EM FX was mostly softer last week as the broad-based dollar rally continued. COP, CLP, and PLN outperformed while MXN, KRW, and ARS underperformed. Risk off sentiment is likely to dominate this week as concerns about financial stability remain high. As such, we expect EM and other risk assets to remain under pressure. MSCI EM has given up virtually all of its s2023 gains and is on track to test the December 20 low near 943 and then the November 28 low near 923.
AMERICAS
Mexico reports January IP Monday. The economy is clearly slowing under the weight of tighter monetary policy. Yet inflation remains high and so the tightening cycle is not yet over. At the last policy meeting February 9, Banco de Mexico delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected. Next meeting is March 30 and another hike then is expected. The swaps market is pricing in a peak policy rate near 11.5%.
Colombia reports January manufacturing production and retail sales Wednesday. January GDP proxy will be reported Friday. The economy is clearly slowing under the weight of tighter monetary policy. Yet inflation remains high and so the tightening cycle is not yet over. At the last policy meeting January 27, the central bank delivered a dovish surprise with a 75 bp hike to 12.75% vs. 100 bp expected. The bank noted that “With today’s decision, monetary policy is nearing the stance required to cause inflation to slow to its 3% over the medium term.” Next meeting is March 30 and another hike then is expected. The swaps market is pricing in a peak policy rate near 13.5%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports January current account and retail trade data Monday. A deficit of -$10.1 bln is expected vs. -$5.91 bln in December. If so, the 12-month total would rise to -$51.9 bln and would be the highest since February 2014. February central government budget balance will be reported Wednesday. The twin deficits are likely to get worse this year even as external financing dries up.
South Africa reports January manufacturing production Tuesday. Production is expected at -5.4% y/y vs. -4.7% in December. Retail sales will be reported Wednesday and are expected at -2.1% y/y vs. -0.6% in December. The economy is clearly slowing under the weight of tighter monetary policy. Yet inflation remains high and so the tightening cycle is not yet over. At the last policy meeting January 26, SARB delivered a dovish surprise with a 25 bp hike to 7.25% vs. 50 bp expected. Next meeting is March 30 and another hike then is expected. The swaps market is pricing in a peak policy rate between 7.75-8.0%.
Poland reports February CPI Wednesday. Headline is expected at 18.5% y/y vs. 17.2% in January. If so, it would be the highest since July 1996 and further above the 1.5-3.5% target range. January trade and current account data and core CPI will be reported Thursday. Core is expected at 11.9% y/y vs. 11.5% in December. If so, it would be the highest since November 1998. At the policy meeting last week, the central bank kept rates steady at 6.75% and said it was unclear if rates can be cut this year or next. Governor Glapinski said inflation may rise to 18.5% in February but allowing to 6-7% this year. Next meeting is April 5 and no change is expected then. Swaps market is still pricing in the start of an easing cycle over the next 3-6 months but this seems unlikely.
Israel reports February CPI Wednesday. Headline is expected at 5.0% y/y vs. 5.4% in January. If so, it would be the first deceleration since August but would remain well above the 1-3% target range. At the last policy meeting February 20, Bank of Israel delivered a hawkish surprise with a 50 bp hike to 4.25% vs. 25 bp expected. Deputy Governor Andrew Abir said then that future decisions will be “very data dependent.” He added that political uncertainty has affected the shekel and equity markets but noted that the central bank has yet to see any direct impact on capital flows. Next meeting is April 3 and a 25 bp hike to 4.5% seems likely then. Swaps market is pricing in a peak policy rate near 4.75%.
Russia central bank meets Friday and is expected to keep rates steady at 7.5%. At the last meeting February 10, the bank kept rates steady but the forward guidance tilted hawkish as the bank noted “If pro-inflation risks intensify, the Bank of Russia will consider the necessity of a key rate increase at its upcoming meetings.” At the December meeting , Governor Nabiullina gave a hawkish hint in noting that “Due to a growing shortage of personnel, companies’ labor costs are increasing. This is evident among firm operating in industry, transport, logistics and construction. If wages grow at a rate higher than labor productivity, this may lead to an additional increase in prices through business costs.” Since then, inflation eased to 10.99% y/y in February, the lowest since February 2022 but still well above the 4% target.
ASIA
India reports February CPI Monday. Headline is expected at 6.40% y/y vs. 6.52% in January. WPI will be reported Tuesday and is expected at 4.0% y/y vs. 4.73% in January. At the last policy meeting February 8, he Reserve Bank of India hiked rates 25 bp and left the door open to further hikes by maintaining its tightening stance and noting “It is imperative to remain alert on inflation so as to ensure that it remains within the tolerance band and progressively aligns with the target.” Governor Das noted that the “global economic outlook does not look as grim now as it was a while ago but added “We need to see a decisive moderation in inflation.” The tightening bias surprised some observers who were looking for a softer tone. Next meeting is April 6 and another 25 bp hike seems likely. The swaps market is now pricing in a peak policy rate near 7.0%.
China reports January-February IP and retail sales Wednesday. IP is expected at 2.6% y/y vs. 1.3% in December, while sales are expected at 3.5% y/y vs. -1.8% in December. PBOC also sets its 1-year MLF rate Wednesday and is expected to remain steady at 2.75%. Governor Yi Gang will remain in his post, surprising many who thought that he and other policy pragmatists would be replaced for Xi’s third term.
Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%. At the last meeting February 16, the bank kept rates steady at 5.75% and said it sees both headline and core inflation returning to the target range in H2. The tightening cycle has likely ended, as Governor Warjiyo said that there’s “no need for any more hikes.” He added that both headline and core inflation are falling faster than initially expected.
