by EM and other risk assets stabilized to end the week after Thursday’s selloff, but remain vulnerable. The risks ahead are the same as before, which include a second wave of infections as well as a longer and shallower than expected recovery in global growth. The Fed’s message of low rates as far as the eye can see was balanced by Powell’s grim outlook for unemployment. The liquidity story should remain positive for EM, with the BOE expected to increase its QE this week, but that may not be enough to sustain continued gains in risk assets. AMERICAS Chile central bank meets Tuesday and is expected to keep policy unchanged. The bank quickly cut rates 125 bp in March to the current 0.5%. This is considered the lower bound and so further easing, if needed, would likely
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EM and other risk assets stabilized to end the week after Thursday’s selloff, but remain vulnerable. The risks ahead are the same as before, which include a second wave of infections as well as a longer and shallower than expected recovery in global growth. The Fed’s message of low rates as far as the eye can see was balanced by Powell’s grim outlook for unemployment. The liquidity story should remain positive for EM, with the BOE expected to increase its QE this week, but that may not be enough to sustain continued gains in risk assets.
AMERICAS
Chile central bank meets Tuesday and is expected to keep policy unchanged. The bank quickly cut rates 125 bp in March to the current 0.5%. This is considered the lower bound and so further easing, if needed, would likely be with expanded QE. The central bank is already buying bank bonds in the secondary market but could expand that to include other securities. For now, however, we think the bank remains in wait and see mode. The recent recovery in copper prices should help the economic outlook once the lockdowns end.
Brazil reports April retail sales Tuesday, which are expected to fall -13.9% y/y vs. -1.2% in March. COPOM meets Wednesday and is expected to cut rates 75 bp to a record low 2.25%. IPCA inflation fell to 1.88% y/y in May, the lowest since January 1999 and further below the 2.5-5.5% target range. CDI market is pricing in a 25 bp cut to 2.0% at the August 5 meeting.
EUROPE/MIDDLE EAST/AFRICA
Poland reports April trade and current account data Monday. The central bank meets Tuesday and is expected to keep policy unchanged. The bank surprised markets with a 40 bp cut to 0.1% at the May 28 meeting. As such, we expect policymakers to take a wait and see approach for now, especially as Europe starts to reopen. Minutes will be released Thursday. May industrial output and PPI will be reported Friday. They are expected at -18.0% y/y and -1.5% y/y, respectively.
Israel reports May CPI Monday, which is expected to fall -1.2% y/y vs. -0.6% in April. If so, deflation would be the deepest since May 2007 and fall further below the 1-3% target range. The bank left rate steady at its May 25 meeting. However, it warned that the strong shekel may impact the economy and inflation just as the country reopens. Next policy meeting is July 6 and no change is expected then. Instead, the bank is likely to reaffirm its commitment to intervene in the FX markets to prevent excessive currency appreciation. Q1 GDP will be reported Tuesday.
Russia reports May IP Tuesday, which is expected to contract -8.3% y/y vs. -6.6% in April. Q1 GDP data will be reported Wednesday, with growth expected to remain steady at 1.6% y/y. The central bank then meets Friday and is expected to cut rates 75 bp to 4.75%. However, markets are split as most analysts see either a 50 or 100 bp cut. May real retail sales will also be reported Friday and are expected to contract -16.6% y/y vs. -23.4% in April.
ASIA
China reports May IP and retail sales Monday. The former is expected to rise 5.0% y/y vs. 3.9% in April, while the later is expected to fall -2.3% y/y vs. -7.5% in April. This dichotomy between the manufacturing sector and consumption highlights the problems every country faces when the lockdowns end. That is, the factories may be up and running but consumers are not returning to normal spending patterns as long as the risk of infection remains. Furthermore, an outbreak in Beijing has shown how difficult it to contain the virus even in the face of draconian lockdowns.
India reports May WPI Monday, which is expected to fall -1.2% y/y. Last week, May CPI was not reported as scheduled due to data collections issues due to the pandemic lockdowns. However, food inflation was reported at 9.28% y/y vs. 8.76% in April. The Reserve Bank of India last cut rates 40 bp May 22. Next policy meeting is August 6 and another cut is expected then, if not sooner. May trade will be reported Monday as well.
Taiwan central bank meets Thursday and is expected to cut rates 12.5 bp to 1.0%. However, analysts are pretty much evenly split between no cut, 12.5 bp, and 25 bp. We see risks of a dovish surprise. Despite the modest recovery in the mainland economy, nations in the greater China supply chain have yet to feel much positive impact. May exports orders will be reported Saturday.
Bank Indonesia meets Thursday and is expected to cut rates 25 bp. CPI rose 2.2% y/y in May, the lowest since June 2000 and below the 2.5-4.5% target range. Furthermore, BI estimates June inflation will fall to 1.79% y/y. The bank has been easing very cautiously but low inflation and the strong rupiah suggests a chance of a dovish surprise.
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Our Latest Thoughts on the Dollar
The dollar remains under pressure, due in large part to the Fed’s aggressive efforts to inject stimulus. We see dollar weakness persisting near-term. From a longer-term perspective, we note that the greenback remains largely rangebound and is unlikely to fall below its 2018 lows.
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.
EM Preview for the Week Ahead
While the global economic backdrop remains favorable for EM, rising geopolitical risks will be a growing headwind. The EM VIX surged above 18% Friday as Iran tensions escalated, the highest since early December. With these tensions likely to persist, EM may remain under some pressure for the time being. High oil prices are positive for the exporters in Latin America and the Middle East but negative for the importers in Asia and Eastern Europe.
Some Thoughts on the Latest Treasury FX Report
The US Treasury’s latest “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” report no longer considers China a currency manipulator. The underlying message is that the Trump administration will continue to use an ad hoc “carrot and stick” approach to improve US access to the domestic markets of its major trading partners.
EM Preview for the Week Ahead
The still-growing impact of the coronavirus should keep EM and risk sentiment under pressure this week. The weekend G20 meeting in Saudi Arabia acknowledged the risks to the global economy and said participants agreed on a “menu of policy options.” However, the G20 offered little specific in terms of a coordinated policy response.
Lessons from Singapore?
Singapore has been hailed for its quick response to the coronavirus that limited initial infections, but the outlook is shifting. Despite their early success, they will have to revert to a lockdown. Can Singapore’s experience offer any lessons for European and the US policymakers?
Dollar Stabilizes as the New Week Begins
The dollar has stabilized a bit; Friday’s US jobs data could be a game changer. The US bond market selloff continues; for now, the weak dollar trend is hard to fight. The Brazilian government has found a way to make a bad situation worse by trying to control its Covid-19 statistics.
Weekly SNB Sight Deposits and Speculative Positions: Corona Recovery Rally
Update June 15, 2020: Corona Recovery Rally: Sight Deposits have fallen: The change is -0.7 bn. compared to last week, this means the SNB is selling euros and dollars.
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