EM Preview for the Week Ahead

EM had a solid week with risk sentiment picking up as more countries moved towards reopening.  Never mind that the economic data were horrible.  It’s worth noting that EM FX performance diverged, with oil-related currencies (COP, RUB, MXN) outperforming and those with idiosyncratic risk (BRL, ARS, TRY) underperforming.  We do think markets remain too optimistic about the global rebound story but for now, the stronger EM credits should do all right.

AMERICAS

Mexico reports March IP Tuesday and is expected at -2.5% y/y vs. +5.8% in February.  Banco de Mexico meets Thursday and is expected to cut rates 50 bp to 5.5%.  April inflation came in at 2.15%, the lowest since December 2015 and near the bottom of the 2-4% target range.  There has been no inflation pass-through from the weak peso and so the bank has ample room to cut rates further this year.

Brazil COPOM minutes will be released Tuesday.  At that meeting, it surprised markets with a 75 bp cut to 3.0% and signaled a final cut for this cycle at the June 17 meeting.  CDI market is now pricing in a 50 bp cut to 2.5% next month.  IPCA inflation eased to 2.4% y/yin April, below the 2.5-5.5% target range.  There has been little inflation pass-through from the weak real and so further easing is likely despite the damage to the currency.  March retail sales will be reported Wednesday, which are expected to contract -4.0% y/y vs. +4.7% in February.

Colombia reports March manufacturing production and retail sales Thursday.  The former is expected to contract -7% y/y and the latter by -9% y/y.  Q1 GDP will be reported Friday and is expected to grow 0.1% y/y vs. 3.4% in Q4.  The central bank just cut rates 50 bp to 3.25% this month.  Next policy meeting is June 26 and another cut then is likely.  Stabilizing oil prices are welcome but they remain depressed from year-ago levels and so further stimulus is needed.

 

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports April CPI Wednesday, with inflation expected to slow to 3.1% y/y from 3.4% in March.  The central bank just delivered a larger than expected 75 bp cut last week that took the policy rate to a record low 0.25%.  The vote was 5-2, with the two dissents in favor of the expected 50 bp cut.  Governor Rusnok saw no “extreme pressure” for further easing now.  Q1 GDP will be reported Friday and is expected to contract -3.3% q/q and -1.8% y/y.  Officials said that the state of emergency could end after May 17, with some restrictions to be eased.

Turkey reports March current account data Wednesday, where a deficit of -$4.33 bln is expected.  If so, the 12-month total surplus would drop to $1.9 bln.  March IP will be reported Thursday and is expected to rise 1.6% y/y vs. 7.5% in February.  The lira has stabilized after last week’s action to ban three major foreign banks from lira trading.  However, we do not believe the measures will have any lasting impact.  Please see our recent piece “Turkey’s Desperate Moves Unlikely to Buoy the Lira” for more details.

Poland reports April trade and current account data Thursday.  Q1 GDP will be reported Friday and is expected to contract -1.2% q/q and rise 1.7% y/y.  This weekend’s scheduled presidential election was suddenly called off last week, as the ruling Law and Justice party came under criticism for trying to move ahead with the vote for fear that its support would fall due to the recession.  No date has been set for the new vote yet.

 

ASIA

China reports April money and loan data sometime this week.  Aggregate financing is expected to ease to CNY2.775 bln from CNY5.15 trln in March.  PBOC promised “more powerful” policies to counter the current downturn.  CPI and PPI will be reported Tuesday, with the former expected to rise 3.7% y/y and the latter expected to fall -2.6% y/y.  April IP and retail sales will be reported Friday.  IP is expected to rise 1.5% y/y vs. -1.1% in March, while sales are expected to contract -5.9% y/y vs. -15.8% in March.  If so, this underscores the problem that every country coming out of lockdown faces.  That is, factories may start humming again but consumers may remain reluctant to go out and spend.

Malaysia reports March IP and manufacturing sales Tuesday.  IP is expected to contract -2.5% y/y vs. +5.8% in February.  Q1 GDP and current account data will be reported Wednesday.  The economy is expected to contract -0.6% y/y (-2.5% q/q) vs. +3.6% (+0.6% q/q) in Q4, while the current account surplus is expected at MYR5 bln.  The authorities will extend the relaxed lockdown until June 9, allowing the economy to reopen while keeping its borders closed and schools shut.

India reports April CPI and March IP Tuesday.  Inflation is expected at 5.80% y/y vs. 5.91% in March, while IP is expected to contract -7.7% y/y vs. +4.5% in February.  April WPI will be reported Thursday, which is expected to rise 0.25% y/y vs. 1.0% in March.  The RBI cut the repo rate 75 bp and the reserve ratio 100 bp back in March.  Next policy meeting is June 5 and further easing is expected then.