Despite broad dollar weakness against the majors last week, EM FX was mixed. With dollar strength likely to reassert itself this week in the back of firm US data, the overall investment outlook for EM is likely to remain mixed. Stronger global growth remains positive for EM equities, but EM FX is unlikely to decouple from broad dollar moves, at least for now. Furthermore, idiosyncratic risks are likely to continue for BRL, RUB,TRY, and INR.
Brazil reports February retail sales Tuesday. Sales are expected to fall -2.5% y/y vs. -0.3% in January. The economy is already suffering greatly from the raging pandemic, and rate hikes will only add to the headwinds. Last week, IPCA inflation came in at 6.1% y/y vs. 5.2% in February, the highest since December 2016 and further above the 2.25-5.25% target range. Next policy meeting is May 5 and the CDI market is pricing in a 100 bp move, followed by another 75 bp hike at the June 16 meeting and even more hikes in H2. Investor confidence in the government has been shaken and it will be up to the central bank to help regain it.
Colombia reports February manufacturing production and retail sales Thursday. Production is expected to fall -0.6% y/y and sales by -3.3% y/y. Despite high oil prices, the economy remains weak. Inflation was 1.51% y/y in March vs. 1.56% in February, near the all-time low of 1.49% in November and still below the 2-4% target range. Next policy meeting is April 30 and no change is expected then after the unanimous decision to hold rates steady at the March 26 meeting. Consensus sees some potential for one last cut in Q2 and then steady rates through much of 2021, with odds of a hike rising as we move into Q4 and beyond. We concur.
Turkey reports February current account data Monday. A deficit of -$2.5 bln is expected. If so, the 13-month total would fall slightly to -$47.8 bln. February IP will be reported Tuesday and is expected to rise 8.0% y/y vs. 11.4% in January. The central bank meets Thursday and is expected to keep rates steady at 19.0%. A couple of analysts look for a rate cut. Comments from Erdogan confirm his desire to cut rates rapidly and so there is clear risk of a dovish surprise this week. The economy is suffering greatly from the pandemic and Erdogan is desperate to inject some stimulus quickly.
Czech Republic reports March CPI Tuesday. Inflation is expected to pick up to 2.4% y/y vs. 2.1% in February. If so, it would be the highest since November but still within the 1-3% target range. Minutes from the March 24 meeting saw policymakers acknowledge a longer than expected impact of the pandemic, which would mean a later start to the tightening cycle as well as a slower pace than outlined in their forecasts for three hikes this year starting mid-year. Next central bank policy is May 6 and so we expect a dovish hold that updates its official forward guidance to be more in line with the March minutes.
Israel reports March CPI Wednesday. Inflation is expected to pick up to 0.1% y/y vs. 0.0% in February. If so, it would be the highest since February 2020 but still well below the 1-3% target range. Next central bank policy is April 19 and steady policy is expected. At the last meeting February 22, the bank sounded more upbeat about the economic outlook whilst warning that the pandemic’s “adverse impact on the economy, and particularly on the labor market, is expected to be prolonged.” Rates are likely to be kept at the current rock bottom 0.10% for the foreseeable future, with the bank likely to rely on a weaker shekel for any further monetary stimulus. The bank is also hoping for help on the fiscal side, with Governor Yaron warning that “Without a stable government that operates long term, it’s impossible to advance such plans.” Unfortunately, the recent elections have yet to yield a workable government and so political instability appears likely to continue.
South Africa reports February retail sales Wednesday. Sales are expected to fall -1.7% y/y vs. -3.5% in January. The economy remains weak due to the pandemic and yet the SARB has kept rates steady at 3.5% since the last 25 bp cut in July 2020. At the March 25 meeting, its model suggested a potential rate hike at the next meeting May 20. Of note, the last vote to keep rates was unanimous and shows a shift from previous 3-2 split votes that had dissents pushing for a rate cut. We simply cannot fathom what is in the bank’s model that justifies a rate hike. Inflation of 2.9% y/y in February is below the 3-6% target range, while unemployment was a record high 32.5% in Q4.
China reports March new loan and money data sometime this week. New loans are expected to pick up to CNY2.3 trln from CNY1.36 trln in February, while aggregate financing is expected to pick up to CNY3.7 trln from CNY1.7 trln in February. Loan growth is expected to slow in the coming months after reports that the PBOC asked the major banks to keep new loans in 2021 at roughly the same level as last year. March trade will be reported Tuesday, with exports expected to rise 38.0% y/y and imports by 24.6% y/y. Q1 GDP and March IP and retail sales data will be reported Friday. GDP is expected to grow 18.3% y/y vs. 6.5% in Q4, IP is expected to rise 18.0% y/y, and sales are expected to rise 28.0% y/y. These figures are likely to cool as base effects drop out and policymakers focus on deleveraging.
India reports March CPI and February IP Monday. Inflation is expected at 5.42% y/y vs. 5.03% in February, while IP is expected to fall -3.0% y/y vs. -1.6% in January. If so, inflation would be the highest since November and nearing the top of the 2-6% target range. The RBI just left rates steady last week but began QE. Consensus sees steady policy through 2021, with odds of a hike rising around mid-2022 and beyond. We are not convinced the easing cycle is over, especially after last week’s QE move. March WPI and trade will be reported Thursday. WPI is expected to rise 6.16% y/y vs. 4.17% in February. If so, price pressures are likely to remain high in the coming months.
Singapore reports Q1 GDP Wednesday. The economy is expected to grow 1.5% q/q vs. 3.8% in Q4. The MAS typically meets on the same day as the GDP report. With the regional recovery taking hold, the MAS is likely to maintain its current accommodative stance by keeping its S$NEER trading band unchanged. At its last meeting in October, the MAS provided dovish forward guidance, stating that “As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time.” It warned then of a weak recovery and downside risks from still-challenging global demand, limited travel, a soft labor market, and ongoing public health concerns. Since then, the outlook has clearly improved but not by enough to change the MAS stance. February retail sales will also be reported Wednesday. February trade data will be reported Friday, with NODX expected to rise 2.1% y/y vs. 4.2% in February.
Bank of Korea meets Thursday and is expected to keep rates steady at 0.50%. Inflation was 1.5% y/y in March, the highest since January 2020 but still below the 2% target. At the last meeting February 25, Governor Lee stressed that any talk of withdrawing stimulus at that stage was premature. He downplayed inflation risks, noting that supply-side pressures from commodity prices were unlikely to lead to a sustained rise in inflation. Lastly, Lee said he’s closely monitoring recent rise in bond yields and stressed that the bank stands ready to take action if market volatility increases. Since that meeting, the local curve has steepened 10-15 bp. For now, we believe monetary policy will be kept at current accommodative settings through 2021.