EM Preview for the Week of April 17, 2022

April 17, 2022

EM FX was mostly softer last week as the dollar extended its broad-based gains.  COP, TRY, SGD, and MXN outperformed while RUB, PHP, TWD, and ARS underperformed.  U.S. yields are likely to continue rising this week and this should lead to further dollar gains.  Meanwhile, data out of China are expected to show ongoing weakness and that is negative for EM, especially emerging Asia.    


Brazil data remains delayed due to the civil servants strike that began April 1.  Central bank workers are demanding a 26.3% pay hike to help offset the inflation seen since the last wage adjustment back in 2019. As one Bloomberg columnist noted, “There’s an irony here -- central bankers going on strike because of high inflation is like police going on strike because of high crime.”  Reports suggest President Bolsonaro will offer a 5% pay hike starting in July, which would increase spending by BRL6.3 bln.  Only BRL 1.7 bln reais has been set aside in the budget and so the additional BRL4.6 bln will have to be offset by cuts in other areas to comply with the spending cap law.  This offer strikes us as too low given demands for 26.3% and IPCA inflation running at 11.3% y/y in March.  February current account, FDI, and budget data have all been delayed. 

Colombia reports February GDP proxy Monday.  Growth is expected at 7.2% y/y vs. 7.8% in January.  If so, growth would be the slowest since February 2021.  Of note, retail sales and manufacturing production came in weaker than expected and so we see downside risks for GDP as well.  The central bank has hiked rates a total of 325 bp since October, with the last move being 100 bp to 5.0% vs. 150 bp expected.  The bank spoke of uncertainty then, suggesting it is growing more concerned about the slowing economy.  However, it acknowledged that tightening “must continue in the coming months.”  Next policy meeting is  April 29 and another 100 bp hike to 6.0% seems likely.  Swaps market sees the policy rate peaking near 9.0% over the next 12 months.  February trade data will be reported Thursday.   

Mexico reports mid-April CPI data Friday.  Headline inflation is expected at 7.51% y/y vs. 7.29% in mid-March.  If so, inflation would continue to move above the 2-4% target range.  Banco de Mexico delivered the expected 50 bp hike to 6.5% in March.  Minutes showed a range of views on further tightening but suggested there is a consensus to continue hiking rates at the current 50 bp pace.  Next policy meeting is May 12 and another 50 bp hike to 7.0% seems likely.  Swaps market sees the policy rate peaking near 9.25% over the next 12 months.  Elsewhere,  it appears that U.S.-Mexico trade will move back towards normal after Texas Governor Abbott halted all truck inspections at the border.  Those inspections had led to a border blockade in protest, all of which severely disrupted the flow of goods across the border. 


South Africa reports March CPI Wednesday.  Headline is expected at 6.0% y/y vs. 5.7% in February, while core is expected at 3.7% y/y vs. 3.5% in February.  If so, headline would be the highest since  March 2017 and right at the top of the 3-6% target range.  The South African Reserve Bank has embarked on a tightening cycle and has signaled quarterly 25 bp hikes through 2022 and 2023.  Next policy meeting is May 19 and another 25 bp hike to 4.5% seems likely.  Meanwhile, flooding has led to significant damage.  South African Chamber of Commerce & Industry warned the floods will deal a “significant” setback to the economic recovery, adding “Many businesses have been lost as their premises, equipment and property has been damaged and this will threaten jobs and livelihoods.  We urge the government to do everything in its powers to assist our businesses to mitigate the risks they are facing.” 

Poland reports March core CPI Tuesday.  Core inflation is expected at 7.0% y/y vs. 6.7% in February.  Industrial output and PPI will be reported Thursday.  Output is expected at 11.6% y/y vs. 17.6% in February, while PPI is expected at 18.1% y/y vs. 15.9% in February.  If so, this suggests upward pressure on CPI will continue.  The central bank delivered a hawkish surprise this month with a 100 bp hike to 4.5% vs. 50 bp expected.  Next policy meeting is May and another 100 bp hike to 5.5% seems likely.  Swaps market sees the policy rate peaking near 5.5% over the next 12 months but we continue to see upside risks.  Real retail sales and construction output will be reported Friday.  Sales are expected at 8.8% y/y vs. 8.1% in February, while output is expected at 14.8% y/y vs. 21.2% in February.   


China reports March retail sales, IP, and Q1 GDP Monday.   Sales are expected at -3.0% y/y vs. 6.7% in the January-February period, while IP is expected at 4.0% y/y vs. 7.5% in the January-February period.  GDP growth is expected at 4.2% y/y vs. 4.0% in Q4, while the q/q rate is expected at 0.7% vs. 1.6% in Q4.  Commercial banks set their 1- and 5-year Loan Prime Rates Wednesday and are expected to cut them 5-10 bp.  Last week, the PBOC kept its 1-year MLF rate steady at 2.85% but instead cut the RRR by 50 bp for large banks and 100 bp for small banks.  More needs to be done, however, as the growth target for this year of “around 5.5%” is looking increasingly unlikely.

Malaysia reports March trade data Monday.  Exports are expected at 10.4% y/y vs. 16.8% in February, while imports are expected at 16.4% y/y vs. 18.4% in February.  March CPI data will be reported Friday.  Inflation is expected at 2.3% y/y vs. 2.2% in February.  While Bank Negara does not have an explicit inflation target, easing price pressures should allow it to remain on hold for the time being.  Bloomberg consensus sees steady rates in Q2 followed by likely liftoff in Q3.  However, this could be delayed if the mainland China slowdown intensifies and hurts regional activity. 

Bank Indonesia meets Tuesday and is expected to keep rates steady at 3.5%.  Headline inflation was 2.64% y/y in March, the highest since April 2020 but still in the lower half of the 2-4% target range.  At the last policy meeting March 17, the bank delivered a dovish hold.  Governor Warjiyo said “We will maintain a low policy rate of 3.5% until there are signs of fundamental inflationary pressures.  I need to emphasize that monetary policy responds to a fundamental increase in inflation which is seen in core inflation.  We don’t respond directly to the increase in volatile food and administered prices inflation.”  Bloomberg consensus sees steady rates in Q2 followed by likely liftoff in Q3.  However, this could be delayed if the mainland China slowdown intensifies and hurts regional activity. 

Taiwan reports March export orders Wednesday.  Orders are expected at 15.5% y/y vs. 21.1% in February.  It’s clear that regional trade remains on a slowing trend, due in large part to the slowdown in mainland China.  Meanwhile, domestic activity is likely to soften after Taiwan reported a record number of daily Covid cases.  Daily infections rose to an all-time high of 1,209 last week, the first time since the global pandemic began that Taiwan has reported more than 1,000 in a day. Health Minister Chen warned that the daily case figures are likely to get much worse.  This is likely to weigh on growth in Q2. 

Korea reports trade data for the first 20 days of April Thursday.  Average daily exports rose 17.7% y/y in the first 10 days of April.  March PPI will also be reported Thursday.  PPI rose 8.4% y/y in February and has fallen three straight months, which suggests CPI may start to ease from the 4.1% y/y peak in March.  Bank of Korea hiked rates 25 bp to 1.5% last week, as expected.  Governor Lee’s successor Rhee Chang-yong has not been confirmed yet and so the meeting was led by acting chairman of the MPC Joo Sang-yong, who said “Big changes have happened since the February meeting.  We concluded the existing inflationary pressures could go on for longer than expected due to the Ukraine situation. So despite the vacancy of the governor position, we had no choice but to respond.” 

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