EM Preview for the Week of March 27, 2022

March 27, 2022

EM FX has held up well despite expectations of a more aggressive Fed tightening path. This is typically bad for EM, but many central banks have front-run the Fed and hiked rates aggressively as well. It’s no coincidence that the best performing EM currencies year to date also have some of the highest policy rates. These are BRL (11.75%), ZAR (4.25%), CLP (5.5%), COP (4.0%), PEN (4.0%), and MXN (6.5%). All are expected to continue tightening, including Chile and Colombia this week.

AMERICAS

Brazil reports February current account and FDI data Monday. High commodity prices have helped boost exports, increase the trade surplus, and narrow the current account deficit to -1.71% of GDP in the 12 months through January. This is more than covered by FDI and is another supporting factor for BRL on top of high interest rates. Swaps market sees the policy rate peaking at 13.25% over the next 6 months vs. 11.75% currently. February central government budget data will be reported Wednesday, and consolidated budget data will be reported Thursday. Despite some fiscal pump-priming ahead of fall elections, the primary balance has moved into surplus and the nominal deficit of -3.6% of GDP is the smallest since August 2014. IP and trade data will be reported Friday, with IP expected at -4.7% y/y vs. -7.2% in January.

Chile central bank meets Tuesday and is expected to hike rates 175 bp to 7.25%. However, the market is split as nearly half the analysts polled by Bloomberg see a 200 bp move. Headline inflation was 7.8% y/y in February, the highest since November 2008 and further above the 2-4% target range. The central bank delivered a hawkish surprise at the last meeting January 26, hiking 150 bp to 5.5% vs. 125 bp expected. Swaps market sees the policy rate peaking near 9.0% over the next 6 months. February unemployment will be reported Wednesday, while retail sales and manufacturing production will be reported Thursday. Sales are expected at 11.0% y/y vs. 14.2% in January, while production is expected at 0.1% y/y vs. 2.6% in January.

Colombia central bank meets Thursday and is expected to hike rates 150 bp to 5.5%. Headline inflation was 8.01% y/y in February, the highest since August 2016 and further above the 2-4% target range. The central bank delivered a hawkish surprise at the last meeting January 28, hiking 100 bp to 4.0% vs. 75 bp expected. Bloomberg consensus sees the policy rate peaking near 7.5% by year-end, but we see upside risks to this.

Peru reports March CPI Friday. Headline inflation is expected to remain steady at 6.15% y/y. If so, it would still be well above the 1-3% target range. The central bank the expected 50 bp to 4.0% earlier this month. Next policy meeting is April 7 and another 50 bp hike to 4.5% seems likely. Bloomberg consensus sees the policy rate peaking near 5.25% by year-end, but we see upside risks to this.

EUROPE/MIDDLE EAST/AFRICA

South Africa reports Q4 labor market data Tuesday. Unemployment is expected at 35.1% vs. 34.9% in Q3. Non-farm payrolls will also be reported. February budget, money, and private sector credit data will be reported Wednesday. Money and credit growth are expected to pick up slightly from January. PPI and trade data will be reported Thursday, with PPI expected to pick up a tick to 10.2% y/y. SARB just delivered the expected 25 bp hike last week and set forth a more hawkish rate path. Next policy meeting is May 19 and another 25 bp hike to 4.5% seems likely.

Russia reports February real retail sales and unemployment Wednesday. Sales are expected at 4.2% y/y vs. 3.6% in January, while unemployment is seen up a tick to 4.5%. Obviously, the February data do not yet reflect the impact of the sanctions. Analysts are already busy marking down growth forecasts and marking up inflation forecasts. Latest Bloomberg survey of 24 analysts has consensus of -9.6% GDP contraction in 2022 and -1.5% in 2023, while consensus for 2022 inflation is 20%.

Czech National Bank meets Thursday and is expected to hike rates 50 bp to 5.0%. However, a few analysts are also looking for 25 and 75 bp moves. Headline inflation was 11.1% y/y in March, the highest since June 1998 and further above the 1-3% target range. The central bank delivered the expected 75 bp hike to 4.5% last month and we see some odds of a hawkish surprise this week. Swaps market sees the policy rate peaking near 5.5% over the next 6 months.

Poland reports March CPI Friday. Headline inflation is expected at 9.8% y/y vs. 8.5% in February. If so, it would be the highest since October 2000 and further above the 1.5-3.5% target range. The central bank delivered a hawkish surprise this month, hiking rates 75 bp to 3.5% vs. 50 bp expected. Next policy meeting is April 6 and another 75 bp hike to 4.25% seems likely. Swaps market sees the policy rate peaking near 5.25% over the next 12 months, though we still see upside risks to this.

ASIA

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. Headline inflation was 5.28% y/y in March, the highest since September 2008 and further above the 1-3% target range. At the last policy meeting February 9, the bank delivered a dovish hold. The bank said it still expects the average for the year to be within the 1-3% target range, while Assistant Governor Piti said “We haven’t seen a broad-based price increase yet, so we are not too concerned on overall inflation for now. Inflation exceeding the target is normal, and it doesn’t mean we need to adjust the rate right away as long as we have credibility.” We believe the Bank of Thailand will likely be one of the last in the region to tighten, as its tourism-reliant economy was one of the hardest hit by the pandemic. Bloomberg consensus sees steady rates through year-end with liftoff in Q1 23. However, swaps market is pricing in liftoff over the next 6 months.

Korea reports February IP Thursday. IP is expected to slow a tick to 4.2% y/y. March trade data will be reported Friday. Exports are expected at 18.8% y/y vs. 20.6% in February, while imports are expected at 30.3% y/y vs. 25.2% in February. Retail sales will be reported sometime this week. For now, the economy continues to recover and the outlook has improved now that it appears that the virus numbers have peaked. CPI rose 3.7% y/y in February, just below the cycle peak of 3.8% in November and nearly double the 2% target and so the Bank of Korea will continue tightening. Next policy meeting is April 14 and a 25 bp hike to 1.5% seems likely. Swaps market sees the policy rate peaking at 2.5% over the next 12 months.

China reports official March PMI readings Thursday. Manufacturing is expected at 50.0 vs. 50.2 in February, while non-manufacturing is expected at 50.6 vs. 51.6 in February. If so, the composite would likely drop close to a full point from 51.2 in February. Caixin reports its manufacturing PMI Friday and is expected at 50.0 vs. 50.4 in February. The economy is slowing from the latest pandemic wave and the growth target for this year of “around 5.5%” looks increasingly difficult to achieve. As a result, it’s clear that more stimulus measures will be seen soon, both fiscal and monetary. We believe central bank divergence and narrowing interest rate differentials will continue to weaken the yuan.

Indonesia reports March CPI Friday. Headline inflation is expected at 2.56% y/y vs. 2.06% in February, while core is expected at 2.34% y/y vs. 2.03% in February. If so, it would be the highest since April 2020 but still in the lower half of the 2-4% target range. At the last policy meeting March 17, Bank Indonesia delivered a dovish hold. Governor Perry Warjiyo said “We will maintain a low policy rate of 3.5% until there are signs of fundamental inflationary pressures. I need to emphasize that monetary policy responds to a fundamental increase in inflation which is seen in core inflation. We don’t respond directly to the increase in volatile food and administered prices inflation.” Next policy meeting is April 19 and rates are likely to be kept steady. Bloomberg consensus sees steady rates in H1 followed by likely liftoff in Q3.  

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