was a downshift from the 50 bp hike at the previous meeting. Governor Medalla said “Our action will be almost completely driven by our outlook on inflation. In the absence of new shocks, we think we are already moving in the right direction.” He added that if CPI starts to decline m/m, “then we might actually not increase next meeting.” Of note, February CPI came in flat m/m unadjusted and 0.3% seasonally adjusted. Next policy meeting is May 18 and it will obviously depend on the data. By then, April CPI data will have been released already.
Thailand reports March CPI Wednesday. Headline is expected at 3.38% y/y vs. 3.79% in February, while core is expected at 1.83% y/y vs. 1.93% in February. If so, headline would be the lowest since January 2022 and nearing the 1-3% target range. At the policy meeting last week, 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.” Forecasts for growth, headline inflation, and core inflation this year were all cut by a tick to 3.6%, 2.9%, and 2.4%, respectively, while the forecast for headline inflation next year was raised to 2.4% vs. 2.0% previously. The market is pricing in a very gradual tightening cycle, with the policy rate seen at 2.25% in one year and 2.50% in three years. Next policy meeting is May 31 and another 25 bp hike seems likely.
Reserve Bank of India meets Thursday and is expected to hike rates 25 bp to 6.75%. At the last policy meeting February 8, the central bank hiked rates 25 bp to 6.50%. The vote was 4-2 and the bank left the door open to further hikes by maintaining its tightening stance and noting “It is imperative to remain alert on inflation so as to ensure that it remains within the tolerance band and progressively aligns with the target.” Governor Das noted that the “global economic outlook does not look as grim now as it was a while ago but added “We need to see a decisive moderation in inflation.” The tightening bias surprised some observers who were looking for a softer tone after CPI came in at 5.72% in December, the lowest since December 2021. Inflation then accelerated to 6.52% in January before easing slightly to 6.44% in February.
