EM FX was mixed last week, buffeted by talk of a Fed skip on one hand and weak Chinese data on the other. COP, KRW, and PLN outperformed while TRY, ARS, and CNY underperformed. The dollar could see some near-term weakness this week given the dearth of any top tier data or Fed speakers. Next week brings CPI and PPI and that’s when things could get interesting. The Cleveland Fed Nowcast is pointing to a 0.5% m/m gain for core CPI, with little relief seen in June. Can the Fed really skip in June? With global liquidity still tightening globally and China continuing to struggle, we believe EM will remain under pressure.
Brazil reports May IPCA inflation Wednesday. Headline is expected at 4.06% y/y vs. 4.18% in April. If so, it would be the lowest since October 2020 and well within the 1.75-4.75% target range for this year. Next policy meeting is June 21 and rates are likely to be kept steady at 13.25%. However, markets are pricing in the start of the easing cycle at the subsequent meeting August 2. We concur. Of note, Lula has nominated two new members to the central bank board but are not expected to be confirmed by the June 21 meeting.
Chile reports May trade data Wednesday. May CPI will be reported Thursday. Headline is expected at 8.9% y/y vs. 9.9% in April. If so, it would be the lowest since February 2022 but still well above the 2-4% target range. Rates have been kept steady since the last hike in October. At the last meeting May 12, the bank said “The Board considers it appropriate to maintain the MPR at 11.25% until the state of the macro-economy indicates that the process of inflation convergence to the 3% target has been consolidated.” Next meeting is June 19 and rates are likely to be kept steady at 11.25%. However, the market is pricing in the start of an easing cycle over the next three months.
Colombia reports May CPI Wednesday. Headline is expected at 12.67% y/y vs. 12.82% in April. If so, it would be the lowest since November but still well above the 2-4% target range. At the last policy meeting April 28, the bank hiked rates 25 bp to 13.25%. Governor Villar wouldn’t rule out further tightening but notes that there were signs that inflation is starting to ease. Next policy meeting is June 30 and rates are expected to remain steady at 13.25%. However, the market is pricing in the start of an easing cycle over the next six months.
Mexico reports May CPI Thursday. If so, it would be the lowest since XX but still well above the 2-4% target range. Minutes to the May 18 meeting showed that after holding rates steady at 11.25%, the bank felt that “In order to achieve an orderly and sustained convergence of headline inflation to the 3% target, it considers that it will be necessary to maintain the reference rate at its current level for an extended period.” Next policy meeting is June 22 and no change is expected then. Governor Rodriguez said last week that the bank will hold rates for at least two meetings, adding that a U.S. recession would play a role in Banxico’s decision-making. The next meetings are June 22, August 10, and September 28. While Rodriquez seemed to rule out June and August for any policy changes, Deputy Governor Espinosa added that a rate cut was unlikely in September. That leaves November 9 and December 14. The swaps market sees steady rates for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us in light of this latest forward guidance. April IP will be reported Friday.
Peru central bank meets Thursday and is expected to keep rates steady at 7.75%. Rates have been kept steady since the last 25 bp hike in January. At the last meeting May 11, the bank reiterated that inflation would fall to 3% by year-end but would not rule out further hikes if needed. The market is pricing in the start of an easing cycle in Q3.
Turkey reports May CPI Monday. Headline is expected at 39.20% y/y vs. 43.68% in April, while core is expected at 43.70% y/y vs. 45.48% in April. Of note, consensus sees headline inflation ending this year around 43% y/y. In order to get tighter policy via a positive real rate, this would require a massive hike in the nominal policy rate to something between 45-50% in order to lower inflation back to the 3-7% target. Will Erdogan really allow that? This is why we can’t get too excited about the return of Simsek to the Finance Ministry. April IP will be reported Friday and is expected at 0.8% y/y vs. -0.1% in March.
Hungary reports April retail sales Tuesday. Sales are expected at -10.6% y/y vs. -13.1% in March. IP will be reported Wednesday and is expected at -1.1% y/y WDA vs. -4.0% in March. Central bank minutes will also be released Wednesday. At that May 23 meeting, the bank kept the bank rate steady at 13%. However, the next day, it cut the key 1-day deposit rate to 17.0% vs. 18.0% previously. It had been kept at 18.0% since being introduced as the new policy rate back in October. May CPI and April trade data will be reported Thursday. Headline inflation is expected at 22.3% y/y vs. 24.0% in April. If so, it would be the lowest since October but still well above the 2-4% target range.
Czech Republic reports April industrial and construction output and trade data Tuesday. IP is expected at 0.4% y/y vs. 2.4% in March. Retail sales will be reported Wednesday and sales ex-autos are expected at -6.1% y/y vs. -8.1% in March. The economy is clearly slowing, which is why the central bank is keen to start an easing cycle. Next policy meeting is June 21 and rates are likely to be kept steady at 7.0%. However, the market is pricing in the start of an easing cycle over the next three months.
South Africa reports Q1 GDP data Tuesday. Growth is expected at 0.3% q/q vs. -1.3% in Q4, while the y/y rate is expected at 0.1% vs. 0.9% in Q4. Q1 current account data and April manufacturing production will be reported Thursday. The deficit is expected at -2.8% of GDP vs. -2.6% in Q4, while production is expected at 2.0% y/y vs. -1.1% in March. It’s disappointing that the external accounts are worsening despite slow growth. The market is pricing in a peak policy rate near 9.0% the next twelve months vs. 8.25% currently.
National Bank of Poland meets Tuesday and is expected to keep rates steady at 6.75%. Minutes to the May 10 meeting will be released Friday. At that meeting, the bank kept rates steady. While Governor Glapinski said that rate cuts weren’t discussed then, he wouldn’t rule out cuts in late 2023. The market is pricing in the start of an easing cycle over the next three months.
Caixin reports May services and composite PMIs Monday. Services is expected at 55.2 vs. 56.4 in April. China reports May trade data and foreign reserves Wednesday. Exports are expected at -2.0% y/y vs. 8.5% in April, while imports are expected at -8.0% y/y vs. -7.9% in April. We have been skeptical of the recent gains in mainland exports, which did not jibe with trade data from its major trading partners. May CPI and PPI will be reported Friday. CPI is expected at 0.2% y/y vs. 0.3% in April, while PPI is expected at -4.2% y/y vs. -3.6% in April. It’s clear that China is facing deflation risks, which supports our view that the impact of reopening on growth (both domestic and global) remains very disappointing. That said, that should make it easier for the PBOC to justify additional stimulus in the coming months.
Indonesia reports May CPI Monday. Headline is expected at 4.22% y/y vs. 4.33% in April, while core is expected at 2.82% y/y vs. 2.83% in April. If so, headline would be the lowest since May 2022 and closer to the 2-4% target range. At the last policy meeting May 25, Bank Indonesia kept rates steady at 5.75% and said it would continue selling short-term bonds to boost yields and attract foreign inflows. Governor Warjiyo said that a strong rupiah was key to curbing imported inflation. Next meeting is June 21 and rates are likely to be kept steady again. The market is pricing in the start of an easing cycle in Q4.
Philippines reports May CPI Tuesday. Headline is expected at 6.1% y/y vs. 6.6% in April. If so, headline would be the lowest since June 2022 but still well above the 2-4% target range. April trade data will be reported Friday. Exports are expected at -2.2% y/y vs. -9.1% in March, while imports are expected at -8.1% y/y vs. -2.7% in March. At the last policy meeting May 18, the central bank kept rates steady at 6.25% and signaled a pause in the tightening cycle. However, the bank warned of upside risks to inflation and pledged to hike again if needed. Governor Medalla said that the bank was likely to pause for the next 2-3 meetings and signaled a reluctance to cut as the spread to the U.S. would narrow, adding that BSP may cut if the Fed were to cut. Next meeting is June 22 and rates are expected to remain steady at 6.25%.
Thailand reports May CPI Tuesday. Headline is expected at 1.55% y/y vs. 2.67% in April, while core is expected at 1.57% y/y vs. 1.66% in April. If so, headline would be the lowest since August 2021 and well within the 1-3% target range. Last week, the Bank of Thailand hiked rates 25 bp to 2.0% and maintained a hawkish bias as Assistant Governor Piti said “It’s still appropriate to continue the current strategy that we have adopted.” The bank noted that “The Committee recognizes upside risks to domestic growth, in part owing to forthcoming government economic policies. At the same time, there is a need to monitor the uncertain economic and monetary policy outlook of major economies.” Next meeting is August 2 and another 25 bp hike to 2.25% seems likely, which the market now sees as the peak rate over the next 12 months.
Taiwan reports May CPI Tuesday. Headline is expected at 2.40% y/y vs. 2.35% in April. While the central bank does not have an explicit inflation target, low price pressures should allow it to maintain steady policy for the rest of this year. Next quarterly policy meeting is June 15 and rates are likely to be kept steady at 1.875%. May trade data will be reported Wednesday. Exports are expected at -12.5% y/y vs. -13.3% in April and recent export orders data suggest no relief in sight for the next six months.
Reserve Bank of India meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting April 6, the bank delivered a dovish surprise and kept rates steady at 6.5% vs. an expected 25 bp hike. The decision was unanimous but the bank flagged risks of further tightening by keeping its bias towards “removal of accommodation.” Governor Das stressed “Our job is not yet finished and the war against inflation has to continue. The MPC will not hesitate to take further action as may be required in its future meetings.” Das said that the bank felt it necessary to evaluate the cumulative impact of 250 bp of tightening already seen, adding that the decision is a “pause, not a pivot.” The market says otherwise and is pricing in no more hikes and a potential easing cycle over the next 12 months.