EM FX did surprisingly poorly last week as the dollar was largely on its back foot. In particular, MXN and ZAR underperformed and we believe these two should be watched as possible canaries in a coal mine for a breakdown in risk sentiment. For now, steeper yield curves in most major economies are being digested well by the markets, with global equity markets at or near record highs. The global reflation trade should remain positive for EM and commodity prices this week.
AMERICAS
Brazil reports mid-February IPCA inflation and January current account data Wednesday. Inflation is expected at 4.59% y/y vs. 4.30% in mid-January. If so, it would be the highest since May 2019 and closer towards the top of the 2.25-5.25% target range. Next COPOM meeting is March 17 and markets are pricing in the start of a tightening cycle with a 25-50 bp hike. January consolidated budget data will be reported Friday, where a primary surplus of BRL49.6 bln is expected vs. a -BRL51.8 bln deficit in December.
Mexico reports mid-February CPI Wednesday. Headline inflation is expected at 3.88% y/y vs. 3.33% in mid-January. If so, it would be the highest since October and closer to the top of the 2-4% target range. Q4 current account data and Banco de Mexico minutes will be released Thursday. At that meeting, the bank resumed its easing cycle with a unanimous decision to cut 25 bp to 4.0%. Since then, Deputy Governor Esquivel said he saw scope for two more cuts this year, with one possible at the next meeting March 25. He did warn that an expected spike in headline inflation due to higher fuel prices could delay that cut and so the minutes will be very important. January trade will be reported Friday.
Chile reports January retail sales, manufacturing production, and unemployment Friday. Sales are expected to rise 6.0% y/y vs. 10.4% in December, manufacturing is expected to fall -3.0% y/y vs. 0.4% in December, and unemployment is expected to remain steady at 10.3%. The economy started the year off facing headwinds. However, lockdowns have begun easing with only 9.2% of the population affected now vs. 17.7% previously. Next central bank meeting is March 30 and no change is expected then.
EUROPE/MIDDLE EAST/AFRICA
Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. At its last meeting January 4, the bank upgraded its growth forecasts to 6.3% this year and 5.8% next year under a rapid vaccination program but still projected that its policy rate would be in the 0.0-0.10% range in one year’s time. Until a workable government is sworn in, the burden of stimulus falls on the central bank and so it will likely continue its efforts to weaken the shekel. Ahead of the decision, Israel reports December manufacturing production.
South Africa reports Q4 unemployment Tuesday. It is expected to rise to a record high 32.0% from 30.8% in Q3. Finance Minister Mboweni presents the 2021/22 budget Wednesday and will likely signal further delays to its effort to stabilize its debt trajectory to beyond the current plan for 2025/26. January PPI will be reported Thursday and is expected to rise 3.2% y/y vs. 3.0% in December. It then reports January money and loan growth, trade, and fiscal data Friday. Next SARB policy meeting is March 25. CPI rose 3.2% y/y in January, near the cycle lows and at the bottom of the 3-6% target range. The vote was 3-2 to keep rates steady at the January meeting. The bank said then that its models still show two hikes this year, but we see risks of another cut of the economy remains weak.
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 0.6%. CPI rose 2.7% y/y in January, remaining at the cycle lows and in the bottom half of the 2-4% target range. However, the bank has warned that inflation may temporarily rise above target in H1. This suggests the bank is unlikely to tighten policy in reaction to this acceleration unless it turns into something more than temporary.
Turkey reports January trade data Friday. A deficit of -$3.1 bln is expected vs. -$4.53 bln in December. The external accounts have deteriorated but are being easily financed as high interest rates attract foreign inflows. However, any loss of confidence in the central bank’s commitment to orthodox policy would be dangerous. The bank just left rates steady at 17% last week and pledged to tighten more if needed. Next policy meeting is March 18 and much will depend on February CPI data out March 3.
ASIA
Korea reports trade data for the first 20 days of February Monday. During the first 10 days of February, exports rose 69.1% y/y while daily average exports during the same period rose 39.3% y/y. Strength is noteworthy since the timing of the Lunar New Year holiday would tend to boost y/y numbers for January and depress them in February. Bank of Korea meets Thursday and is expected to keep rates steady at 0.5%. CPI rose 0.6% y/y in January, well below the 2% target. At the last policy meeting January 15, Governor Lee stressed that it’s too soon to consider changing its policy stance as the pandemic continues and restrictions remain in place. We believe monetary policy will be kept loose throughout this year, with fiscal policy carrying the load if additional stimulus is needed.
Singapore reports January CPI Tuesday. Headline is expected to rise 0.1% y/y vs. flat in December, while core is expected to fall -0.2% y/y vs. -0.3% in December. While the MAS does not have an explicit inflation target, low price pressures should allow it to keep policy unchanged at its April policy meeting. It noted at its last meeting in October that “As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time.” January IP will be reported Friday and is expected to rise 3.6% y/y vs. 14.3% in December.
Malaysia reports January CPI Wednesday. Headline is expected to fall -0.8% y/y vs. -1.4% in December. While the central bank does not have an explicit inflation target, ongoing deflation risks as well as widening lockdowns warn of an eventual rate cut this year. At its last meeting January 20, Bank Negara Malaysia kept rates steady at 1.75% but left the door open for further easing by noting that policy going forward “will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth.” Next policy meeting is March 4. Trade will be reported Friday, with exports expected to rise 7.6% y/y vs. 10.8% in December and imports expected to rise 1.8% y/y vs. 1.6% in December.
Taiwan reports January export orders Wednesday. Orders are expected to rise 46.1% y/y vs. 38.3% in December. As noted above, the timing of the Lunar New Year holiday would tend to boost y/y numbers for January and depress them in February. Top US officials have approached Taiwan for help alleviating the global semiconductor shortage. Reports suggest the US auto industry has asked the White House to work with foreign chipmakers and governments to allocate more of their supplies to the US. IP will be reported Thursday and is expected to rise 19.15% y/y vs. 9.9% in December. Q4 current account data will be reported Friday.
India reports Q4 GDP data Friday. Growth is expected at 0.5% y/y vs. -7.5% in Q3. After the massive fiscal stimulus package announced for the upcoming fiscal year, growth should pick up significantly. At some point this year, we believe the RBI will add some more monetary stimulus too. Next policy meeting is April 7 and a cut is possible if inflation continues to ease. CPI rose 4.06% y/y in January, the lowest since September 2019 and near the middle of the 2-6% target range.
