EM assets are again being pulled in two directions. EM equities are getting a boost from the PBOC rate cut over the weekend, while EM currencies are starting off soft this week as the strong US jobs report puts Fed lift-off back on the radar screen. US retail sales for April come out on Wednesday, and another strong report would likely lead to another leg higher for the greenback.
EM bonds are also vulnerable in light of the ongoing correction in global bond markets. Yet what’s encouraging for EM bulls is the fact that the carnage is nothing like the 2013 “Taper Tantrum.” The US 2-10 year curve has steepened 28 bp (Germany by 36 bp), and yet the worst hit in EM have only seen curve steepening of 25-30 bp. Back in 2013, the EM bond selloff was much worse.
Overall, we remain cautious on EM assets, and advise investors to maintain the divergence theme within EM. We see Asia as the best-positioned in the current environment, with EMEA and Latam less so.
China reports April money and loan growth sometime this week, with aggregate financing expected to remain strong at CNY1.2 trln. Over the weekend, PBOC cut rates after earlier reporting soft April CPI and PPI data. On Wednesday, China reports April retail sales and IP. The former is seen up 10.4% y/y vs. 10.2% in March, while the latter is seen up 6.0% y/y vs. 5.6% in March. The trade data was disappointing, and points to downside risks to this data. Even after the weekend cut, markets are pricing in further PBOC easing, and we agree. PBOC fixed USD/CNY at a cycle low last week, supporting our view that the authorities aren’t pushing a weak yuan policy.
Philippines reports March exports Tuesday, expected at -3.9% y/y vs. -3.1% in February. The central bank meets Thursday and is expected to keep rates steady at 4%. Governor Tetangco noted last week that April data shows the inflation outlook is manageable, and affirms that the current monetary stance is appropriate. Deputy Governor Guinigundo also noted that the 7-8% growth target for this year will likely be achieved, and that a similar growth rate could be seen next year too. We see steady rates in 2015, barring an unexpected slowdown in the economy.
Czech Republic reports April CPI Tuesday, expected to rise 0.4% y/y vs. 0.2% in March. It then reports Q1 GDP Friday, expected to rise 2.0% y/y vs. 1.4% in Q4. The central bank left policy and forward guidance unchanged last week, which seems prudent given the recent improvement in data. Base effects will start pushing y/y inflation higher in H2, while the real sector is robust.
Turkey reports March current account Tuesday, expected at -$4.3 bln vs. -$3.2 bln in February. If so, the 12-month total would worsen from the cycle-best -$42.8 bln in February. With energy prices headed higher and growth picking up in Turkey, the best external numbers are likely behind us. The central bank meets May 20, and should keep policy steady after the higher than expected April CPI data. But government officials are starting to get nervous ahead of the June elections, with Economy Minister Zeybekci complaining about tight monetary policy.
South Africa reports March manufacturing production Tuesday, expected to rise 1.0% y/y vs. -0.5% in February. Price pressures remain low, but SARB has maintained a hawkish stance this year. Next policy meeting is May 21, and it will be important to see if the SARB will remain hawkish in H2. The economic outlook remains weak, with mining company Lonmin warning that it may cut its workforce in South Africa by 10% (about 3500 jobs) due to low platinum prices.
India reports March IP and April CPI Tuesday. The former is seen up 3.0% y/y vs. 5.0% in February, while the latter is seen up 4.9% y/y vs. 5.2% in March. India reports April WPI Thursday, expected to remain steady at -2.3% y/y. We think the RBI will continue to ease policy, albeit cautiously. The rebound in energy and commodity prices will likely start pushing up price pressures in the coming months. Next RBI meeting is June 2, though Governor Rajan has shown a penchant for moving intra-meeting. After June 2, the next meeting is August 4.
Mexico reports March IP Tuesday, expected to rise 1.9% y/y vs. 1.6% in February. The central bank releases minutes from its last meeting Thursday. The statement after the April 30 meeting was on the dovish side, and we would expect the minutes to reflect this too. Next Banxico meeting is June 4, and no change is expected. Indeed, we continue to believe that a rate hike in 2015 is unlikely.
Hungary reports Q1 GDP Wednesday, expected to rise 3.3% y/y vs. 3.4% in Q4. Deflationary conditions continue to ease, with CPI -0.3% y/y in April vs. -0.6% in March. We think easing will continue at the next policy meeting May 26, where a 15 bp cut to 1.65% is seen. Another 15 bp cut is seen in June to 1.5% but further easing beyond that will depend on the data. Real sector data show the economy remains fairly robust.
Poland reports April CPI Thursday, expected at -1.2% y/y vs. -1.5% in March. It then reports Q1 GDP Friday, expected to rise 3.3% y/y vs. 3.1% in Q4. The central bank has signaled steady rates for now, and we think the inflation data will start to justify this. The y/y deflation should ease and then end once low base effects start to fall off. However, political risk is rising after the weekend presidential election saw the opposition Law and Justice party candidate win more votes than the ruling Civic Platform candidate. This points to rising discontent with the Civic Platform after 8 years in power. These two candidates were the top vote-getters, so they now go into a second round runoff on May 24.
Brazil reports March retail sales, seen up 1.4% y/y vs. -3.1% in February. The real sector outlook remains poor, especially as COPOM signaled that another 50 bp rate hike to 13.75% is likely at the June 3 meeting. April IPCA inflation rose 8.17% y/y, slightly lower than expected but still the high for this cycle and well above the 2.5-6.5% target range. The Senate is also expected to vote sometime this week on fiscal measures that were approved by the House last week.
Chile central bank meets Thursday and is expected to keep rates steady at 3%. April CPI came in higher than expected at 4.1% y/y, and remains above the 2-4% target range. We see steady rates for now. Meanwhile, President Bachelet continues to struggle, and is expected to announce a new cabinet sometime this week. Consumer confidence has fallen to the lowest level since 2009, which is clearly filtering into less support for Bachelet.
Colombia reports March retail sales and IP Thursday. The former is seen up 3.5% y/y vs. 4.3% in February, while the latter is seen at -1.0% y/y vs. -1.3% in February. Inflation remains too high for the central bank to cut rates, so the outlook is steady rates for now. April CPI came in higher than expected at 4.6% y/y, and remains above the 2-4% target range. However, central bank official Meisel said it was a temporary spike due to food and import costs. The real sector is giving mixed signals, and so steady rates seems to be the most prudent policy for now.
Peru central bank meets Thursday and is expected to keep rates steady at 3.25%. April CPI came in as expected at 3% y/y, and remains right at the top of the 1-3% target range. The economy remains sluggish, and so we think the central bank may tilt more dovish as inflation moves back into the target range. For now, however, steady rates seem warranted. However, Finance Minister Segura last week signaled that fiscal stimulus is likely as the nation will tap accumulated savings from the multi-year commodity boom.
Bank of Korea meets Friday and is expected to keep rates steady at 1.75%. However, a small handful look for a 25 bp cut to 1.5%. April CPI came in at 0.4% y/y, and remains well below the 2.5-3.5% target range. The strong won is acting like a monetary tightening, so the BOK should cut rates to offset this impact. Last move was a 25 bp cut in March, but that was the first move since October 2014 and so the BOK has been cautious. A May cut seems too soon, while a June cut seems more likely.
Malaysia reports Q1 GDP Friday, expected to rise 5.4% y/y vs. 5.8% in Q4. Exports contracted sharply in Q1, so we see downside risk to GDP. The central bank left rates steady last week and offered a fairly upbeat view on the economy. However, we do think the bank will tilt more dovish if the economy slows much further. There is no official inflation target, but at 0.9% in April, there is room for the central bank to ease if
needed. Next meeting isn’t until July 9, and a lot can change before then that could change the outlook.
Indonesia reports April trade Friday. Exports expected at -7.6% y/y, imports at -19.3% y/y. Q1 GDP came in weaker than expected at 4.7% y/y, and was the weakest since Q3 2009. As such, April data could provide a good clue about the Q2 outlook. We think Bank Indonesia remains in easing mode, but will be cautious in light of recent IDR softness and rising inflation. CPI rose 6.8% y/y in April, well above the 3-5% target. Next policy meeting is May 19, and is expected to keep rates steady at 7.5%.
Courtesy Marc Chandler, Marc to Market