EM came under severe pressure last week as global yields rose and the dollar rebounded. MSCI EM fell -6.4%, making it the worst week since the one ending last March 20. Similarly, MSCI EM FX fell -0.66%, making it the worse week since the one ending last September 25. The worst performing EM currencies last week were the usual high beta group of TRY, BRL, ZAR, CLP, and MXN. Markets this week will be watching the USD and the UST market closely as these are likely to remain the major drivers globally for the time being.
Brazil reports February trade Monday. Q4 GDP will be reported Wednesday, with the economy expected to grow 2.8% q/q vs. 7.7% in Q3. January IP will be reported Friday and is expected to rise 2.2% y/y vs. 8.2% in December. Next COPOM meeting is March 17 and markets are pricing in a 50 bp hike to 2.5% then. Tightening expectations have picked up in the wake of Bolsonaro’s controversial firing of the Petrobras CEO. The commitment to reform and fiscal austerity is clearly gone, and so inflationary forces are picking up, especially in light of the weaker real. The clean break of the 5.50 area last week sets up a test of the October high near 5.8075.
Banco de Mexico releases its quarterly inflation report Wednesday. Minutes released last week showed that three of the five MPC members see room for further easing after it cut 25 bp in a unanimous decision at the February 11 meeting. Deputy Governor Esquivel said last week that 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 inflation report will be very important.
Colombia reports February CPI Friday. Headline inflation is expected at 1.44% y/y vs. 1.60% in January. If so, it would be the lowest on record and move further below the 2-4% target range. Next policy meeting is March 26 and we think it’s going to be a close call. At the last meeting January 29, the vote was 5-2 to hold rates steady at 1.75% with the two dissents in favor of a 25 bp cut. Since then, the data have come in soft, with the unemployment rate jumping to 19.5% in January.
Turkey reports Q4 GDP data Monday. Growth of 6.9% y/y is expected vs. 6.7% in Q3. February CPI will be reported Wednesday, with headline inflation expected at 15.39% y/y vs. 14.97% in January. If so, it would be the highest since July 2019 and move further above the 3-7% target range. Next policy meeting is March 18 and it’s going to be a close call. If there is an upside inflation surprise and/or the lira continues to weaken, then the central bank becomes more likely to hike rates then. It has remained on hold since the last 200 bp hike back in December.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. Central bank minutes for the February 3 meeting will be released Friday. CPI rose 2.7% y/y in January, still near the center of the 1.5-3.5% target range. While some officials are talking about a possible rate cut, the policy rate of 0.10% leaves little room for easing. While we cannot rule out a rate cut to 0%, we expect the bank to instead continue using asset purchases and FX intervention to provide more stimulus if needed.
Russia reports February CPI Friday. Headline inflation is expected at 5.5% y/y vs. 5.2% in January. If so, it would be the highest since November 2016 and move further above the 4% target. Governor Nabiullina has signaled that the easing cycle is over and has started to talk about the possibility of tightening this year. Next policy meeting is March 19 and rates are expected to remain steady at 4.25%. OPEC+ meets Thursday and is widely expected to boost output given that oil prices are the highest since last January.
Caixin reports China manufacturing PMI Monday. It is expected at 51.4 vs. 51.5 in January. China reported softer official February PMI readings over the weekend. Manufacturing came in at 50.6 vs. 51.0 expected and 51.3 in January, while non-manufacturing came in at 51.4 vs. 52.0 expected and 52.4 in January. As a result, the composite fell to 51.6 from 52.8, the lowest since February. Caixin services and composite PMI readings will be reported Wednesday, with services expected at 51.5 vs. 52.0 in January. On Friday, the annual session of the National People’s Congress begins in Beijing and is expected to run shorter than its usual two weeks due to the pandemic.
Korea reports February trade Monday. Exports are expected to rise 12.0% y/y vs. 11.4% in January while imports are expected to rise 15.3% y/y vs. 3.6% in January. January IP will be reported Tuesday and is expected to rise 6.0% y/y vs. 3.4% in December. February CPI will be reported Thursday, with headline inflation expected at 0.9% y/y vs. 0.6% in January. If so, this would be the highest since September but still well below the 2% target. BOK met last week and kept rates steady at 0.5%, as expected. Governor Lee said he was closely monitoring the recent rise in bond yields. A day later, the bank announced it will buy the equivalent of $6.2 bln of government bonds through H1. Lee stressed that this should not be considered QE. However, if the BOK is forced to lean continuously against the tide of rising yields, then that signals a stronger policy stance than just limiting volatility. Next policy meeting is April 15.
Indonesia reports February CPI Monday. Headline inflation is expected at 1.39% y/y vs. 1.55% in January. If so, it would be the lowest since the cycle low of 1.32% in August and move further below the 2.5-4.5% target range. Next policy meeting is March 18 and rates are expected to remain steady at 3.5%. It seems too soon for another cut as the bank just delivered a 25 bp cut at the February 18 meeting. Further easing is possible later this year but much will depend on how the rupiah is performing.
Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 1.75%. However, a couple of analysts look for a 25 bp cut to 1.5%. At the last meeting January 20, , the bank 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.” January CPI came in at -0.2% y/y vs. -0.8% expected and -1.4% in December. While the bank does not have an explicit inflation target, the lack of any price pressures should allow for another cut this year if needed.
Philippines reports February CPI Friday. Headline inflation is expected at 4.8% y/y vs. 4.2% in January. If so, it would be the highest since December 2018 and move further above the 2-4% target range. Governor Diokno has signaled that the easing cycle is on hold. Next policy meeting is March 25 and rates are expected to remain steady at 2.0%. The nation just got its first shipment of vaccines from China and will begin vaccinations this week, putting it behind some its neighbors.
Thailand reports February CPI Friday. Headline CPI is expected at -0.15% y/y vs. -0.34% in January. If so, it would be the “highest” since February 2020 but still well below the 1-4% target range. With extremely low base effects kicking in for the March-May period, the y/y rates should jump but would likely be viewed as temporary. Next policy meeting is March 24 and rates are expected to remain steady at 0.5%.