EM FX was mixed last week as markets remain volatile. HUF, COP, and CZK outperformed while CLP, ZAR, and KRW underperformed. The dollar ended last week on a strong note after a solid jobs report underscored the need for the Fed to tighten further. This week brings CPI, PPI, and retail sales data that should send the same message. We believe the dollar should resume climbing when markets price out Fed easing this year.
AMERICAS
Mexico reports February IP Tuesday. IP is expected at 3.1% y/y vs. 2.8% in January. Banco de Mexico releases its minutes Thursday. At that March 30 meeting, the bank hiked rates 25 bp to 11.25% and shifted to more dovish forward guidance by noting “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 it will be a close call. If inflation continues to ease, a pause then is possible and could signal the end of the tightening cycle. Market is pricing in steady rates over the next six months, followed by the start of an easing cycle over the subsequent six months.
Brazil reports March IPCA inflation Tuesday. Headline is expected at 4.71% y/y vs. 5.60% in February. If so, it would be the lowest since January 2021 and back within this year’s 1.75-4.75% target range. At the last COPOM meeting March 22, the central bank left rates steady at 13.75% but raised its inflation forecasts for this year and next and warned of a deteriorating inflation outlook. Central bank officials should feel a little better about the fiscal outlook after the government announced its fiscal framework. If so, it could start the easing cycle in H2, perhaps as early as the August 2 meeting but more likely at the September 20 one. February retail sales will be reported Wednesday and are expected at 1.6% y/y vs. 0.4% in January.
Peru central bank meets Thursday and is expected to keep rates steady at 7.75%. At the last policy meeting March 9, the bank kept rates steady for the second straight month but reiterated that it doesn’t rule out more hikes. However, the rest of the messaging was dovish as it still saw inflation returning to the 1-3% target range by Q4. If headline inflation continues to ease, we may have seen the end of the tightening cycle. Bloomberg consensus sees the start of an easing cycle in Q3, which seems unlikely given that core inflation continues to accelerate.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports February current account data Monday. The deficit is expected at -$8.45 bln vs. -$9.85 bln in January. If so, the 12-month total would riser to -$54.9 bln, the highest since December 2013. The twin deficits will become harder and harder to finance unless interest rates are allowed to rise. IP will be reported Tuesday and is expected at 1.5% y/y vs. 4.5% in January. In a sign that President Erdogan knows that he and his AK party face a serious challenge in the May elections, the minor Democratic Left Party (DSP) just joined the ruling coalition. In the past, AK dominated the political landscape and did not need the support of such minor parties.
Hungary reports March CPI Wednesday. Headline is expected at 24.9% y/y vs. 25.4% in February. If so, it would be the lowest since December but still well above the 2-4% target range. Central bank minutes will also be released Wednesday. At that March 28 meeting, the central bank left the base rate steady at 13.0%. It kept its 2023 inflation forecast steady at 15-19.5% but raised its 2024 forecast to 3-5% vs. 2.3-4.5% previously. Despite government pressure to ease, Deputy Governor Virag pledged to keep policy tight until the bank sees “trend-like improvement” in its risk assessment. Next policy meeting is April 25 and steady rates are expected then. The market is still pricing in the start of an easing cycle over the next three months, which seems very unlikely.
Czech Republic reports March CPI Thursday. Headline is expected at 15.0% y/y vs. 16.7% in February. If so, it would be the lowest since April 2022 but still well above the 1-3% target range. At the last policy meeting March 29, the central bank left rates steady at 7.0%. Governor Michl said that bets on a rate cut were premature and that he sees rats “relatively higher for some time.” Next policy meeting is May 3 and no change is expected then. The market is pricing in one more hike over the next three months followed by the start of an easing cycle over the subsequent three months, which seems very unlikely.
Israel reports March CPI Friday. Headline is expected at 5.1% y/y vs. 5.2% in February. If so, it would be the lowest since October but still well above the 1-3% target range. Last week, Bank of Israel hiked 25 bp to 4.5% and flagged further tightening ahead. It said inflation was broad and high and that policy will be data dependent. The research department saw the policy rate at 4.75% in Q1 2024. While it looks like we're nearing the end of the tightening cycle, the bank is signaling that rates are likely to stay for an extended period. Next policy meeting is May 22 and a 25 bp hike to 4.75% seems likely.
ASIA
China reports March new loan and money data sometime this week. New loans are expected at CNY3.3 trln vs. CNY1.8 trln in February, while aggregate financing is expected at CNY4.5 trln vs. CNY3.2 trln in February. CPI and PPI data will be reported Tuesday. CPI is expected to remain steady at 1.0% y/y while PPI is expected at -2.5% y/y vs. -1.4% in February. With price pressures so low, the PBOC can focus on injecting more stimulus to boost growth without having to worry about fanning inflation. Trade data will be reported Thursday. Exports are expected at -7.3% y/y vs. -9.9% in February and imports are expected at -6.9% y/y vs. -7.5% in February. The data continue to support our belief that the reopening is so far having little impact on regional trade and activity.
Taiwan reports March CPI and trade data Tuesday. Headline inflation is expected at 2.20% y/y vs. 2.43% in February. While the central bank does not have an explicit inflation target, it delivered a hawkish surprise at its last meeting March 23 and hiked rates 12.5 bp to 1.875% vs. no change expected. However, Governor Wang said not to interpret the move as hawkish and instead portrayed it as part of the modest and gradual tightening cycle. The bank cut its growth forecast for this year to 2.21% vs. 2.53% previously and sees inflation peaking in Q1 before falling to 1.76% by year-end. Next policy meeting is June 15 and rates are likely to be kept steady if inflation continues to ease. Elsewhere, exports are expected at -15.3% y/y vs. -17.1% in February and imports are expected at -10.6% y/y vs. -9.4% in February. Again, data here suggest little impact from China reopening.
Bank of Korea meets Tuesday and is expected to keep rates steady at 3.5%. At the last policy meeting February 23, the bank kept rates steady at 3.5% and was the first pause since the bank started the tightening cycle back in April 2022. However, Governor Rhee signaled further hikes are likely by saying “I hope the hold this time isn’t going to be seen as meaning the rate hike stance is over.” He noted that there was one dissent in favor of a 25 bp hike, adding that five of the six board members were open to a peak policy rate of 3.75%. Since then, headline inflation ease to 4.8% y/y in February and then 4.2% in March, the lowest since March 2022 but still well above the 2% target. The market is pricing in a peak policy rate near 3.5% but it will depend on the data going forward.
India reports March CPI and February IP Wednesday. Inflation is expected at 5.72% y/y vs. 6.44% in February, while IP is expected at 5.0% y/y vs. 5.2% in January. If so, inflation would be the lowest since December and back within the 2-6% target range. The RBI last week delivered a dovish surprise and kept rates steady at 6.5% vs. an expected 25 bp hike. The decision was unanimous but the bank flagged risks of further tightening by keeping its bias towards “removal of accommodation.” Governor Das stressed “Our job is not yet finished and the war against inflation has to continue. The MPC will not hesitate to take further action as may be required in its future meetings.” Das said that Das the bank felt it necessary to evaluate the cumulative impact of 250 bp of tightening already seen, adding that the decision is a “pause, not a pivot.” The market says otherwise and is pricing in no more hikes and a potential easing cycle in the next 3-6 months. Next policy meeting is June 8 and no change is expected then.
The Monetary Authority of Singapore meets Friday. While it doesn’t not have an explicit inflation target, easing headline readings and the slowing economy should allow the MAS to keep policy steady this week. It will be a close call and there are risks of a hawkish surprise given the continued rise in core inflation. At the last meeting October 14, the MAS tightened policy by re-centering the midpoint of its S$NEER trading band at its prevailing level then. It noted that “The global economy faces high inflation and lower growth next year. Singapore’s GDP growth will come in below trend in 2023, and downside risks have intensified. At the same time, MAS Core Inflation is expected to remain elevated over the next few quarters, with risks still tilted to the upside. MAS has assessed that, on balance, a further tightening of monetary policy is needed to help ensure that price pressures are dampened over the next few quarters.” Singapore reports Q1 GDP data the same day. GDP is expected flat q/q vs. 0.1% in Q4 while the y/y rate is expected at 0.5% vs. 2.1% in Q4.
