There are too many near-term uncertainties to make an outright directional call on EM. Between a looming deal for Greece, a fragile agreement in Ukraine, the bounce in commodity prices and the fall in the dollar, we prefer to focus on market-neutral relative value strategies.
For example, there is an interesting wedge appearing between the Mexican and the Turkish central banks, where the former is looking overzealous about tightening and the latter running the risk of being irresponsibly dovish. The near-term outlook seems favorable for Hungary and Poland with the aggressive easing by the ECB, while the political and economic situation in Brazil is going from bad to worse. And while China is on holiday most of this week, it continues to be a source of risk, which, in our view, is skewed towards the positive side as the prospect of further easing could help regional assets.
Singapore reports January trade Tuesday, with NODX expected to rise 1.7% y/y vs. 2.3% in December. With deflationary risks growing and the real sector slowing, we think the MAS will move to a more dovish stance at its April policy meeting. We look for another adjustment in its S$NEER trading band to loosen policy further.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 7.75%. CPI inflation eased to 6.96% y/y from 8.36% in December. While the central bank is likely to move into dovish mode this year, we think it’s too early now to think about easing. Inflation needs to move closer to the 3.5-5.5% target range before BI cuts rates.
Bank of Korea meets Tuesday and is expected to keep rates steady at 2.0%. CPI inflation eased to 0.8% y/y in both December and January. This is well below the 2.5-3.5% target range, and ongoing low inflation should move the BOK into cutting rates later this year. This is especially so given that the key JPY/KRW cross remains near the lows of the year, which has hurt Korean competitiveness.
Colombia reports December retail sales and IP Tuesday. The former is expected to rise 9.5% y/y, while the latter is expected to fall 10.1% y/y. The central bank meets Friday and is expected to keep rates steady at 4.5%. Officials have signaled a willingness to keep rates on hold for an extended period, but we think an easing cycle will begin later this year.
Russia reports January IP Tuesday, expected to rise 0.7% y/y vs. 3.9% in December. It then reports January retail sales Wednesday, expected to fall -1.9% y/y after rising 5.3% in December. The economy remains in bad shape, and sanctions will be kept on Russia despite the latest Ukraine truce. Firmer oil prices are helping RUB, and so the central bank may continue to ease cautiously at its next policy meeting on March 13.
Malaysia reports January CPI Wednesday, expected to rise 1.8% y/y vs. 2.7% in December. With the economy slowing and inflation falling, the central bank’s tightening cycle has clearly ended. Indeed, it may move to an easing cycle this year. However, the next policy meeting on March 5th is probably too soon to see a move.
South Africa reports January CPI Wednesday, expected to rise 4.5% y/y vs. 5.3% in December. It also reports December retail sales, expected to rise 2.4% y/y vs. 2.6% in December. The SARB took a hawkish tone at its January policy meeting, but with inflation falling towards the bottom half of the 3-6% target range, it will be harder and harder to justify this. We think SARB will move tilt more dovish as the year progresses. Next meeting on March 26 is probably too soon to see a shift, however.
Poland reports January IP and retail sales Wednesday. The former is expected to rise 2.6% y/y, while the latter is expected to rise 0.9% y/y. The central bank releases minutes from its last meeting Thursday. After the February 4 meeting, Governor Belka hinted that the bank is close to a consensus in cutting rates. We think a move at the March 4 meeting is likely, especially after Poland just reported deeper deflation of -1.4% y/y in January.
Banco de Mexico releases its quarterly inflation report Wednesday. Mexico then reports Q4 GDP on Friday. According to the most recent minutes, Banco de Mexico has taken rate cuts off the table (for now). The weaker peso seems to be one of the key variables in their reaction function, and we believe it will help determine the timing. If MXN continues to weaken at this pace, it is possible that Banxico will hike before or around the same time the Fed does (June, in our view).
Brazil is closed during the first half of the week for the Carnival. On Thursday, Brazil will report its second preview for February IGP-M wholesale inflation, which is expected to rise 0.3% m/m. If this pace is sustained for the entire month, it would translate into a 3.9% y/y rate, down from 4.0% in January. With IPCA inflation above 7% now, and well above the 3.5-6.5% target range, the central bank is likely to continue hiking rates at its next policy meeting on March 4th.
(from my colleagues Ilan Solot and Dr. Win Thin)