EM FX was mostly softer last week despite broad dollar weakness against the majors. PEN, COP, and MYR outperformed while ZAR, MXN, and CLP underperformed. EM inflation readings this week are expected to show persistent price pressures, but most EM central banks are reluctant to hike rates further as GDP data are likely to show continued sluggish growth. We expect EM assets to remain under pressure near-term.
AMERICAS
Brazil reports Q1 GDP data Tuesday. Growth is expected at 0.7% q/q vs. 0.0% in Q4, while the y/y rate is expected to pick up two ticks to 2.3%. April IP will be reported Wednesday and is expected ate -0.1% m/m vs. 0.9% in March. May trade data will be reported Thursday. Next COPOM meeting is June 19, and the easing cycle has likely ended due to persistent price pressures and loose fiscal policy. Of note, Finance Minister Haddad said that while he called the 3% inflation target “demanding,” a change was never considered.
Chile reports April GDP proxy Monday. May CPI and trade data will be reported Friday. Headline is expected to pick up a tick to 4.1% y/y. If so, inflation would accelerate for the second straight month to the highest since February and move above the 2-4% target range. At the last meeting May 23, the central bank cut rates 50 bp to 6.0% and signaled further cuts that it said would be data dependent. Next meeting is June 18 and if inflation continues to rise, a 25 bp cut seems more likely than a 50 bp cut. The swaps market is pricing in 100-125 bp of further easing over the next year that would see the policy rate bottom near 4.75-5.0%.
Mexico reports May CPI Friday. Headline is expected at 4.83% y/y vs. 4.65% in April, while core is expected at 4.29% y/y vs. 4.37% in April. If so, headline would accelerate for the third straight month to the highest since January and further above the 2-4% target range. At the last meeting May 9, the central bank kept rates steady at 11.0% and raised its inflation forecasts. It now sees inflation reaching its 3% target in Q4 2025 vs. Q2 2025 previously. Next meeting is June 27 and if inflation continues to rise, another hold is likely then. The swaps market is pricing in 100-125 bp of further easing over the next year. Elections are being held Sunday. As of this writing, the polls were still open, and no official results have been announced.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports May CPI Monday. Headline is expected at 74.80% y/y vs. 69.80% in April, while core is expected at 74.45% y/y vs. 75.81% in April. If so, headline would be the highest since November 2022. At the last meeting May 23, the central bank kept rates steady at 50.0% but tightened liquidity by raising required reverse ratios for lira deposits and limiting the monthly growth of FX loans to 2%. If inflation continues to rise, the bank may be forced into another rate hike, but instead the market is pricing in the start of an easing cycle over the next three months. This seems highly unlikely.
South Africa reports Q1 GDP data Tuesday. Growth is expected at 0.2% q/q vs. 0.1% in Q4, while the y/y rate is expected at 0.8% vs. 1.2% in Q4. Q1 current account data will be reported Thursday. The deficit is expected at -1.9% of GDP vs. -2.3% in Q4. All eyes are on politics after the ANZ’s vote share plunged to 40.2% vs. 57.5% in 2019. It will now have to enter into a coalition government for the first time since the end of apartheid. The best outcome for the markets would be a coalition with the Democratic Alliance, which espouses more market-friendly policies than the Economic Freedom Fighters or Zuma’s MKP. The National Assembly must convene within 14 days to elect a speaker and a president.
National Bank of Hungary releases its minutes Wednesday. At that May 21 meeting, the central bank cut rates 50 bp to 7.25% and reiterated that it “will take decisions on any further reductions in the base rate in a cautious and data-driven manner.” Specifically, Deputy Governor Virag noted again that the base rate will be between a 6.75-7.00% by end-June, adding that room for rate cuts in the second half of this year is “very, very limited.” This implies at most 50 bp of easing at the June policy meeting. The swaps market is pricing in 75 bp of total easing over the next six months.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” MPC members continue to stick to the message of no rate cuts before 2025. In our view, there is room for NBP to ease earlier. The swaps market is pricing in around 50 odds of a 25 bp rate cut over the next six months. However, ongoing tension between the government and the central bank governor complicates the policy rate path projection. Governor Glapinski holds his post-decision press conference Thursday. Minutes to the May 9 meeting will be released Friday. At that meeting, the bank kept rates steady at 5.75%.
ASIA
Caixin reports May manufacturing PMI Monday. Headline is expected to rise two ticks to 51.6. Services and composite PMIs will be reported Wednesday. Services is expected to remain steady at 52.5. Last week, official PMIs came in a bit softer than expected and so there are downside risks to the Caixin readings. May trade data will be reported Friday. Exports are expected at 5.1% y/y vs. 1.5% in April while imports are expected at 4.5% y/y vs. 8.4% y/y in April. China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate domestic demand.
Indonesia reports May CPI Monday. Headline is expected at 2.97% y/y vs. 3.00% in April, while core is expected at 1.85% y/y vs. 1.82% in April. At the last meeting May 22, the central bank kept rates steady at 6.25%. Governor Warjiyo said the bank remains watchful of the implications of high U.S. rates and expects the Fed to cut rates towards year-end. He added that geopolitical tensions are another risk to consider, stressing “Such conditions demand a strong policy response to mitigate the adverse impact of global spillovers, including in Indonesia.” Warjiyo said policy will remain “data dependent.” If the rupiah remains relatively firm, then rates have likely peaked. Next meeting is June 20, and no change is expected then.
Korea reports May CPI Tuesday. Headline is expected to fall a tick to 2.8% y/y and core is expected to fall a tick to 2.2% y/y. If so, headline would be the lowest since January but still well above the 2% target. At the last meeting May 23, the central bank kept rates steady at 3.5%. It raised its 2024 growth forecast to 2.5% vs. 2.1% previously but maintained its inflation forecast at 2.6%. Governor Rhee noted that “We thought the big change in the growth forecast would have a huge impact on inflation, but it wasn’t big enough to change the inflation outlook. That’s big news for us.” Rhee added that “Uncertainties over the timing of a rate cut have grown. If there is confidence that inflation stabilizes, the task of normalizing the rate level would need to be started.” The swaps market still sees steady rates over the next six months, followed by some odds for the start of an easing cycle over the subsequent six months. Next meeting is July 11, and no change is expected then. Q1 GDP data will be reported Wednesday. Growth is expected at 1.2% q/q vs. 1.3% in Q4, while the y/y rate is expected at 3.3% vs. 3.4% in Q4.
Philippines reports May CPI Wednesday. Headline is expected to pick up two ticks to 4.0% y/y. If so, inflation would accelerate for the fourth straight month to the highest since November and right at the top of the 2-4% target range. At the last meeting May 16, the central bank kept rates steady at 6.5% but Governor Remolona began setting the table for a rate cut. He said the bank is starting to see that policy is tighter than necessary and is confident enough to start easing in H2. Next meeting is June 27 and with price pressures still sticky, no change is expected then.
Thailand reports May CPI Wednesday. Headline is expected at 1.20% y/y vs. 0.19% in April, while core is expected to remain steady at 0.37% y/y. If so, headline would be the highest since April 2023 and back within the 1-3% target range. At the last meeting April 10, the central bank kept rates steady at 2.5% by a 5-2 vote, with the dissents in favor of a 25 bp cut, same as the February 7 meeting. The bank expressed concerns about the impact of loose fiscal policy stemming from the government’s cash handout program. Assistant Governor Piti said that the policy rate may not be adjusted if the economic recovery persists. He views the current rate as close to neutral and stressed that “Our monetary policy is not an obstacle to economic growth.” The swaps market is pricing in steady rates over the next six months followed by some odds of a 25 bp cut over the subsequent six months. Next meeting is June 12, and no change is expected then.
Taiwan reports May CPI Thursday. Headline is expected at 2.14% y/y vs. 1.95% in April. At the last meeting March 21, the central bank unexpectedly hiked rates 12.5 bp to 2.0%. Governor Yang said the bank is still in a tightening cycle but added that he saw limited upside for rates in the future. Next meeting is June 13 and with price pressures limited, no change is expected then. However, the swaps market is pricing in solid odds of one more 25 bp hike over the next year. May trade data will be reported Friday. Exports are expected at 9.8% y/y vs. 4.3% in April while imports are expected at 4.8% y/y vs. 6.6% y/y in April.
Reserve Bank of India meets Friday and is expected to keep rates steady at 6.5%. At the last meeting April 5, the central bank kept rates steady at 6.5% and maintained its policy stance of “withdrawal of accommodation.” Importantly, there was no indication the RBI was prepared to loosen policy anytime soon as the vote was again 5-1 to keep rates on hold. Varma dissented for a second consecutive meeting in favor of a rate cut. The swaps market is pricing in steady rates over the next six months followed by the start of an easing cycle over the subsequent six months as inflation is falling towards the mid-point of the RBI’s 2-6% target range.
