EM FX was mostly firmer last week as the broad-based dollar rally ran out of steam. CLP, MXN, and CZK outperformed while ARS, MYR, and TWD underperformed. We believe it unwise to buy risk and sell the dollar ahead of a pivotal week that has Fed chair Powell testifying before Congress as well as the February jobs report. Data are expected to show ongoing resilience in the U.S. economy, while Powell is expected to highlight a more hawkish stance from the Fed. Risk assets and EM are also likely to suffer from disappointment with China’s modest growth forecast for this year of “around 5%.”
AMERICAS
Chile reports February trade data Tuesday. February CPI will be reported Wednesday and headline is expected to slow a tick to 12.2% y/y. if so, it would be third straight month of deceleration to the lowest since May 2022 but still well above the 2-4% target range. The central bank has kept rates steady at 11.25% since the last 50 bp hike in October. At the last meeting January 26, the bank warned that “Inflation remains very high and its convergence to the 3% target is still subject to risks. The Board will maintain the MPR at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.” Next policy meeting is April 4 and no change is expected then. The swaps market is pricing in the start of an easing cycle over the next three months but this seems very unlikely.
Mexico reports February CPI Thursday. Headline stood at 7.91% y/y in January while core stood at 8.45% y/y. Banco de Mexico delivered a hawkish surprise at its last policy meeting February 23 with a 50 bp hike to 11.0% vs. 25 bp expected. The decision was unanimous and Deputy Governor Espinosa later warned that it’s risky to signal a smaller hike at its next meeting is March 30. If inflation continues to run hot, we look for a 50 bp hike to 11.5%. The swaps market is pricing in a peak policy rate near 11.75% over the next six months.
Peru central bank meets Thursday and is expected to keep rates steady at 7.75%. At the last policy meeting February 9, the bank delivered a dovish surprise and kept rates steady vs. an expected 25 bp hike to 8.0%. It saw inflation starting to fall in March and moving back to the 1-3% target range by Q4. However, it warned that the pause did not signal an end to the tightening cycle. Much will depend on the data, of course.
Brazil reports February IPCA inflation Friday. Headline stood at 5.77% y/y in January. The central bank has kept rates steady at 13.75% since its last 50 bp hike in August 2022. At the last meeting February 1, the bank kept a hawkish tone and noted a deterioration in the long-term inflation outlook, adding that inflation expectation are drifting away from target and that it won’t hesitate to hike again if needed. Next COPOM meeting is March 22 and no change is expected then. The swaps market is still pricing in the start of an easing cycle over the next six months.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports January retail sales Monday. Sales are expected at -2.9% y/y vs. -3.9% in December. IP will be reported Tuesday and is expected at 4.3% y/y vs. 5.7% in December. February CPI will be reported Wednesday and is expected at 25.4% y/y vs. 25.7% in January. If so, this might begin the disinflation trend from the January peak but would remain well above the 2-4% target range. The central bank kept rates steady at the last meeting February 28 but said its assessment of economic risks had improved but not by enough to allow for easing policy. Next policy meeting is March 28 and no change is expected. The swaps market is still pricing in the start of an easing cycle over the next three months, which seems highly unlikely. January trade data will be reported Friday.
South Africa reports Q4 GDP data Tuesday. GDP is expected at -0.4% q/q vs. 1.6% in Q3, while the y/y rate is expected at 2.2% vs. 4.1% in Q3. Q4 current account data will be reported Thursday, with the deficit expected at -2.7% of GDP vs. -0.3% in Q3. If so, it would be the largest deficit since Q2 2020 and comes despite slowing import demand. After posting current account surpluses in 2020 and 2021, South Africa likely slid back into deficit in 2022 and is expected to remain in deficit for several years hence. This is negative for the rand, especially as SARB slowed its pace of tightening to 25 bp January 26 and Governor Kganyago stressed that prospects for growth were even more uncertain than usual. Next policy meeting is March 31 and another 25 bp hike to 7.5% is expected then. The swaps market is pricing in a peak policy rate near 8.0% over the next 12 months.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. The central bank kept rates steady at the last meeting February 8. Governor Glapinski said then that scope for easing would appear “at some point” but stressed that the tightening cycle hasn’t officially ended and that it’s too early to discuss a cut. The swaps market is now pricing in steady rates over the next 12 months, which seems more likely than the easing cycles are that are being priced in for Hungary and Czech Republic.
Czech Republic reports January industrial and construction output and February CPI Friday. Headline inflation is expected at 16.6% y/y vs. 17.5% in January. If so, it would resume the disinflation trend that was interrupted by the January spike but remain well above the 1-3% target range. The central bank kept rates steady at the last meeting February 2. Next policy meeting is March 29 and no change is expected. The swaps market is still pricing in the start of an easing cycle over the next three months, which seems highly unlikely.
ASIA
Korea reports February CPI Monday. Headline is expected at 5.0% y/y vs. 5.2% in January. If so, it would resume the disinflation trend that was interrupted by the January spike but remain well above the 2% target. At the last policy 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%. Next policy meeting is April 11 and while a hike then is possible, it will depend on the data. The swaps market is pricing in a peak policy rate near 4.0% over the next 6 months. January current account data will be reported Friday.
Philippines reports February CPI Tuesday. Headline is expected at 8.9% y/y vs. 8.7% in January. If so, it would be the highest since November 2008 and further above the 2-4% target range. At the last policy meeting February 16, the central bank hiked rates 50 bp to 6.0% and Governor Medalla signaled further hikes ahead by noting that he personally is ruling out steady rates as well as 75 bp hikes. He added that a pause is feasible in H1. Next policy meeting is March 23 and another hike is expected, though the magnitude (25 vs. 50 bp) will depend in large part on the CPI data. The swaps market is pricing in a peak policy rate near 6.25% but this will have to move higher if inflation continues to rise.
Thailand reports February CPI Tuesday. Headline is expected at 4.16% y/y vs. 5.02% in January, while core is expected at 2.10% y/y vs. 3.04% in January. If so, it would resume the disinflation trend that was interrupted by the December spike but remain well above the 1-3% target range. At the last policy meeting January 25, the Bank of Thailand hiked rates 25 bp to 1.5% and sounded hawkish, noting “There is a risk that core inflation would remain high for longer than expected owing to a potential increase in pass-through given elevated costs. Risks of rising demand-side inflationary pressures must be monitored.” Assistant Governor Piti later said “The economy is taking off so it’s still appropriate to raise the rate for a while. But how far we will go is the key task for the following meetings.” The swaps market is pricing in a policy rate near 2.25% over the next 12 months, rising to near 2.75% over the subsequent 24 months.
China set a growth target for this year of “around 5%.” This disappointed most observers that were looking for a stronger rebound from 2022 after the end of Covid Zero. The rather modest target suggests that large-scale stimulus is unlikely this year. China reports February new loan and money data sometime this week. New yuan loans are expected at CNY1.5 trln vs. CNY4.9 trln in January while aggregate financing is expected at CNY2.20 trln vs. CNY5.98 trln in January. Combined January-February trade data will be reported Tuesday. Exports are expected at -9.0% y/y vs. -9.9% in December, while imports are expected at -5.5% y/y vs. -7.5% in December. February CPI and PPI data will be reported Thursday. CPI is expected at 1.9% y/y vs. 2.1% in January and PPI is expected at -1.3% y/y vs. -0.8% in January. Low price pressures will give the PBOC leeway to ease policy this year but we no longer expect aggressive monetary easing.
Taiwan reports February CPI and trade data Tuesday. Headline is expected at 2.53% y/y vs. 3.04% in January, while core is expected at 2.60% y/y vs. 2.98% in January. If so, both would resume the disinflation trend that was interrupted by the December-January spike. While the central bank does not have an explicit inflation target, easing price pressures should allow it to keep rates on hold at 1.75% at the next policy meeting March 23. Elsewhere, exports are expected at -12.9% y/y vs. -21.2 % in January, while imports are expected at -9.8% y/y vs. -16.6% in January.
Bank Negara meets Thursday and is expected to keep rates steady at 2.75%. However, nearly a third of the analysts polled by Bloomberg look for a 25 bp hike to 3.0%. At the last meeting January 19, the bank delivered a dovish surprise and kept rates on hold at 2.75% vs. an expected 25 bp hike. The bank noted that “Any changes to the OPR depend on how strong the economy and prices grow,” adding that the pause will allow the bank to assess the impact of past tightening “given the lag effects of monetary policy on the economy.” The bank said headline inflation peaked in Q3 and is expected to ease further this year. Since then, January CPI inflation eased to the lowest since June 2022 and so we may have seen the end of the tightening cycle.
