EM Preview for the Week Ahead

EM and other risk assets are likely to remain under pressure this week as the impact of the coronavirus continues to spread.  Germany and Italy announced more severe restrictions on gatherings and travel.  Reports that the Republican Senate-led aid bill has stalled due to Democratic resistance hasn’t helped matters, nor have increasingly dire estimates of the potential Q2 contraction for the US.

AMERICAS

Mexico reports mid-March CPI Tuesday, which is expected to rise 3.68% y/y vs. 3.52% in mid-February.  Banco de Mexico delivered a surprise 50 bp cut to 6.5% late Friday afternoon, choosing to move ahead of this Thursday’s planned meeting.  Further easing will be seen in the coming weeks.  It also took measures to boost liquidity in the system and said it plans to hold more dollar auctions.  February trade will be reported Friday.

Brazil reports January retail sales Tuesday, which are expected to rise 2.7% y/y vs. 2.6% in January.  COPOM minutes will also be released then.  At that meeting, it cut rates 50 bp to 3.75%.  Mid-March IPCA inflation will be reported Wednesday, which is expected to rise 3.73% y/y vs. 4.21% in mid-February.  February current account and FDI data will also be reported Wednesday.  The central bank releases its quarterly inflation report Thursday.

Colombia central bank meets Friday and is expected to cut rates 25 bp to 4.0%.  However, analysts are split between no cut and cuts of 25 bp and 50 bp.  Inflation was 3.7% y/y in February, near the top of the 2-4% target range.  However, the collapse in oil prices is a growing headwind on the economy and so we see risks of a dovish surprise.  The bank has not cut since April 2018 and is the only one in the region that hasn’t responded to the coronavirus yet.

 

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary meets Tuesday and is expected to keep rates steady.  Inflation was 4.4% y/y in February, well above the 2-4% target range.  However, the focus is clearly on supporting growth now.  With other regional central banks already easing aggressively, we believe there is a significant risk of a dovish surprise here.

Czech National Bank meets Thursday and is expected to cut rates 50 bp to 1.25%.  However, analysts are split between no cut and cuts of 25 bp, 50 bp, and 75 bp.  Since its emergency 25 bp cut last week, EUR/CZK has risen about 4%.  The bank’s own model suggest each 1 ppt move in the currency is equal to 25 bp of easing, and so it may not feel compelled to cut rates so aggressively this week.

 

ASIA

Korea reports trade data for the first twenty days of March Monday.  This data will be a good bellwether of how badly regional trade is getting due to the coronavirus.  Bank of Korea just delivered an emergency 50 bp cut to 0.75% last week as the economic outlook deteriorates.  Next regularly scheduled meeting is April 9 and further easing seems likely.

Singapore reports February CPI Monday, which is expected to rise 0.5% y/y vs. 0.8% in January.  MAS will likely hold its semiannual policy meeting sometime during the week of April 6, but may follow the lead of other central banks and deliver an emergency move.  It does not have an explicit inflation target but rising risks to growth suggests the MAS will loosen policy then by adjusting its S$NEER trading band.  February IP will be reported Thursday, which is expected to contract -2.0% y/y vs. +3.4% in January.

Taiwan reports February IP Monday, which is expected to rise 3.7% y/y vs. -1.5% in January.  The central bank delivered a dovish surprise last week with a 25 bp rate cut to 1.125%.  This puts the policy below the crisis-era trough of 1.25% and we would not rule out further easing this year.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.75%.  A handful of analysts look for another 25 bp cut to 0.5%.  It just delivered an emergency cut last Friday after an unexpected 25 bp cut to 1.0% at its February 5 meeting.  As such, another cut this week seems too soon but further easing is likely in the coming months.