EM FX was mostly softer last week as risk off impulses boost the dollar and hurt risk assets. While those impulses have eased, we believe the fundamental backdrop for EM remains difficult. Data this week should show that the mainland Chinese economy continues to slow, while interest rates should continue climbing as global liquidity continues to tighten. With last week’s drop to a new cycle low near 983, charts suggest MSCI EM will test the March 2020 low near 752.
Brazil reports March consolidated budget data Monday. A primary deficit of -BRL3.2 bln is expected vs. a surplus of BRL3.5 bln in February. If so, the 12-month total would be BRL124.4 bln, the largest since May 2012. Despite slowing growth, rising interest rates, and election-related spending, the fiscal accounts continue to improve. Current account, FDI, and monthly GDP data will be reported sometime this week. The central bank is nearing the end of the tightening cycle. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 13.75%. Next policy meeting is June 15 and the CDI market is pricing in a 50 bp hike to 13.25%.
Colombia reports Q1 GDP data Monday. The q/q rate is expected at 0.5% vs. 4.3% in Q4, while the y/y rate is expected at 7.7% vs. 10.8% in Q4. March data came in stronger than expected and so there are upside risks to Q1 GDP. The bank delivered the expected 100 bp hike to 6.0% April 29 and noted that internal demand was growing at an unsustainable pace. It noted that the policy rate is getting closer to neutral but clearly, a restrictive policy is needed. April CPI came in at 9.23% y/y vs. 8.80% expected and 8.53% in March, the highest since July 2000 and further above the 2-4% target range. The swaps market is pricing in another 425 bp of tightening over the next 12 months that would see the policy rate peak near 10.25%.
Chile reports Q1 GDP and current account data Wednesday. The q/q rate is expected at -0.4% vs. 1.8% in Q4, while the y/y rate is expected at 7.9% vs. 12.0% in Q4. Central bank minutes will be released Friday. At the May 5 meeting, the bank delivered a hawkish surprise by hiking rates 125 bp to 8.25% vs. 100 bp expected. It warned that inflation trends were worse than expected, suggesting further tightening ahead. Since then, May CPI came in at 10.5% y/y vs. 10.1% expected and 9.4% in March. This was the highest since August 1994 and further above the 2-4% target range. Next policy meeting is June 7 and we expect another 125 bp hike to 9.5%.
Turkey reports March current account data Monday. A deficit of -$5.7 bln is expected vs. -$5.15 bln in February. If so, the 12-month total would rise for the fourth straight month to -$24.2 bln, the highest since July 2021. We believe external financing will become a serious problem for the nation, especially as reports suggest little interest in its recent scheme to attract foreign investment with guaranteed return local bonds. The lira is trading at the weakest level since December near 15.50 and, absent any change in monetary policy, remains on track to test that month’s low near 18.36. Next policy meeting is May 26 and rates are likely to remain steady at 14%.
Israel reports Q1 GDP Monday. Annualized growth of 2.3% is expected vs. 17.8% in Q4. Over the weekend, it reported April CPI at 4.0% y/y as expected and up from 3.5% in March. This was the highest since June 2011 and further above the 1-3% target range. The bank just delivered a hawkish surprise at the last meeting April 11 by starting liftoff with a 25 bp hike to 0.35% vs. 15 bp expected. At that time, the bank saw the policy rate at 1.5% in Q1 23. Of note, the swaps market is pricing in 175 bp of tightening over the next 12 months followed by another 25 bp in the subsequent 12 months that would see the policy rate peak near 2.35%. Next meeting is May 23 and another 25 bp hike seems likely.
Poland reports core CPI Monday. It is expected at 7.6% y/y vs. 6.9% in in March. Q1 GDP data will be reported Tuesday. The q/q rate is expected at 1.8% vs. 1.7% in Q4, while the y/y rate is expected at 8.2% vs. 7.3% in Q4. April IP and PPI will be reported Friday. IP is expected at 16.3% y/y vs. 17.3% in March, while PPI is expected at 20.3% y/y vs. 20.0% in March. Central bank Governor Glapinski was just appointed to another six-year term. It was reportedly a struggle to drum up support for him due to high inflation, with one poll showing 60% of Poles believe the government and central bank are responsible for rising mortgage payments and another showing over 70% did not want a second term for Glapinski.
South Africa reports April CPI and March retail sales Wednesday. Headline inflation is expected to remain steady at 5.9% y/y while core is expected to remain steady at 3.8% y/y. Sales are expected at 1.5% y/y vs. -0.9% in February. South African Reserve Bank meets Thursday and is expected to hike rates 50 bp to 4.75%. A few analysts look for a 25 bp move. At the last meeting March 24, the vote to hike 25 bp was 3-2 with the two dissents in favor of a 50 bp move. The bank warned that inflation is likely to breach the 3-6% target range in Q2 and raised its 2022 inflation forecast to 5.8% vs. 4.9% previously. Its repo rate forecasts were tweaked modestly to 5.06% by end-2022 vs. 4.91% previously, 6.1% by end-2023 vs. 5.84% previously, and 6.68% by end-2024 vs. 6.55% previously. That is an even more aggressive rate path than we expected for a country that still has 35% unemployment and is struggling to grow.
China reports April IP and retail sales Monday. IP is expected at 0.5% y/y vs. 5.0% in March, while sales are expected at -6.6% y/y vs. -3.5% in March. PBOC also sets its 1-year MLF rate Monday. Despite the weak new loan and aggregate financing reported Friday, consensus sees the MLF rate kept steady at 2.85%. However, nearly half of the 25 analysts polled by Bloomberg see between 5-15 bp of easing. Commercial banks will set their 1- and 5-year Loan Prime Rates Friday and will take their cue from the PBOC’s MLF decision. In perhaps a sign of things to come, PBOC cut the mortgage rate for first-time buyers to as low as 4.4% vs. 4.6% previously. The bank said the cut was aimed at supporting housing demand and will “promote the stable and healthy development of the property market.”
Philippines central bank meets Thursday and is expected to keep rates steady at 2.0%. However, nearly half the 15 analysts polled by Bloomberg see a 25 bp hike. At the 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. April CPI came in at 4.9% y/y, the highest since December 2018 and above the 2-4% target range.
Taiwan reports April export orders Friday. Orders are expected at 8.8% y/y vs. 16.8% in March. If so, orders would be the slowest since June 2020. Regional data are starting to reflect the impact of the deeper than anticipated slowdown in mainland China, as its COVID Zero policy has led to lockdowns that have disrupted already damaged supply chains. TWD is very correlated with CNY; with the yuan likely to continue weakening due to monetary policy divergences, TWD is likely to be dragged lower too.