EM Preview for the Week of May 14, 2023

May 14, 2023

EM FX was mostly softer last week as the dollar mounted a broad-based rally. PEN, CLP, and MXN outperformed and eked out small gains while ZAR, CZK, and RON underperformed and weakened significantly. We believe the dollar rally will continue this week as recent data support our view that market expectations for Fed easing will need to be repriced, most likely quite violently.


Colombia reports Q1 GDP data Monday. It is expected at 0.9% q/q vs. 0.7% in Q4, while the y/y rate is expected at 3.6% vs. 2.9% in Q4. If so, this would mark an acceleration of the y/y rate after two straight quarters of deceleration. With the tightening cycle near an end, the growth outlook is likely to improve in the coming quarters. The swaps market sees steady rate for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us.

Brazil reports April retail sales Wednesday. Headline is expected at 0.9% y/y vs 1.0% in February while broad sales are expected at 2.2% y/y vs -0.2 in February. March GDP proxy will be reported Friday and is expected at 3.50% y/y vs. 2.76% in February. With an easing cycle getting closer, the growth outlook is likely to improve in the coming quarters. Next COPOM meeting is June 21 and that seems too soon for a rate cut. The August 2 or September 20 meetings are more likely. The swaps market is pricing in 275 bp of easing over the next 12 months, which seems too aggressive to us

Banco de Mexico meets Thursday and is expected to keep rates steady at 11.25%. However, a few of analysts look for a 25 bp hike to 11.5%. At the last meeting March 30, the bank downshifted to a 25 bp hike and signaled that the cycle is nearing an end as “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.” Since then, both headline and core have continued to fall and so we believe rates are likely to be kept steady this week. The swaps market sees steady rate for the next three months followed by the start of an easing cycle over the subsequent three months, which seems too soon to us.


As of this writing, the final results of the Sunday election in Turkey are not yet in. Early results suggest that incumbent President Erdogan lacks the simple majority needed to avoid a runoff May 28, winning only 49.6% vs. 44.6% for his main rival Kemal Kilicdaroglu. However, the opposition said that its parallel count shows Kilicdaroglu is actually ahead of Erdogan. To say this election is important would be an understatement. Erdogan has driven away a generation of investors with his unorthodox economic policies. He has also been a thorn in NATO’s side by so far vetoing Sweden’s entry. An opposition victory would help start the process whereby Turkey becomes investable and a reliable NATO ally once again but the outcome is by no means assured. Stay tuned.

Israel reports April CPI and trade data Monday. Headline inflation is expected at 4.7%y/y vs. 5.0% in March. If so, it would be the lowest since September but still above the 1-3% target range. At the last policy meeting April 3, the Bank of Israel hiked rates 25 bp to 4.5% and said the rate path would be determined by the data. It warned that inflation is broad and remains high, though it saw some moderation in a number of indicators. Lastly, the research department saw the policy rate averaging 4.75% in Q1 2024, which suggests one more hike and then a period of steady rates. Next policy meeting is May 22 and right now, it’s a toss-up that will be determined in large part by the CPI data. Q1 GDP data will be reported Tuesday and growth is expected at 2.3% annualized vs. 5.3% in Q4.

South Africa reports Q1 unemployment Tuesday. It is expected to rise to 33.0% vs. 32.7%in Q4. If so, it would be the first rise after four straight quarters of improvement from the 35.3% peak in Q4 2021. March retail sales will be reported Wednesday and expected to remain steady at -0.5% y/y. High unemployment and sluggish growth have become entrenched as the economy struggles with ongoing energy shortages. SARB appears to have gotten inflation under control but at a real cost to the economy. At the last policy meeting March 30, the bank delivered a hawkish surprise and hiked rates 50 bp to 7.75% vs. 25 bp expected. The vote was 3-2 with the dissents in favor of a smaller 25 bp move. The bank said future moves are data dependent but since that meeting, inflation has picked up. Next meeting is May 25 and a 25 bp hike seems likely along with risks of a hawkish surprise.


People’s Bank of China sets its key 1-year MLF rate Monday and is expected to remain steady at 2.75%. While the hard data have been very disappointing, we do not think policymakers will rush to inject more stimulus just yet. April IP and retail sales will be reported Tuesday. IP is expected at 10.8% y/y vs. 3.9% in March while sales are expected at 22.0% y/y vs. 10.6% in March. Don’t be fooled by the steep y/y increases as they are due largely to low base effects as the economy struggled under Covid Zero policies last year. Right now, China is facing deflation risks and weak growth that calls for more stimulus, but recent reports of an exploding debt/GDP ratio warrant some caution.

Thailand reports Q1 GDP Monday. It is expected at 1.8% q/q vs. -1.5% in Q4, while the y/y rate is expected at 2.3% vs. 1.4% in Q4. The incoming government will inherit an economy that’s recovering quite nicely after being hit hard by the pandemic. As of this writing, the final results of the Sunday election are not yet in. Early results suggest the opposition Pheu Thai and Move Forward parties have together won more than 280 seats in the 500-seat lower house. This suggests a coalition government between the two is the likely outcome and would be welcomed by the market. However, because the 250 military-appointed seats in the Senate also cast a vote for Prime Minister, the final outcome remains unclear. Of note, the centrist Bhumjaithai party came in third with around 70 seats and so may play king-maker. Stay tuned.

Philippine central bank meets Thursday and is expected to keep rates steady at 6.25%. However, a handful of analysts look for a 25 bp hike to 6.5%. At the last policy meeting March 23, the central bank hiked rates 25 bp to 6.25%, which was a downshift from the 50 bp hike at the previous meeting. Governor Medalla said “Our action will be almost completely driven by our outlook on inflation. In the absence of new shocks, we think we are already moving in the right direction.” He added that if CPI starts to decline m/m, “then we might actually not increase next meeting.” Of note, both March and April CPI came in at -0.2% m/m, which suggests the tightening cycle may be over, at least for now.

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