EM Preview for the Week of May 5, 2024

May 05, 2024

Win Thin

EM FX was mostly firmer last week, taking advantage of broad dollar weakness. ZAR, HIF, and CLP outperformed while ARS, COP, and INR underperformed. Weak U.S. data and a dovish Fed hold took the wind out of the dollar’s sails. With no major U.S. data this week, we expect the greenback to remain under pressure and so risk assets like EM are likely to continue gaining.

AMERICAS

Brazil reports March consolidated budget data Monday. A primary deficit of -BRL1.9 bln is expected vs. -BRL48.7 bln in February. April trade data will be reported Tuesday. COPOM meets Wednesday and is expected to cut rates 25 bp to 10.50%. However, nearly a quarter of the analysts polled by Bloomberg look for a larger 50 bp move. At the last meeting March 20, it cut rates 50 bp to 10.75% and said, “the Committee members unanimously decided to communicate that, if the scenario evolves as expected, they anticipate a reduction of the same magnitude in the next meeting.” However, recent BRL weakness has markets looking for a smaller cut. The swaps market is pricing in a terminal rate of 10.25% over the next three months. March retail sales will also be reported Wednesday. April IPCA inflation will be reported Friday. Headline is expected at 3.66% y/y vs. 3.93% in March. If so, it would be the lowest since June 2023 and further within the 1.5-4.5% target range.

Colombia central bank releases its minutes Monday. At last week’s meeting, the bank cut rates 50 bp to 11.75% by a 5-2 vote. Like the previous meeting, the two dissents were in favor of larger 75 and 100 bp cuts. Governor Villar said inflation must slow more to speed up rate cuts. The market is pricing in another 300 bp of total easing over the next 12 months, which is likely to weigh on the peso. Colombia reports April CPI Wednesday. Headline is expected at 7.15% y/y vs. 7.36% in March, while core is expected at 8.28% y/y vs. 8.76% in March. If so, it would be the lowest since January 2022 but still well above the 2-4% target range.

Chile reports April trade data Tuesday. April CPI will be reported Wednesday. Headline is expected to remain steady at 3.7% y/y. If so, it would remain within the 2-4% target range. At the last meeting April 2, the bank cut rates 75 bp to 6.5% vs. 75 bp in December and 100 bp in January and warned “Rising inflation figures at the beginning of the year and higher imported cost pressures emphasize the need to continue closely monitoring its evolution.” Around that time, the bank raised its end-2024 inflation forecast to 3.8% vs. 2.9% previously. Next meeting is May 23 and if the peso remains firm, another 75 bp cut is possible. The swaps market is pricing in 150-175 bp of total easing over the next 12 months.

Banco de Mexico meets Thursday and is expected to keep rates steady at 11.0%. At the last meeting Banco de Mexico cut rates 25 bp to 11.0% as expected. It was the first cut after keeping the rate on hold at 11.25% since August 2023. The vote was 4-1, with Espinosa dissenting in favor of steady rates. Ahead of the decision, Mexico reports April CPI. Headline is expected at 4.62% y/y s. 4.42% in March, while core is expected at 4.40% y/y vs. 4.55% in March. The swaps market is pricing in 125 bp of easing over the next 12 months followed by another 125 bp over the subsequent 12 months. March IP will be reported Friday and is expected at -3.0% y/y vs. 3.3% in February.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 5.75%. A couple of analysts polled by Bloomberg look for steady rates. At the last meeting April 11, the bank delivered a dovish surprise and cut rates 25 bp to 6.00% vs. an expected hold. It said that “inflation is projected to continue its downward trend and gradually converge towards the center of the target range in the coming months.” Since then, April inflation came in lower than expected at 2.42% y/y vs. 3.05% in March. By moving back into the 1-3% target range, this gives the bank a green light to cut rates again.

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary releases its minutes Wednesday. At the April 23 meeting, the bank cut rates 50 bp to 7.75% and was a slower pace after cutting rates 100 bp in February and 75 bp in March. Deputy Governor Virag said a “careful and patient approach” was warranted. The bank sees the policy rate between 6.5-7.0% by mid-year and would get there if it cuts 50 bp at the May and June meetings. The market is pricing in 100 bp of easing over the next 12 months. Hungary also reports March trade Monday, retail sales Tuesday, and IP Wednesday. April CPI will be reported Friday. Headline is expected to rise a tick to 3.7% y/y. If so, it would be the first acceleration since January 2023 but would remain within the 2-4% target range.

Egypt reports April CPI Thursday. Inflation spiked higher in February but fell back in March despite the devaluation. Despite some stability in EGP, we see upside risks to inflation. The central bank hiked rates 600 bp to 27.25% when it devalued the pound. Next meeting is May 23, and no change is expected. However, more needs to be done to control inflation and so we see some risks of a hawkish surprise.

National Bank of Poland meets Thursday and is expected to keep rates steady at 5.75%. At the last meeting April 4, the bank kept rates steady and said, “The Council judges that the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” In his post-meeting press conference, Governor Glapinski said no MPC members are talking about rate cuts in 2024. The market is pricing in 25 bp of rate cuts over the next 12 months even with inflation running just under the 2.5% target. However, ongoing tension between the government and the central bank governor complicates the policy rate path projection.

Turkey central bank releases its quarterly inflation report Thursday. April CPI data last week was mixed, with headline coming in slightly lower than expected at 69.80% y/y and core coming in slightly higher than expected at 75.81% y/y. Bot continue to accelerate, however, and so the bank will have to finally increase its inflation forecasts. In its last report in February, the bank kept its inflation forecasts unchanged at 36% for end-2024, 14% for end-2025, and 9% for end-2026. At the last meeting April 25, the bank kept rates steady at 50.0% and said, “Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks.” The market is pricing in the start of an easing cycle over the next three months, which would weigh greatly on the lira.

Czech National Bank releases minutes to its May meeting Friday. At that May 2 meeting, the bank cut rates 50 bp to 5.25%, as expected. However, the tone was a bit more hawkish as Governor Michl said “The fight against inflation isn’t over. The bank board considers it necessary to maintain tight monetary policy and have a very cautious approach to further rate cuts.” More importantly, the bank also lifted its year-end PRIBOR forecast upward by a full percentage point to 5%, suggesting less easing this year than the 75 bp that’s priced in currently.

ASIA

China reports April money and new loan data sometime this week. New loans are expected at CNY1.0 trln vs. CNY3.089 trln in March, while aggregate financing is expected at CN840 bln vs. CNY4.868 trln in March. Policymakers will not (and cannot) rely on debt-fueled fiscal stimulus to boost growth. At the same time, monetary policy is reaching the limits of what it can do in a deflationary environment and so the 5% growth target for this year will be difficult to meet. Caixin reports April services and composite PMIs Monday. Services is expected at 52.5 vs. 52.7 in March. April trade data will be reported Thursday. Exports are expected at 1.5% y/y vs. -7.5% in March, while import are expected at 4.0% y/y vs. -1.9% in March. China reports April CPI and PPI Saturday local time. CPI is expected to remain steady at 0.1% y/y, while PPI is expected at -2.3% y/y vs. -2.8% in March.

Philippines reports April CPI Tuesday. Headline is expected at 4.0% y/y vs. 3.7% in March. If so, it would be the third straight month of acceleration to the highest since November and right at the top of the 2-4% target range. At the last meeting April 8, the central bank left rates unchanged at 6.5% and 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 guidance, the swaps market is still pricing in the start of an easing cycle over the next three months. Next meeting is May 16, and no change is expected. March trade data will be reported Wednesday. Exports are expected at -1.8% y/y vs. 15.7% in February, while import are expected at -4.8% y/y vs. 6.3% in March. Q1 GDP data will be reported Thursday. Growth is expected at 5.9% y/y vs. 5.5% in Q4.

Taiwan reports April CPI Tuesday. Headline is expected to remain virtually unchanged at 2.1% y/y. At the last meeting March 21, the central bank unexpectedly hiked rates 12.5 bp to 2.0% and Governor Yang said “Inflation has been high since 2021. The thing we worry about is that the whole structure of inflation has become a bit different now. We need to keep an eye on inflation expectations and whether electricity prices will go up.” Of note, the bank raised its 2024 inflation forecast to 2.16% vs. 1.89% in December and was based on the assumption that power prices would be raised 10%. The market is pricing in another 12.5 bp hike over the next six months. Next meeting is June 13, and another hike then is possible. April trade data will be reported Wednesday. Exports are expected at 9.7% y/y vs. 18.9% in March, while import are expected at 7.7% y/y vs. 7.1% in March.

Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 3.0%. At the last meeting March 7, the bank kept rates steady but noted “the ringgit is currently undervalued, given Malaysia's economic fundamentals and growth prospects.” This suggests BNM is unlikely to shift to looser policy settings anytime soon despite low inflation of 1.8% y/y in March. While the bank does not have an explicit inflation target, low price pressures should allow it to keep rates on hold for now in order to help support the ringgit. Indeed, the swaps market continues to price in some odds of a rate hike over the next 12 months. Malaysia reports March IP and manufacturing sales Friday. IP is excepted at 1.8% y/y vs. 3.1% in February.

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