EM ended the week on a firm note, which should carry over into this week. The biggest near-term risk to EM is the US jobs data on Friday, as the weekly claims data points to another strong gain. Otherwise, the global liquidity backdrop remains EM-supportive.
Thailand reported April CPI earlier today. It rose 0.07% year-over-year. The market expected another decline after the -0.5% in March. This is well below the 1-4% target range. However, growth remains quite robust, averaging close to 3% for all of 2015. Bank of Thailand has been on hold since its last 25 bp cut to 1.5% back in April 2015. If the economy does slow in the coming months, the bank will have the ability to resume easing as needed. Next meeting is May 11, no change expected then.
Indonesia reported April CPI at 3.6%, a little less than the market and down from the 4.5% in March. Bank Indonesia was in the midst of an easing cycle, but stood pat in April. Indeed, it may be on hold until the new benchmark rate goes into effect in August. The next policy meeting is May 19, and no move seems likely.
Brazil reports April trade Monday. It then reports March IP Tuesday, which is expected at -10.9% y/y vs. -9.8% in February. COPOM minutes will be released Thursday. At this last meeting, it tweaked its language to acknowledge “progress” in lowering inflation but not enough to ease yet. Brazil reports April IPCA inflation Friday, which is expected to rise 9.21% y/y vs. 9.39% in March.
Korea reports April CPI Tuesday, which is expected to remain steady at 1.0% y/y. This is well below the 2.5-3.5% target range. The Bank of Korea has been on hold since its last 25 bp cut to 1.5% back in June 2015, but has cut its growth and inflation forecasts for this year twice already. Next policy meeting is May 13, no action is seen then. However, a small minority looks for a 25 bp cut to 1.25% and we acknowledge slight risks for a dovish surprise.
China’s Caixin manufacturing PMI for April will be reported Tuesday, which is expected at 49.8 vs. 49.7 in March. Caixin services and composite PMI will then be reported Thursday.
Turkey reports April CPI Tuesday, which is expected to rise 6.9% y/y vs. 7.5% in March. This would just within the 3-7% target range. The rates corridor was cut 50 bp at the April 20 meeting, and we think an outright cut in the benchmark rate will be seen in Q2. The next policy meeting is May 24.
Hungary reports March retail sales Wednesday, which are expected to rise 5.0% y/y vs. 6.6% in February. It then reports March IP Friday, which is expected to rise 2.5% y/y vs. 1.8% in February. Despite firm real sector data, deflation has returned. CPI at -0.2% y/y in March, well below the 2-4% target range. Further easing is seen at the May 24 meeting after the 15 bp cut this week. However, central bank officials are trying to limit market expectations for more rate cuts.
Taiwan reports April CPI Thursday, which is expected to rise 1.6% y/y vs. 2.0% in March. This is higher than many countries in Asia, but the central bank does not have an explicit inflation target. The central bank has been cutting rates by 12.5 bp per quarter, with the last cut in March taking the policy rate down to 1.50%. With the economy contracting y/y in H2, another 12.5 bp cut is expected at the next meeting June 21.
The Philippines reports April CPI Thursday, which is expected to rise 1.2% y/y vs. 1.1% in March. This is still well below the 2-4% target range. The central bank has been on hold since its last 25 bp hike to 4.0% back in September 2014. However, the economy has remained fairly robust, with GDP growth averaging nearly 6% y/y in 2015. Given how low inflation is, the bank will have leeway to cut rates if the economy slows this year. Next policy meeting is May 12, no action is seen then.
Czech central bank meets Thursday and is expected to keep policy steady. At the March meeting, its forward guidance for maintaining current policies was pushed out “closer” to mid-2017 from H1 2017 previously. Central bankers have continued to discuss the possibility of negative rates, but we think it would take significant deterioration of the economic outlook for this to happen. March retail sales will be reported Friday, which are expected to rise 6.7% y/y vs. 10.5% in February.
Banco de Mexico meets Thursday and is expected to keep rates steady at 3.75%. It has been on hold since the last intra-meeting emergency 50 bp hike to 3.75% in February. CPI rose 2.7% y/y in March, below the 3% target and in the bottom half of the 2-4% target range. Barring a significant collapse in the peso, we think the tightening cycle is over for the time being. Officials have expressed concern about inflation pass-through from the weak peso, but we simply haven’t seen any yet.
Colombia reports April CPI Thursday, which is expected to rise 8.1% y/y vs. 8.0% in March. This is the highest since October 2001 and is double the top of the 2-4% target range. The central bank is in the midst of a tightening cycle, and just hiked 25 bp to 6.75% this month. Next policy meeting is May 27, and another 25 bp hike to 7.0% is expected then.
Polish central bank meets Friday and is expected to keep rates steady at 1.5%. It has been on hold at 1.50% since its last 50 bp cut in March 2015. Almost the entire MPC has been replaced this year by the incoming Law and Justice party, but the last piece of the puzzle may fall into place in June when central bank President Belka will also be replaced. With a new head, we think the bank will likely ease in H2. Deflation risks persist with CPI at -0.9% y/y in March and well below the 1.5-3.5% target range.
Chile reports April CPI Friday, which is expected to rise 4.2% y/y vs. 4.5% in March. Inflation is turning lower. While still above the 2-4% target range, continued disinflation gives the bank leeway to proceed cautiously. We think the tightening cycle is nearing an end. The latest central bank survey shows median expectations for only one 25 bp hike in 2016 and one 25 bp hike in 2017. Next policy meeting is May 17, no change expected then.
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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