EM FX was mixed last week as the dollar reasserted its strength late in the week. INR, TRY, and THB were the best performers, while COP, MXN, and ZAR were the worst. If the trend of rising US rates and a stronger dollar continues this week, expect EM FX to remain under pressure. On top of that, record daily global virus numbers are being driven by EM, with India and Brazil the major epicenters. This is likely to contribute to a global K-shaped recovery in which DM and the richer EM countries recover faster than the poor EM countries. As a result, the divergences in economic and asset market performances are likely to continue well into H2.
Brazil reports April trade data Monday. COPOM meets Wednesday and is expected to hike rates 75 bp to 3.5%. IPCA inflation came in at 6.1% y/y in April, the highest since December 2016 and further above the 2.25-5.25% target range. With inflation still rising, the CDI market is looking for another 75 bp hike at the June 16 COPOM meeting. Earlier Wednesday, Brazil reports March IP, which is expected to rise 8.5% y/y vs. 0.4% in February. March retail sales will be reported Friday and are expected to fall -2.4% y/y vs. -3.8% in February.
Colombia central bank releases minutes Monday. Last week, the bank kept rates steady at 1.75% , as expected. However, there was one dissent in favor of a cut after several meetings of unanimous decisions and so the minutes bear watching. The bank then releases is quarterly inflation report Wednesday. April CPI will also be reported Wednesday. Headline inflation is expected at 1.70% y/y vs. 1.51% in March. If so, this would be highest since October but not much above the recent low of 1.49% in November and still well below the 2-4% target range. Political risk is rising after protests forced President Duque to withdraw a controversial tax reform bill.
Mexico reports April CPI Friday. Headline inflation is expected at 6.02% y/y vs. 4.67% in March. If so, this would be the highest since December 2017 and would move further above the 2-4% target range. Banco de Mexico has been on hold since the last 25 bp cut to 4.0% back in February. Officials left open the door for one or two more cuts this year but with inflation so high, this seems unlikely until Q3 at the earliest, if at all. GDP unexpectedly grew 0.4% q/q in Q1, but we think the economy will need more stimulus this year as the impact of the pandemic drags on.
Chile reports April CPI and trade data Friday. Headline inflation is expected at 3.2% y/y vs. 2.9% in March. If so, this would be the highest since April 2020 but still within the 4% target. The central bank has been on hold since the last 50 bp cut to 0.5% back in March 2020. Consensus now sees the first rate hike in Q4, followed by another in Q1 2022, two in Q2 2022, and one in Q3 2022 that would take the policy rate to 1.75% then. The bank just announced measures to limit market volatility ahead of the third round of planned pension fund withdrawals. While local assets are likely to weaken, the funding should lead to another burst of consumption.
Turkey reports April CPI Monday. Headline inflation is expected at 17.30% y/y vs. 16.19% in March. If so, this would be the highest since May 2019 and further above the 3-7% target range. The central bank meets Thursday and is expected to keep rates at 19.00%. It will be under great pressure from Erdogan to cut rates as soon as possible. However, with the lira trading near record lows, a cut now would be inviting trouble and so steady rates seem prudent. After this week, the next policy meetings are June 17 and July 14, with both likely to be very much “live.”
Central Bank of Russia releases its quarterly inflation report Tuesday. April CPI will be reported Friday. Headline inflation is expected at 5.6% y/y vs. 5.8% in March. If so, this would be the first deceleration since May 2020 but would still remain well above the 4% target. The bank has delivered 75 bp of tightening so far and more is expected. Next policy meeting is June 11 and a 25 bp hike to 5.25% is expected. However, we see risks of a hawkish surprise.
National Bank of Poland meets Wednesday and is expected to keep rates at 0.10%. Last week, inflation came in much higher than expected at 4.3% y/y, the highest since March 2020 and above the 1.5-3.5% target range. The bank has flagged this expected spike as temporary and so no policy reaction is expected. That said, markets will be on alert for signs that inflation turns into something more than transitory. Bloomberg consensus sees steady rates through Q1 2022, after which the odds of a hike start to rise very modestly. We think the risks are tilted toward a later lift-off, not sooner. The bank releases minutes from its April 7 meeting Friday.
Czech National Bank meets Thursday and is expected to keep rates at 0.25%. The bank has been walking back its forward guidance for three rate hikes this year. Last week, central bank board member said “Three hikes this year would only be realistic if we saw an uncontrolled economic recovery, which I don’t assume will happen.” Ahead of the decision that day, March retail sales will be reported and are expected to rise 15.8% y/y vs. -4.9% in February. March trade and IP will be reported Friday, with IP expected to rise 12.1% y/y vs. -2.6% in February.
Indonesia reports April CPI Monday. Headline inflation is expected at 1.49% y/y vs. 1.37% in March. If so, this would remain near the recent low of 1.32% in August and still well below the 2.5-4.5% target range. Consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. We concur. Foreign inflows have dried up in recent weeks and so further easing would be risky. Next central bank policy meeting is May 25 and rates are expected to remain steady at 3.5%. Q1 GDP will be reported Wednesday and is expected to contract -0.85% q/q vs. -0.42% in Q4.
Hong Kong reports Q1 GDP data Monday. GDP is expected to grow 0.7% q/q vs. 0.2% in Q4. March retail sales will be reported Tuesday, with volume expected to rise 34.4% y/y vs. 31.7% in February. The local economy continues to benefit from mainland growth. However, HKD sold off last week on new restrictions on the big mainland tech companies (see below). Some of the curbs reportedly related to offshore listing and so may impact IPO activity in Hong Kong .
Korea reports April CPI Tuesday. Headline inflation is expected at 2.1% y/y vs. 1.5% in March. If so, this would be the highest since September 2018 and above the 2% target. Consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. We concur. Next central bank policy meeting is May 27 and rates are expected to remain steady at 0.5%. March current account data will be reported Friday. In a sign of the growing importance of Asia to the White House, President Moon will be the second in person visitor for President Biden on May 21 (following Japan Prime Minister Suga last month). China and North Korea are the likely topics for discussion as regional cooperation picks up.
Philippines reports April CPI Wednesday. Headline inflation is expected at 4.7% y/y vs. 4.5% in March. If so, this would match the 4.7% cycle high in February and move further above the 2-4% target range. Consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. We concur. Next central bank policy meeting is May 13 and rates are expected to remain steady at 2.0%. March trade data will be reported Friday, with exports expected to rise 11.5% y/y vs. -2.3% in February and imports expected to rise 5.1% y/y vs. 2.7% in February.
Bank of Thailand meets Wednesday and is expected to keep rates at 0.50%. However, we expect a dovish hold as bank officials have warned that the most recent viral outbreak may impact its 3% growth forecast for this year. Earlier that day, April CPI will be reported. Headline inflation is expected at 2.64% y/y vs. -0.08% in March. If so, this would be the highest since February 2013 and nearing the top of the 1-3% target range. However, the economy has been hit hard by the pandemic and we expect no policy response from the central bank. Consensus sees steady rates through 2022 and we concur. Next central bank policy meeting is May 5 and rates are expected to remain steady at 0.5%.
Bank Negara Malaysia meets Thursday and is expected to keep rates at 1.75%. Consensus sees steady rates through 2021 with rising odds of a hike as we move into 2022. We concur. Ahead of the decision that day, March IP and manufacturing sales will be reported. IP is expected to rise 8.7% y/y vs. 1.5% in February. While the economy is recovering, concerns remain as the virus numbers rise again. New daily cases topped 3,000 for the first time since February 24 last week, and led to the authorities extending curbs on movement by two weeks in the capital city of Kuala Lumpur and four states. This will surely weigh on the economy in Q2.
Caixin reports April China services and composite PMI readings Friday. Services PMI is expected to fall a tick to 54.2. Last week, Caixin manufacturing PMI unexpectedly jumped to 51.9 from 50.6 in March and so the composite is likely to rise from 53.1 in March. April trade will also be reported Friday, with exports expected to rise 23.5% y/y vs. 30.6% in March and imports expected to rise 43.9% y/y vs. 38.1% in March. China’s mega-companies are coming under scrutiny. Regulators imposed wide-ranging restrictions on the financial arms of 13 companies, including Tencent and ByteDance. This comes after the crackdown on Ant Group. The moves come as the Politburo called for strengthened and improved regulatory supervision. It noted in an official report that “The current economic recovery is unbalanced and unstable,” adding that policymakers will try to achieve more balanced economic growth. It stressed that “It is necessary to make use of the current window of opportunity, when pressure on stable growth is relatively small, to promote economic stability and improvement.”