EM FX was mostly lower last week as the broad-based dollar rally continues. RUB, PHP, and INR outperformed while the CEE currencies and BRL underperformed. We expect EM to remain under pressure as global liquidity will continue to tighten this week. The Fed is poised to hike 50 bp and announce accelerated Quantitative tightening this week, Bank of England is expected to hike 25 bp, and markets see better than 50% odds on RBA liftoff. Expected rate hikes this week from Brazil, Chile, Poland, Czech Republic are unlikely to offer much support to their currencies. Official PMI readings from China over the weekend also add to the negative EM backdrop.
AMERICAS
Peru reported April CPI over the weekend. Headline inflation came in at 7.96% y/y vs. 7.80% expected and 6.82% in March. It was the highest since May 1998 and further above the 1-3% target range. The central bank has hiked 50 bp at every meeting since last September. While it is expected to maintain that pace for now, we see growing risks of a hawkish surprise. Next policy meeting is May 12 and another 50 hike to 5.0% seems likely but a 75 bp hike is possible. Bloomberg consensus sees steady rates through H1 and liftoff in Q3. We believe that is still the most likely timeframe. Bloomberg consensus sees the policy rate peaking near 5.25% by year-end but we see upside risks.
Brazil reports February GDP proxy, consolidated budget, and April trade data Monday. Growth is expected at 0.5% y/y vs. flat in January, while a primary deficit of -BRL8.3 bln is expected vs. a surplus of BRL101.8 bln in January. March IP will be reported Tuesday and is expected at -2.8% y/y vs. -4.3% in February. COPOM meets Wednesday and is expected to hike rates 100 bp to 12.75%. At the last meeting March 16, it delivered the expected 100 bp hike to 11.75% and signaled that this May hike could be the last one. Since then, inflation has surprised to the upside and so markets believe the tightening cycle will have to be extended. The swaps market is pricing in another 175 bp of tightening over the next 3 months that would see the policy rate peak near 13.5%.
Chile reports March GDP proxy Monday . Growth is expected at 6.2% y/y vs. 6.8% in January. The central bank meets Thursday and is expected to hike rates 100 bp to 8.0%. However, a couple of analysts polled by Bloomberg see 75 and 150 bp moves. At the last meeting March 29, the bank delivered a dovish surprise with a 150 bp hike to 7.0% vs. 200 bp expected. The swaps market is pricing in another 175 bp of tightening over the next 3 months that would see the policy rate peak near 8.75%. April CPI data will be reported Friday and headline is expected at 10.1% y/y vs. 9.4% in March. if so, it would be the highest since September 1994 and further above the 2-4% target range.
Colombia central bank minutes will be released Tuesday. The central bank just delivered the expected 100 bp hike to 6.0% last week, but the vote was 4-3 with the dissents in favor of a larger 150 bp move. It sees inflation close to 7% by year end and also raised its growth forecast for this year to 5%. Next central bank meeting is June 30 and another 100 bp is expected then, with risks of a 150 bp move. The swaps market is pricing in another 450 bp of tightening over the next 12 months that would see the policy rate peak near 10.5%. April CPI data will be reported Thursday. Headline inflation is expected at 8.80% y/y vs. 8.53% in March. If so, it would be the highest since July 2016 and further above eh 2-4% target range.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports March PPI Monday. PPI has accelerated over the course of the past year or so to a multi-year high of 22.4% y/y. This suggests CPI will also continue to accelerate from the already lofty 8.5% y/y in March. The central bank last week delivered the expected 100 bp hike in the base rate to 5.4% as well as the expected 30 bp hike in the 1-week deposit rate to 6.45% and warned that rates would rise further. The swaps market is pricing in another 140 bp of tightening over the next 12 months that would see the base rate peak near 6.80% but we see upside risks. Retail sales will be reported Wednesday and are expected at 11.6% y/y vs. 9.8% in February. IP will be reported Friday and is expected at 3.1% y/y WDA vs. 4.5% in February.
Turkey reports April CPI and PPI data Thursday. Headline inflation is expected at 67.80% y/y vs. 61.14% in March, core is expected at 52.90% y/y vs. 48.39% in March, and PPI is expected at 121.90% y/y vs. 114.97% in March. If so, headline would be the highest since February 2002 and further above the 3-7% target range. Next central bank policy meeting is May 26 and rates are likely to remain steady at 14%. That said, trouble is brewing. Last week, reports emerged that policymakers are working on a scheme to attract foreign investment. This is the first sign that Turkey is in need for foreign inflows but until the central bank returns to an orthodox policy framework, we do not think the scheme will be very attractive.
Czech National Bank meets Thursday and is expected to hike rates 50 bp to 5.5%. At the last meeting March 31, the bank delivered the expected 50 bp hike to 5.0%. Since then, March inflation came in at 12.7% y/y, the highest since May 1998 and further above the 1-3% target range. The swaps market is pricing in another 75 bp of tightening over the next 12 months that would see the policy rate peak near 5.75% but we see upside risks.
National Bank of Poland meets Thursday and is expected to hike rates 100 bp to 5.5%. However, a few of the analysts polled by Bloomberg look for smaller cuts of 50 or 75 bp. Minutes to the April 6 meeting will be released Friday. At that meeting, the bank delivered a hawkish surprise with a 100 bp hike to 4.5% vs. 50 bp expected. Since then, April inflation came in at 12.3% y/y, the highest since December 1997 and further above the 1.5-3.5% target range. The swaps market is pricing in another 150 bp of tightening over the next 12 months that would see the policy rate peak near 6.0% but we see upside risks.
ASIA
Korea reports April CPI data Tuesday. Headline inflation is expected at 4.4% y/y vs. 4.1% in March. If so, it would be the highest since August 2011 and further above the 2%. Next Bank of Korea meeting is May 26 and rates are likely be kept steady then after the bank just hiked 25 bp to 1.5% at the April 14 meeting. The swaps market is pricing in another 150 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.
Philippines reports April CPI data Thursday. Headline inflation is expected at 4.5% y/y vs. 4.0% in March. If so, it would be the highest since December 2018 and above the 2-4% target range for the first time since last September. The central bank has kept rates steady at 2.0% since it last cut November 2020. While it has been laying the groundwork for liftoff, the bank delivered a dovish hold at its last meeting March 24. Governor Diokno said “The Monetary Board sees scope to maintain the BSP’s policy settings in order to safeguard the momentum of economic recovery amid increased uncertainty even as it continues to develop its plans for the gradual normalization of its extraordinary liquidity measures.” He added that the bank stands ready to address second-round inflation but stressed that sustaining the economic recovery remains its priority. Bloomberg consensus sees steady rates through H1 and liftoff in Q3. We believe that is still the most likely timeframe. March trade data will be reported Friday.
Caixin reports April China services and composite PMI readings Thursday. Services is expected at 41.0 vs. 42.0 in March. If so, the composite PMI would likely be dragged 1-2 points lower from 43.9 in March since its manufacturing PMI came in at 46.0 vs. 48.1 in March. Over the weekend, official PMI readings for April were reported. Manufacturing came in at 47.4 vs. 49.5 in March, non-manufacturing came in at 41.9 vs. 48.4 in March, and the composite came in at 42.7 vs. 48.8 in March. The economy is clearly staggering from Xi’s COVID Zero policy. While policymakers have pledged more stimulus, it is unlikely to be very effective until the hard lockdowns have ended.
Thailand reports April CPI data Thursday. Headline inflation is expected at 4.70% y/y vs. 5.73% in March, while core is expected to remain steady at 2.0% y/y. If so, it would be the first deceleration for headline since December and would move it closer to the 1-3% target range. The central bank has kept rates steady at 0.5% since it last cut May 2020 but has given no hints of liftoff yet. Bloomberg consensus sees steady rates through 2022 and liftoff in Q1 2023. We believe that is still the most likely timeframe. At the last meeting March 30, Assistant Governor Piti said that “It’s not worth weighing on the economy to bring inflation back within the target. We don’t want to use a tool that has wide impact now to deal with short-term problem.”
