by EM may get a little support from a potential OPEC+ deal to limit oil. Even if a deal is struck, the impact is likely to be fleeting as the global growth outlook remains terrible. We remain negative on EM for the time being. AMERICAS Mexico reports March CPI Tuesday, which is expected to rise 3.37% y/y vs. 3.70% in February. If so, inflation would move further towards the 3% target. February IP will be reported Wednesday, which is expected to contract -1.2% y/y vs. -1.6% in January. Central bank minutes will also be released that day. At that emergency meeting, Banxico cut rates 50 bp to 6.5% and noted that it will repeat unscheduled decisions if needed. As such, another 50 bp cut to 6.0% is likely either before or at the next policy meeting May 14. Brazil
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EM may get a little support from a potential OPEC+ deal to limit oil. Even if a deal is struck, the impact is likely to be fleeting as the global growth outlook remains terrible. We remain negative on EM for the time being.
AMERICAS
Mexico reports March CPI Tuesday, which is expected to rise 3.37% y/y vs. 3.70% in February. If so, inflation would move further towards the 3% target. February IP will be reported Wednesday, which is expected to contract -1.2% y/y vs. -1.6% in January. Central bank minutes will also be released that day. At that emergency meeting, Banxico cut rates 50 bp to 6.5% and noted that it will repeat unscheduled decisions if needed. As such, another 50 bp cut to 6.0% is likely either before or at the next policy meeting May 14.
Brazil reports February retail sales Tuesday, which are expected to rise 2.3% y/y vs. 1.3% in January. March IPCA inflation will be reported Thursday, and is expected to rise 3.36% y/y vs. 4.01% in February. If so, inflation would be the lowest since November and move further towards the bottom of the 2.5-5.5% target range for 2020. another 50 bp cut to 6.0% is likely Next COPOM meeting is May 6 and the CDI market is pricing in a 50 bp cut to 3.25%.
Chile reports March trade data Tuesday. March CPI will be reported Wednesday and is expected to rise 3.8% y/y vs. 3.9% in February. If so, inflation would move a little bit further away from the top of the 2-4% target range. The central bank just cut rates 50 bp to 0.5% last week and signaled this is the lower bound and that rates will stay there for an extended period. Next policy meeting is May 6 and no change in policy is expected. The bank has started an asset purchase program and so if the outlook worsens in the coming months, it will likely be expanded.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports February industrial and construction output and trade data Monday. Retail sales will be reported Tuesday and are expected to rise 2.4% y/y vs. 2.1% in January. The economy was already slowing before the impact of the virus hit, which is why the bank cut rates 75 bp to 1.0% last week. EUR/CZK has risen nearly 7% since its first rate March 16, and the bank’s model suggests each one percentage point weakness in the koruna is equivalent to 25 bp of easing.
Bank of Israel meets Monday and is expected to cut rates 15 bp to 0.10%. Late last month, the bank restarted QE for the first time since the financial crisis and committed to purchasing ILS50 bln ($13.6 bln) of government bonds in the secondary market to ease financial conditions and support the economy. As such, a complementary rate cut this week makes sense.
Russia reports March CPI Monday, which is expected to rise 2.7% y/y vs. 2.3% in February. If so, inflation would remain well below the 4% target. Central bank Governor Nabiullina opened the door for more easing last week, saying “There is potential to cut interest rates in 2020. We’ll chose the right moment to start using that potential.” Next policy meeting is April 24 and another 25 bp cut to 5.75% seems likely. Q1 current account data will be reported Thursday and is expected at $14.1 bln vs. $10.2 bln in Q4. February trade data will be reported Friday.
Hungary reports February IP Tuesday, which is expected to rise 1.8% y/y WDA vs. 2.7% in January. It then reports March CPI Wednesday, which is expected to rise 3.6% y/y vs. 4.4% in February. If so, inflation would be the lowest since November and back within the 2-4% target range. The central bank had to take some tightening measures last week to help support the forint, introducing a new 1-week deposit facility offering a 0.90% rate vs. the -0.05% rate on overnight deposits.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.0%. A handful of analysts look for a cut, however. After the 50 bp emergency cut March 17, the central bank seems split on the need for further easing. It has already started asset purchases and we suspect that program will eventually be expanded.
ASIA
Korea reports February current account data Tuesday. Bank of Korea meets Thursday and is expected to keep cut rates 25 bp to 0.50%. However, analysts are split as many analysts are looking for steady rates. CPI rose 1.0% y/y in March vs. 1.1% in February, and moves further below the 2% target. For now, fiscal policy is likely to be the focus but we cannot rule out monetary easing ahead.
Philippines reports March CPI Tuesday, which is expected to rise 2.3% y/y vs. 2.6% in February. If so, inflation would be the lowest since November and further towards the bottom of the 2-4% target range. This should allow the central bank to continue easing. Next policy meeting is May 21 and another 25 bp cut to 3.0% is expected. February trade data will be reported Wednesday, with exports expected to rise 3.5% y/y and imports by 1.8% y/y.
Thailand reports March CPI Tuesday, which is expected to fall -0.55% y/y vs. +0.74% in February. If so, inflation would be the lowest since November and further below the bottom of the 1-4% target range. This should allow the central bank to continue easing. Next policy meeting is May 20 and another 25 bp cut to 0.5% is expected.
Taiwan reports March trade data and CPI Wednesday. Exports are expected to contract -2.2% y/y and imports by -4.8% y/y, while inflation is expected at -0.10% y/y vs. -0.21% in February. The central bank just eased last month at its quarterly policy meeting. Next one is in June and another cut then seems likely.
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A New Stage of the US-China Conflict
The US-China diplomatic relationship may be entering a new stage. The balance of power between the key players – Trump, China, the US Congress, and the Democrats – is changing and their roles are being reshuffled. This might be enough to break the endless cycle of agreements and re-escalations. In short, we think both Trump and Chinese officials have a greater incentive to reach a deal (or at least not to escalate) this time around.
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EM should continue to benefit from the generalized improvement in the global backdrop. Trade tensions have eased whilst the risks of a hard Brexit have fallen, at least for now. Yet recent developments in some major EM countries underscores how important it is for investors to differentiate between the strong credits and the weak ones.
EM Preview for the Week Ahead
EM has had a good month so far as market optimism on a Phase One trade deal remains high. Yet November trade data due out this week should show that until that deal is finalized, the outlook for EM remains weak. Deadline for the next round of US tariffs is December 15 and so talks this week are crucial.
EM Preview for the Week Ahead
Risk assets such as EM got a big boost last week, as tail risks from a hard Brexit and the US-China trade war have clearly ebbed. Still, the initial lack of details on the Phase One deal as well as uncertainty regarding the next phases have left the markets a bit jittery and nervous. Hopefully, this week may bring some further clarity and the good news is that the December 15 tariffs have been canceled.
EM Preview for the Week Ahead
EM FX was mostly firmer last week. ZAR, PEN, and CLP outperformed while TRY, HUF, and CNY underperformed. MSCI EM traded at new highs for the cycle but ran out of steam near the 1110 area, while MSCI EM FX lagged a bit and has yet to surpass its July high. Overall, the backdrop for EM remains constructive but investors must be prepared to differentiate amongst credits in 2020.
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EM has been able to get some traction as markets basically shrugged off the risk-off sentiment after the Iran attacks. This week’s planned signing of the Phase One trade deal should help boost EM further, but we remain cautious. The Iran situation is by no means solved, and we see periodic bouts of risk-off sentiment coming from smaller skirmishes.
EM Preview for the Week Ahead
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