EM Preview for the Week Ahead

EM FX had a solid week, helped by overall weakness in the dollar.  Trump’s threats against China turned out to be much ado about nothing and so risk assets ended the week on a strong note.  This week, markets will be looking for some sort of response from China but quite honestly, Trump did so little that we may not see anything beyond some snarky Tweets from the Global Times.  For now, the dollar is likely to remain under modest pressure ahead of the ECB meeting Thursday.

AMERICAS

Chile reports monthly GDP proxy for April Monday.  It is expected to contract -11.0% y/y vs. -3.5% y/y in March.  It then reports May CPI Friday, with headline inflation expected at 3.0% y/y vs. 3.4% in April.  If so, it would be the lowest since December and right at the central bank’s target.  Next policy meeting is June 16 and no change is expected.  With the policy rate of 0.5% at what is viewed as the lower bound, the bank is likely in wait and see mode.  If further easing is needed, we would expect the bank to expand its QE program.

Brazil reports May trade data Monday.  April IP will be reported Wednesday and is expected to contract -29.9% y/y vs. -3.8% in March.  Data last week showed the economy was already contracting in Q1 even before the pandemic hit.  Q2 will be even worse and the Q3 outlook hinges largely on whether the authorities can contain the spread of the virus better.  As it is, Brazil now has the second highest cases and deaths, behind only the US.  Next COPOM meeting is June 17 and another 50 bp cut to 2.5% is expected, with risks of dovish surprise.

Colombia central bank releases its minutes Monday.  At last week’s meeting, the bank cut rates 50 bp to 2.75%, as expected.  Governor Echavarria said easing has been gradual to avoid any capital flight.  Even more interesting, he said direct lending to the government (QE) has not been ruled out, suggesting a lot of easing still to come.  Next policy meeting is June 26 and another 50 bp cut then is expected.  Colombia then reports May CPI Friday, with headline inflation expected at 3.29% y/y vs. 3.51% in April.  If so, it would be the lowest since April 2019 but still above the central bank’s target.

 

EUROPE/MIDDLE EAST/AFRICA

Poland central bank releases its minutes Monday.  At last week’s meeting, the bank delivered a dovish surprise and cut its main rate 40 bp to 0.10%.  This is most likely the lower bound for rates and the minutes should contain some more clues.  QE is already under way and so if further easing is needed, the bank can expand its asset purchases or perhaps start Yield Curve Control rather than take rates negative.  Next policy meeting is June 16 and we expect no change then.

Turkey reports May CPI Wednesday, with headline inflation expected at 10.90% y/y vs. 10.94% in April.  If so, inflation would decelerate for the third straight month but remain well above the 3-7% target range.  Next policy meeting is June 25 and another cut then is expected.  Indeed, inflation has been above the target range this entire easing cycle, as policymakers focus entirely on boosting growth.

Hungary reports April retail sales Thursday, which are expected to contract -15.0% y/y vs. +3.5% in March.  April IP will be reported Friday, which is expected to contract -23.3% y/y WDA vs. -10.0% in March.  Next policy meeting is June 23.  We believe the bank is in wait and see mode for now.  It began QE in May and so far, has succeeded in pushing the yield curve down.  If further easing is needed, we expect the bank to increase QE or perhaps move to Yield Curve Control.

Russia reports May CPI Friday.  3.0% y/y vs. 3.1% in April.  The central bank cut rates 50 bp to 5.5% at its April 24 meeting and signaled further easing.  Next policy meeting is June 19 and Governor Nabiullina said that a 100 bp remains on the agenda then, though she added that the odds of such a large cut are less than 100%.  Last week, Russia reported April retail sales, unemployment, and construction.  As expected, all deteriorated sharply from March as the impact of the pandemic spread.

 

ASIA

Korea reports May trade data Monday.  Exports are expected to contract -25.1% y/y and imports by -20.6% y/y.  As the bellwether for the region, such weak readings would suggest that a recovery remains far off.  May CPI will be reported Tuesday, with headline inflation expected at -0.2% y/y vs. +0.1% in April.  April current account data will be reported Thursday.  Bank of Korea just cut rates 25 bp to 0.5%.  Next policy meeting is July 16.  While we cannot rule out further easing ahead, we suspect the bank will wait to see how the economy responds to fiscal stimulus that’s in the pipeline.

Caixin reports China May manufacturing PMI Monday and is expected to improve to 49.6 from 49.4 in April.  Caixin services and composite PMI readings will be reported Wednesday.  The service reading is expected to improve to 47.3 from 44.4 in April.  Over the weekend, the official PMI readings for May came out.  Manufacturing fell a couple ticks to 50.6 while non-manufacturing improved a few ticks to 53.6, which left the composite steady at 53.4.

Hong Kong reports April retail sales data Monday.  In volume terms, sales are expected to contract -38.0% y/y vs. -43.8% in March.  Some restrictions were lifted in May, but we suspect any improvement in the data won’t be seen until June, if at all.  It remains to be seen whether the current round of protests will be sustained.  If so, there are risks that consumption will remain depressed well into H2.

Indonesia reports May CPI Tuesday, with headline inflation expected at 2.20% y/y vs. 2.67% in April.  If so, inflation would be the lowest since June 2000 and would move below the 2.5-4.5% target range.  Bank Indonesia confounded expectations for a cut at its May meeting but if disinflation continues, a 25 bp cut is expected at its policy meeting June 18.  The bank recently expressed concern that the rupiah remains undervalued, so the exchange rate may be a major factor behind its next rate decision.

Singapore reports May PMI Wednesday.  April retail sales will be reported Friday, which are expected to contract -30.2% y/y vs. -13.3% in March.  The authorities started lifting restrictions mid-May and so activity is likely to remain weak that month too.  Whether we see some further recovery in June will depend in large part on how the reopening proceeds, with the second phase to commence this week.  If needed, we expect the MAS to ease policy before the next scheduled meeting in October.  For now, it is likely on hold so it can gauge the impact of the latest round of fiscal stimulus just announced.

Philippines reports May CPI Friday, with headline inflation expected at 2.1% y/y vs. 2.2% in April.  If so, inflation would be the lowest since November and would move closer to the bottom of the 2-4% target range.  Next policy meeting is June 25 and another 50 bp cut to 2.25% is possible.  At the very least, a 25 bp cut is expected.

Thailand reports May CPI Friday, with headline inflation expected at -3.20% y/y vs. -2.99% in April.  If so, inflation would be the lowest since July 2009 and would move further below the 1-4% target range.  Next policy meeting is June 24.  At its May meeting, the bank cut rates 25 bp to 0.5% and said it “stands ready to use additional monetary policy tools if needed.”  The central bank also said it was worried about recent baht strength, which raises the odds of a dovish surprise in June.