EM FX was mixed last week. CLP, COP, and HUF outperformed while BRL, THB, and ARS underperformed. Despite the strong U.S. data reported, the dollar was unable to build on its recent gains. We believe underlying strength in the U.S. economy is likely to continue, making it harder for the Fed to contemplate an easing cycle anytime soon. Furthermore, inflation data this week should underscore this message, which in turn should keep the dollar rally going.
AMERICAS
Chile reports March CPI and trade data Monday. Headline inflation is expected at 3.9% y/y vs. 4.5% in February. If so, it would almost reverse last month’s acceleration from 3.8% in January and move back within the 2-4% target range. At the last meeting April 2, the bank cut rates 75 bp to 6.5% by a unanimous decision. However, the bank signaled a more cautious approach ahead and said easing will depend on the economic outlook and the inflation path. Next policy meeting is May 23, and the size of the cut will depend on how inflation and the peso develop. The market is pricing in 75 bp of easing over the next three months and a total 150 bp of easing over the next year that would see the policy rate bottom at 5.0%.
Mexico reports March CPI Tuesday. Headline is expected at 4.50% y/y vs. 4.40% in February, while core is expected at 4.63% y/y vs. 4.64% in February. If so, headline would remain stuck above the 2-4% target range. That didn’t stop Banco de Mexico from starting the easing cycle March 21 with a 25 bp cut. Minutes from that meeting were very cautious. One member saw room for “fine tuning” but not a rate cutting cycle, while another saying rate cuts to be made on a meeting-by-meeting basis. One member said monetary policy is being challenged by wage hikes, while another said it is being tested by expansive fiscal policy. Next meeting is May 9, and the decision then will depend on whether inflation resumes its downward path. The market is pricing in 25 bp of easing over the next three months and another 25 bp over the subsequent three months. February IP will be reported Thursday and expected at 3.2% y/y vs. 2.9% in January.
Brazil reports March IPCA inflation Wednesday. Headline inflation is expected at 4.00% y/y vs. 4.50% in February. If so, this would be the lowest since July 2023 and further within the 1.5-4.5% target range. At the last COPOM meeting March 20, the central bank cut rates 50 bp to 10.75% and committed to a cut of a “similar magnitude” at the next meeting May 8 only, implying smaller cuts after that. Due to the more hawkish tone, the swaps market is pricing in 75 bp of total easing over the next three months that would see the policy rate bottom at 10% vs. 9.25% in mid-March. February retail sales will be reported Thursday and expected at 3.8% y/y vs. 4.1% in January.
Peru central bank meets Thursday and is expected to keep rates steady at 6.25%. At the last meeting March 7, the bank delivered a hawkish surprise and kept rates steady at 6.25% vs. an expected 25 bp cut after February inflation unexpectedly accelerated to 3.29% vs. 3.02% in January. This was the first hold since the easing cycle began last September. Since the last meeting, March inflation came in at 3.05% y/y vs. 2.80% expected and remains above the 1-3% target range, which warrants another hold this week.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Poland releases minutes of its March meeting Monday. At the March 6 meeting, the bank kept rates steady at 5.75% and Governor Glapinski said inflation was certain to rise in H2. Last week, the bank kept rates steady again and Glapinski said a rate cut was not discussed and stressed that no MPC members are talking about rate cuts in 2024. The market is pricing in nearly 50 bp of rate cuts over the next 12 months. We see risks that the NBP delivers more easing than is currently priced in, as inflation is running below the 2.5% target and domestic demand activity remains weak. Nevertheless, escalating tension between the government and the central bank governor complicates the policy rate path projection.
Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. However, the market is split as nearly half the analysts polled by Bloomberg see a 25 bp cut to 4.25%. At the last meeting February 26, the bank delivered a hawkish surprise and kept rates steady at 4.5% vs. an expected 25 bp cut. Governor Yaron warned of the inflationary risks from fiscal policy but said the bank can continue cutting rates if inflation stabilizes. The market is pricing in 50-75 bp of easing over the next year that would see the policy rate bottoming between 3.75-4.0%.
Czech Republic reports March CPI Wednesday. Headline inflation is expected to fall a tick to 1.9% y/y. If so, it would be the lowest since April 2018 and below the midpoint of the 1-3% target range. At the last policy meeting March 20, the central bank cut rates 50 bp to 5.75% by a 5-2 vote, with the dissents in favor of a larger 75 bp move. It warned that the outlook is “modestly inflationary” and suggests larger rate cut increments are unlikely. Minutes showed that “In the debate, a majority of the board members’ emphasized the upside risks to inflation at the forecast horizon and the effort not to surprise the financial market.” The swaps market is pricing in 175 bp of total easing over the next year.
Hungary central bank releases its minutes Wednesday. At the March 26 meeting, the bank cut the base rate 75 bp to 8.25%, as expected. However, Deputy Governor Virag said “We’ve entered a new phase of monetary policy. In the second quarter, the rate-cut pace will slow.” However, he added that market expectations for a policy rate of 6.5-7.0% by mid-year were “realistic.” The next three meetings are April 23, May 21, and June 18. If the bank cuts 50 bp at each, the policy rate would be 6.75% by mid-year. However, the market is pricing in only 75-100 bp of total easing over the next three months. March CPI will be reported Thursday and headline is expected to fall two ticks to 3.5% y/y. If so, it would be the lowest since February 2021 and further within the 2-4% target range.
ASIA
China reports March money and new loan data sometime this week. New loans are expected at CNY3.7 trln vs. CNY1.456 trln in February, while aggregate financing is expected at CNY4.844 trln vs. CNY1.521 trln in February. Policymakers will not (and cannot) be relying on debt-fueled fiscal stimulus to boost growth. At the same time, monetary policy is reaching the limits of what it can do in a deflationary environment and so the 5% growth target for this year will be difficult to meet. CPI and PPI will be reported Thursday. CPI is expected at 0.4% y/y vs. 0.7% in February, while PPI is expected at -2.8% y/y vs. -2.7% in February. If so, it would be the deepest PPI deflation since November and suggests upside for CPI inflation is limited. March trade data will be reported Friday. Exports are expected at -1.8% y/y vs. 5.6% in February, while import are expected at 1.0% y/y vs. -8.2% in February.
Philippines central bank meets Monday and is expected to keep rates steady at 6.5%. March CPI was reported last week at 3.7% y/y, accelerating for the second straight month to the highest since December. At the last meeting February 15, the bank kept rates steady. However, the tone tilted less hawkish as it noted “The risks to the inflation outlook have receded but remain tilted toward the upside” and added that it was “appropriate to keep policy settings unchanged in the near term.” The swaps market is pricing in the start of an easing cycle over the next three months as well as 125 bp of total easing over the next year.
Taiwan reports March CPI Tuesday. Headline inflation is expected at 2.53% y/y vs. 3.08% in February. If so, it would partially reverse last month’s acceleration from 1.80% in January. While the central bank does not have an explicit inflation target, rising price pressures led it to deliver a hawkish surprise at the last meeting March 21, when it hiked rates 12.5 bp to 2.0% vs. no change expected. Next meeting is June 13, and no change is expected then if inflation continues to ease. March trade data will be reported Wednesday. Exports are expected at 7.5% y/y vs. 1.3% in February, while import are expected at -0.9% y/y vs. -17.8% in February.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 2.5%. However, nearly a third of the analysts polled by Bloomberg look for a 25 bp cut to 2.25%. At the last meeting February 7, the bank kept rates steady despite heavy jawboning for a cut by the government. However, it was a dovish hold as the 7-2 vote was the first split in nearly a year and a half. The two dissents favored a 25 bp cut and so the bank took the first steps toward an easing cycle. While outright deflation makes a strong case for easing, ongoing interference by the government is troubling. Of note, the swaps market is pricing in 25 bp of easing over the next three months.
Monetary Authority of Singapore meets Friday and is expected to keep policy steady. At the last meeting January 29, the MAS kept policy on hold as “Core inflation is likely to remain elevated in the earlier part of the year but should decline gradually and step down by” Q4. It added that “Lower imported costs and a slower pace of domestic cost increases should underpin the moderating trend in inflation.” Since then, both headline and core inflation accelerated sharply to 3.4% y/y and 3.6% y/y, respectively. While the MAS does not have an explicit inflation target, sticky inflation should keep it on hold this week. Advance Q1 GDP data will be reported at the same time, with growth expected at 0.6% q/q vs. 1.2% in Q4.
Bank of Korea meets Friday and is expected to keep rates steady at 3.5%. At the last meeting February 22, the bank kept rates steady. While one board member was open to a rate cut, Governor Rhee stressed that “The direction of rate policy will become clear only when we become confident inflation is going to trend as we projected. If inflation slows as expected, our policy room will grow. But if it doesn’t, we should think of other methods, too.” He added that a rate cut in H1 was unlikely. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.
India reports March CPI and February IP Friday. Headline inflation is expected at 4.85% y/y vs. 5.09% in February. If so, it would be the third straight month of deceleration to the lowest since May 2023. At last week’s policy meeting, the Reserve Bank of India delivered another hawkish hold. The policy rate was kept steady at 6.50% by a 5-1 vote and the bank maintained its policy stance of “withdrawal of accommodation.” Varma dissented for a second consecutive meeting in favor of lower rates. Governor Das said the MPC remain vigilant to upside risks to inflation. The market sees steady rates over the next six months, followed by 25 bp of easing over the subsequent six months. Elsewhere, IP is expected at 6.1% y/y vs. 3.8% in January.
