EM FX was largely softer last week as the hawkish Fed and rising U.S. interest rates helped the broad-based dollar rally continue. RUB, MXN, and PEN outperformed while COP, BRL, and CZK underperformed. U.S. yields are likely to head higher this week due to the hawkish Fed, while global growth concerns are likely to intensify due to continued slowing in the eurozone and China. In other words, the tailwinds that helped EM in 2021 should continue to turn into headwinds in 2022.
Mexico reports April CPI Monday. Headline inflation is expected at 7.73% y/y vs. 7.45% in March, while core is expected at 7.18% y/y vs. 6.78% in March. Banco de Mexico meets Thursday and is expected to hike rates 50 bp to 7.0%. Minutes from the March meeting suggest policymakers mostly favored continuing the recent pace of 50 bp hikes. One noted that market expectations for tightening were too high, while another said raising rates too fast could hit growth. The swaps market is pricing in 300 bp of further tightening over the next 12 months that would see the policy rate peak near 9.50%. March IP will also be reported Thursday and is expected at 2.0% y/y vs. 2.5% in February.
Brazil reports March retail sales Tuesday. Sales are expected at 2.3% y/y vs. 1.3% in February. April IPCA inflation will be reported Wednesday, with headline expected at 12.06% y/y vs. 11.30% in March. If so, it would be the highest since October 2003 and further above the 2-5% target range. COPOM just delivered the expected 100 bp hike to 12.75% last week and signaled a smaller hike at the next policy meeting June 15. The swaps market is pricing in another 100 bp of tightening over the next 6 months that would see the policy rate peak near 13.75%.
Peru central bank meets Thursday and is expected to hike rates 50 bp to 5.0%. CPI rose 7.96% y/y in April, the highest since May 1998 and further above the 1-3% target range. As such, we see risks of a hawkish surprise this week. At the last meeting April 7, the bank forecast inflation to slow starting in July and return to target around Q2 or Q3 2023. This seems too optimistic and so markets should be prepared for a longer tightening cycle. Bloomberg consensus sees the policy rate peaking near 5.25% in Q4 but that is clearly unrealistic.
Czech Republic reports March industrial and construction output and trade data Monday. April CPI and March retail sales will be reported Tuesday. Headline inflation is expected at 13.2% y/y vs. 12.7% in March. If so, it would be the highest since March 1998 and further above the 1-3% target range. No wonder the central bank delivered a hawkish surprise last week with a 75 bp hike to 5.75% vs. 50 bp expected. Next meeting is June 22 and another hike is likely then. The swaps market is pricing in 50 bp of further tightening over the next 3 months that would see the policy rate peak near 6.25% but we see upside risks.
Hungary reports March trade data Monday. April CPI will be reported Tuesday. Headline inflation is expected at 8.9% y/y vs. 8.5% in March. If so, it would be the highest since March 2007 and further above the 2-4% target range. The central bank delivered the expected 100 bp hike in the base rate to 5.40% last week. Central bank minutes will be released Wednesday. Next policy meeting is May 31 and another hike seems likely then. The swaps market is pricing in 165 bp of further tightening over the next 12 months that would see the policy rate peak near 7.0% but we see upside risks.
Russia celebrates Victory Day Monday. All eyes are on Putin as he will likely use the occasion to drum up support for the disastrous invasion of Ukraine. With the West announcing another round of sanctions over the weekend, the economy is likely to continue cratering. Reports suggest the EU is nearing a deal to ban Russian energy imports, with Hungary the lone holdout. April CPI will be reported Friday. Headline inflation is expected at 18.05% y/y vs. 16.69% in March. If so, it would be the highest since January 2002 and further above the 4% target. Yet the central bank delivered two 300 bp cuts in April that took the policy rate down to the current 14.0%. Next scheduled policy meeting is June 10 but the bank won’t hesitate to cut intra-meeting if circumstances allow. The bank may feel emboldened to cut again soon by the firming ruble, but that exchange rate is meaningless as long as foreign investors are prohibited from selling local assets and repatriating the proceeds.
China reports April new loan and money data sometime this week. New loans are expected at CNY1.55 trln vs. CNY3.13 trln in March, while aggregate financing is expected to rise CNY2.2 trln vs. CNY4.65 trln in March. Trade data will be reported Monday, with exports expected at 2.7% y/y vs. 14.7% in March and imports expected at -3.0% y/y vs. -0.1% in March. CPI and PPI will be reported Wednesday. CPI is expected at 1.9% y/y vs. 1.4% in March, while PPI is expected at 7.8% y/y vs. 8.3% in March. If so, headline inflation would be the highest since November but still well below the 3% target for this year. At this point, policymakers are focused on boosting growth, not fighting inflation. However, despite pledges to stimulate the economy, the measures announced so far have been minimal.
Indonesia reports April CPI and Q1 GDP data Monday. Headline inflation is expected at 3.34% y/y vs. 2.64% in March, while core is expected at 2.60% y/y vs. 2.37% in March. If so, headline would be the highest since April 2018 and into the upper half of the 2-4% target range. At the last meeting April 19, Bank Indonesia delivered a dovish hold. Governor Warjiyo said “The decision is consistent with the need to maintain exchange rate stability and control inflation, coupled with efforts to revive economic growth despite a build-up of external pressure. We will very carefully consider our further moves to maintain stability and support economic growth.” Next meeting is May 24 and rates are likely to remain steady at 3.5%. Bloomberg consensus sees steady rates in Q2 followed by likely liftoff in Q3. However, this could be delayed if the mainland China slowdown intensifies and hurts regional activity. GDP is expected at -0.93% q/q vs. 1.06% in Q4, while the y/y rate is seen steady near 5%.
Malaysia reports March IP and manufacturing sales Tuesday. Bank Negara meets Wednesday and is expected to keep rates steady at 1.75%. At the last meeting March 3, the bank left rates steady and noted that its current policy stance remains “appropriate and accommodative” and will continue to be determined by incoming data. CPI rose 2.2% y/y in March and has been decelerating steadily from the 3.3% pea in November. While the central bank does not have an explicit inflation target, falling price pressures should allow it to remain on hold for the time being. Bloomberg consensus sees steady rates through Q2 followed by 25 bp hikes in both Q3 and Q4. However, we think liftoff could be pushed out if the mainland China slowdown impacts regional growth significantly. Q1 GDP and current account data will be reported Friday. Growth is expected at 4.0% y/y vs. 3.6% in Q4.
India reports April CPI and March IP Thursday. Headline inflation is expected at 7.40% y/y vs. 6.95% in March. If so, it would be the highest since October 2020 and further above the 2-6% target range. No wonder the central bank delivered a hawkish surprise last week with a 40 bp intra-meeting hike in the repo rate to 4.40%. Next scheduled meeting is June 8 and another hike then seems likely. Reports suggest the RBI opted for the intra-meeting hike rather than waiting until June to deliver an even larger hike, as that may have spooked the markets. IP is expected at 1.3% y/y vs. 1.7% in February.