EM FX was mostly weaker last week as the dollar mounted a broad recovery on the back of higher U.S. yields. PLN, PEN, and MXN outperformed while BRL, COP, and KRW underperformed. U.S. data this week are expected to show a resilient economy and stubborn price pressures, which should keep upward pressure on yields. If so, EM and other risk assets should remain under pressure.
Mexico reports mid-April CPI Monday. Headline is expected at 6.28% vs. 6.58% end-March and core is expected at 7.76% y/y vs. 8.03% end-March. if so, headline would be the lowest since mid-October 2021 but still well above the 2-4% target range. At the last policy meeting March 30, Banco de Mexico hiked rates 25 bp to 11.25% and noted “Since the last monetary policy meeting, annual headline inflation has decreased more than expected. For its upcoming decision, the Board will take into account the inflation outlook, considering the monetary policy stance already attained.” Next policy meeting is May 18 and if inflation continues to fall, the bank is likely to keep rates steady. Market is pricing in low odds of a hike over the next six months, followed by the start of an easing cycle over the subsequent six months. February GDP proxy will be reported Tuesday and is expected at 4.07% y/y vs. 4.43% in January. March trade data will be reported Thursday. Q1 GDP data will be reported Friday. Growth is expected at 0.8% q/q vs. 0.5% in Q4, while the y/y rate is expected at 3.3% y/y vs. 3.6% in Q4.
Brazil reports March current account and FDI and February retail sales data Tuesday. Sales are expected at 0.8% y/y vs. 2.6% in January, while broad retail sales are expected at -1.9% y/y vs. 0.5% in January. Mid-April IPCA inflation will be reported Wednesday. Headline is expected at 4.21% y/y vs. 5.36% in mid-March. If so, it would be the lowest since and back within this year’s target range of 1.75-4.75%. With the new fiscal framework looking pretty solid, the central bank should be able to start cutting rates in the coming months. May 3 and June 21 seem too soon and so the market is penciling in a 25 bp cut August 2 as the starting point. The market is also pricing in 250 bp of easing over the next 12 months. March central government budget data will be reported Thursday and a primary deficit of -BRL700 mln is expected vs. -BRL41.0 bln in February. Consolidated budget data and February GDP proxy will be reported Friday. A primary surplus of BRL1.6 bln is expected vs. -BRL26.5 bln in February, while GDP is expected at 1.05% y/y vs. 3.03% in January.
Colombia central bank meets Friday and is expected to keep rates steady at 13.0%. However, about a third of the analysts polled by Bloomberg look for a 25 bp hike to 13.25% and one looks for a larger 50 bp move. At the last policy meeting March 30, the central bank hiked rates 25 bp to 13.0% and Governor Villar said inflation data would determine if the tightening cycle has ended. He stressed that it would maintain a restrictive policy for some time and that it’s unclear if it will cut rates this year. Since then, March CPI data showed both headline and core inflation accelerating to new cycle highs. We see risks of a hawkish surprise this week with one last 25 bp hike to 13.25%. We also think the market is wrong to price in the start of an easing cycle over the next six months.
Poland reports March industrial and construction output, real retail sales, and PPI Monday. IP is expected at -2.2% y/y vs. -1.2% in February, construction is expected at 0.5% y/y vs. 6.6% in February, sales are expected at -6.2% y/y vs. -5.0% in February, and PPI is expected at 11.0% y/y vs. 18.4% in February. April CPI will be reported Friday and headline is expected at 15.0% y/y vs. 16.1% in March. if so, it would be the lowest since May but still well above the 1.5-3.5% target range. We do not think inflation can return to target without further tightening and yet the market is pricing in the start of an easing cycle over the next six months. Next policy meeting is May 10 and no change is expected then.
National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. At the last policy meeting March 28, the bank kept the base rate unchanged and said that it would keep the more important 1-day deposit rate steady at 18% until it sees a “trend-like improvement” in Hungary’s inflation outlook. Inflation remains stubbornly high and well above the 2-4% target range and so any thoughts of an easing cycle anytime soon seem misguided.
Turkey central bank meets Thursday and is expected to keep rates steady at 8.5%. However, a couple of analysts polled by Bloomberg look for a 50 bp cut to 8.0%. At the last policy meeting March 23, the bank kept rates steady after cutting 50 bp at the February 23 meeting. It noted that “The Committee assessed that the current monetary policy stance is adequate to support the necessary recovery in the aftermath of the earthquake by maintaining price stability and financial stability.” However, we see some risks of a dovish surprise as this is the last meeting before the May 14 elections. Indeed, President Erdogan said Friday that “As long as this friend of yours remains in power, interest rates won’t rise, interest rates will continue to fall. And you will also see inflation coming down.” March trade data will be reported Friday and a deficit of -$8.6 bln is expected vs. -$12.1 bln in February. If so, the 12-month total would rise to a record high -$117.9 bln.
Singapore reports March CPI Monday. Headline is expected at 5.6% y/y vs. 6.3% in February, while core is expected at 5.1% vs. 5.5% in February. If so, headline would be the lowest since May and core would be the lowest since December. While the MAS does not have an explicit inflation target, falling price pressures amidst slowing growth led it to keep policy steady at this month’s meeting. Next meeting is in October and we expect steady policy then as well. IP will be reported Wednesday and is expected at -6.1% y/y vs. -8.9% in February. If so, it would be the sixth straight monthly contraction.
Taiwan reports March IP Monday. It is expected at -15.0% y/y vs. -8.68% in February. If so, it would be the seventh straight monthly contraction. Q1 GDP data will be reported Friday and is expected at -1.60% y/y vs. -0.41% in Q4. If so, it would be the weakest since Q2 2009. Clearly, China reopening has had little impact on Taiwan’s economy. Given this weak backdrop, markets (including us) were surprised when the central bank unexpectedly hiked rates at its March 23 meeting. Next meeting is June 15 and no change is expected then.
Korea reports Q1 GDP data Tuesday. Growth is expected at 0.3% q/q vs. -0.4% in Q4, while the y/y rate is expected at 1.0% y/y vs. 1.3% in Q4. If so, it would be the weakest y/y rate since Q4 2020. March IP will be reported Friday and is expected at -10.2% y/y vs. -8.1% in February. If so, it would be the sixth straight monthly contraction. Here too, China reopening has had little impact on the economy. Bank of Korea has kept rates steady for two straight meetings but has called it a pause. If the economy continues to weaken, we think the tightening cycle may have ended. Next policy meeting is May 25 and rates are likely to be kept steady again at 3.5%.
China reports official April PMI readings Sunday local time. Manufacturing is expected at 51.5 vs. 51.9 in March. If so, it would be the lowest since January. Yet the non-manufacturing sector continues to benefit from the reopening. The reliance on boosting domestic non-manufacturing activity rather than export-focused manufacturing activity is the major reason why other countries in the region have yet to feel much impact from China reopening.