EM Preview for the Week of May 12, 2024

May 12, 2024

Win Thin

EM FX was mixed last week as the dollar gained limited traction. CLP, MXN, and COP outperformed while BRL, ARS, and KRW underperformed. The dollar’s fate will be determined by major data reports this week: CPI. PPI, and retail sales. We see upside risks and so believe the dollar rally will continue.

AMERICAS

Colombia reports March IP and retail sales Tuesday. IP is expected at -3.2% y/y vs. 0.0% in February, while sales are expected at 2.1% y/y vs. -1.8% in February. Q1 GDP will be reported Wednesday and is expected at -0.3% y/y vs. 2.5% in February. The recovery is starting to pick up steam but clearly remains uneven and so the central bank will continue its easing cycle. It cut rates 50 bp to 11.75% at the April 30 meeting by a 5-2 vote, with the dissents in favor of larger 75 and 100 bp cuts. Next meeting is June 28 and another 50 bp cut seems likely. The market is pricing in 200 bp of total easing over the next 12 months.

Brazil reports March GDP proxy Wednesday. It is expected at -1.9% y/y vs. 2.59% in February. if so, it would be the first y/y contraction since October 2021 but due in large part to high base effects. Still, the recovery is clearly losing steam even as the central bank is nearing the end of the easing cycle. It just cut rates 25 bp to 10.5% last week but gave no forward guidance. Next meeting is June 19, and the market sees around 50% odds of one last 25 bp cut.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports April CPI Monday. Headline is expected at 2.4% y/y vs. 2.0% in March. If so, it would be the first acceleration since October but would remain within the 1-3% target range. At the last meeting May 2, the Czech National Bank cut rates 50 bp to 5.25% and raised its year-end PRIBOR forecast by a full percentage point to 5.0%. Governor Michl warned that it would be very cautious about further cuts. The swaps market is pricing in 125 bp of total easing over the next 12 months, which is in line with the CNB’s projection.

National Bank of Poland releases minutes to its April 4 meeting Monday. At that meeting, the bank left rates at 5.75% and reiterated that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Following the May 9 meeting, Governor Glapinski pointed out again that “I do not see readiness in the Council to cut interest rates this calendar year.” The market still pricing in 25 bp of easing over the next three months. Poland reports April core CPI Thursday and is expected at 4.0% y/y vs. 4.6% in March. If so, this would be the lowest since August 2021.

Israel reports April CPI Wednesday. Headline is expected at 2.5% y/y vs. 2.7% in March. If so, it would match the cycle low from February and remain well within the 1-3% target range. At the last meeting April 8, Bank of Israel kept rates steady at 4.5% and Governor Yaron said, “In view of recent developments, which indicate a substantial increase in the geopolitical uncertainty, the Monetary Committee decided to side with caution and kept the interest rate unchanged.” Next meeting is May 27 and with increasing hostilities in Gaza, another hold seems likely. Q1 GDP will be reported and annualized growth is expected at 14.9% vs. a war-related -21.0% plunge in Q4. The Bank of Israel forecasts real GDP growth of 2% over 2024.

ASIA

Over the weekend, China reported weak April money and new loan data. New loans came in at CNY731 bln vs. CNY940 bln expected and CNY3.089 trln in March, while aggregate financing came in at -CNY199 bln vs. CNY914 bln expected and CNY4.868 trln in March. This was the first drop in aggregate financing since the series began in 2017 and suggests that policymakers have hit a wall in terms of injecting stimulus and so the 5% growth target for this year will be difficult to meet. People’s Bank of China sets its 1-year MLF rate Wednesday and is expected to keep it steady at 2.5%. China reports April IP, retail sales, and fixed asset investment Thursday. IP is expected at 5.5% y/y vs. 4.5% in March, sales are expected at 3.7% y/y vs. 3.1% in March, FAI is expected at 4.7% YTD vs. 4.5% in March. Better than expected trade figures last week suggest some upside risks to this batch of data.

India reports April CPI Monday. Headline is expected at 4.80% y/y vs. 4.85% in March. If so, it would be the fourth straight month of deceleration to the lowest since May 2023. At the last meeting April 5, the Reserve Bank of India kept rates steady at 6.5% and retained its policy stance of “withdrawal of accommodation.” Governor Das said “It’s in the best interest of the economy that CPI continues to moderate and align itself to the target on a durable basis. Until this is achieved our task remains unfinished.” Next meeting is June 7, and no change is expected. WPI will be reported Tuesday and is expected at 1.05% y/y vs. 0.53% in March.

Philippine central bank meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting April 8, the bank kept rates steady at 6.5% and warned the “risks to the inflation outlook continue to lean toward the upside.” Governor Remolona said “If we were relatively dovish, we might reduce rates in the third quarter, that would be no more than 25 bp. But now we are feeling a bit more hawkish than before, so I would say that we’re not gonna do it in 3Q, we may do it down the road.” Despite this hawkish guidance, the swaps market is still pricing in the start of an easing cycle over the next three months.

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