EM Preview for the Week of March 3, 2024

March 03, 2024

Win Thin

EM FX was mixed last week, mirroring the dollar’s mixed performance against the majors. CLP, ZAR, and BRL outperformed while TRY, HUF, and IDR underperformed. Data this week will be key in determining whether the dollar can finally break of its recent well-worn ranges. Jobs report Friday is the highlight, but we also get other major data, the Fed’s Beige Book report, and plenty of Fed speakers that should keep downward pressure on EM FX.

AMERICAS

Brazil reports January consolidated budget data Thursday. A primary surplus of BRL98.0 bln is expected vs. a deficit of -BRL129.6 bln in December. Fiscal slippage is very concerning and could impact the central bank’s easing cycle. At the last COPOM meeting January 31, the central bank cut rates 50 bp to 11.25% and pledged that “If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings.” Next meeting is March 20 and another 50 bp cut to 10.75% is expected. February services and composite PMI readings will be reported Tuesday, while January current account and FDI and February trade data will be reported Wednesday.

Mexico reports February CPI Thursday. Headline is expected at 4.43% y/y vs. 4.88% in January, while core is expected at 4.62% y/y vs. 4.76% in January. If so, headline would decelerate for the first time since October but would remain above the 2-4% target range. At the last meeting February 8, Banco de Mexico kept rates steady at 11.25% but removed the phrase that it would hold rates “for some time” and instead said that it will make any decisions “depending on available information” at its next meetings. Next meeting is March 21 and a 25 bp cut to 11.0% seems likely.

Colombia reports February CPI Thursday. Headline is expected at 7.70% y/y vs. 8.35% in January, while core is expected at 9.08% y/y vs. 9.69% in January. If so, headline would be the lowest since January 2022 but would remain well above the 2-4% target range. At the last meeting January 31, the bank delivered a hawkish surprise and cut rates 25 bp to 12.75% vs. 50 bp expected. Governor Villar said it would ease “in a cautious way to control the risks that a more accelerated reduction will lead to a situation in which the process has to be slowed down or even eventually reversed.” Next meeting is March 22 and another 25 bp cut to 12.5% seems likely.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 6.0%. At the last meeting February 8, the bank cut rates 25 to 6.25%. Since then, February inflation came in higher than expected at 3.29% y/y vs. 3.02% in January. It was the first acceleration since January 2023 and moves further above the 1-3% target range. As such, the central bank’s cautious approach to easing seems justified. Looking ahead, Bloomberg consensus sees 50 bp of easing in Q2, 75 bp in Q3, and 25 bp in Q4 that would see the policy rate end the year at 4.5%.

Chile reports February CPI Friday. Headline is expected at 4.1% y/y vs. 3.8% in January. If so, headline would accelerate for the first time since November 2022 and would move back above the 2-4% target range. We note that Chile is changing its CPI basket weightings to put more emphasis on imported goods prices. With CLP the worst performer in EM at -9.1% YTD, there are upside risks to inflation readings going forward. At the last meeting January 31, the bank increased the pace of easing and cut rates 100 bp to 7.25% vs. 75 bp in December. It noted that “The Board considers that the convergence of inflation to the 3% target would materialize sooner than expected,” and one member voted for a larger 125 bp move. Next meeting is April 2, and the size of the cut will depend on large part on how the peso is trading. February trade data will be released Thursday.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports February CPI Monday. Headline is expected at 66.0% y/y vs. 64.86% in January, while core is expected at 71.90% y/y vs. 70.48% in January. If so, headline would be the highest since November 2022 and move further above the 3-7% target range. At the last meeting February 22, the bank kept rates steady at 45.0%. This was the first meeting led by new Governor Karahan and the bank stressed that it would tighten policy “in case a significant and persistent deterioration in inflation outlook is anticipated.” Next meeting is March 21 and rates are expected to remain steady at 45%. We do not think this is enough to lower inflation and stabilize the lira. However, the market sees steady rates over the next six months followed by 900 bp of easing over the subsequent six months.

National Bank of Poland meets Wednesday is expected to keep rates steady at 5.75%. It publishes the minutes to its February 7 meeting Friday. At that meeting, the bank kept rates steady, and Governor Glapinski has maintained a hawkish stance. He warned earlier in February that “I don’t see prospects for a MPC majority to cut rates if data matches our forecasts this year,” while MPC member Kotecki said more recently “now we should forget about a rate cut, until core inflation permanently nears the 2.5% target.” The market is pricing in 25 bp of easing over the next six months. This seems reasonable considering the potential GDP boost from the EU unblocking as much as EUR137 bln of funds to Poland.

Hungary reports February CPI Friday. Headline is expected at 4.0% y/y vs. 3.8% in January. If so, headline would accelerate for the first time since January 2023 and would move to the top of 2-4% target range. At the policy meeting last week, the central bank cut rates 100 bp to 9.0% vs. 75 bp in January. Deputy Governor Virag said the faster pace of easing was “temporary” and that future moves will remain “gradual.” Next meeting is March 26, and the size of the cut is likely to depend on how the forint is trading. January IP, retail sales, and trade data will all be reported Wednesday.

ASIA

Korea reports February CPI Wednesday. Headline is expected at 3.0% y/y vs. 2.8% in January, while core is expected to remain steady at 2.5% y/y. If so, headline would accelerate for the first time since October and would further above the 2% target. At the last meeting February 22, the Bank of Korea kept rates steady at 3.5%, as expected. While one board member was open to a rate cut, Governor Rhee stressed that “The direction of rate policy will become clear only when we become confident inflation is going to trend as we projected. If inflation slows as expected, our policy room will grow.” He added that a rate cut in H1 was unlikely. Next meeting is April 12, and no change is expected then. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months. January IP will be reported Monday.

Philippines reports February CPI Tuesday. Headline is expected at 3.1% y/y vs. 2.8% in January. If so, headline would accelerate for the first time since September but would remain within the 2-4% target range. At the last policy meeting February 15, the bank kept rates steady at 6.5% but the tone tilted less hawkish. It noted that “The risks to the inflation outlook have receded but remain tilted toward the upside” and added that it was “appropriate to keep policy settings unchanged in the near term.” Next meeting is April 4, and no change is expected then. However, the swaps market is pricing in 25 bp of easing over the next three months followed by 50 bp of easing over the subsequent three months.

Caixin reports February services and composite PMIs Tuesday. Services PMI is expected to rise a tick to 52.8. January-February trade data will be reported Wednesday. Exports are expected at 2.0% y/y while imports are expected at 1.5% y/y. February CPI and PPI will be reported Saturday local time. CPI is expected at 0.3% y/y vs. -0.8% in January, while PPI is expected to remain steady at -2.5% y/y. If so, headline would be positive for the first time since August. Still, deflation risks are likely to be felt throughout much of this year.

Bank Negara meets Thursday and is expected to keep rates steady at 3.0%. At the last meeting January 24, the bank kept rates steady and warned that risks remain in place. It noted that the government review of price controls and subsidies this year adds uncertainty to the inflation outlook. Of note, January headline CPI came in steady at 1.5% y/y. While the bank does not have an explicit inflation target, low price pressures should allow it to keep rates on hold for now with an eye on easing later this year. The swaps market is pricing in steady rates over the next three years, which seems way too hawkish.

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