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Brown Brothers Harriman: Emerging Markets Preview for the Week Ahead

EM and risk assets came under greater pressure Friday as trade tensions mount. This backdrop is not conducive for EM by any stretch, and unless tensions are ratcheted down, selling pressures are likely to remain in play.

China reports March new loan and money supply data this week, but no date has been set.  It reports March CPI and PPI Wednesday, with the former expected to rise 2.6% y/y and the latter by 3.3% y/y.  March trade will be reported Friday, with exports expected to rise 11.9% y/y and imports by 12.4% y/y.  China-US trade relations are likely to remain the near-term focus.

Hungary reports February trade Monday, and a EUR710 mln surplus is expected.  It then reports March CPI Tuesday, which is expected to rise 2.1% y/y vs. 1.9% in February.  If so, inflation would move back into the 2-4% target range.  However, the central bank remains in dovish mode and is likely to keep monetary policy loose in 2019.

Taiwan reports March trade Monday.  Exports are expected to rise 7.1% y/y and imports by 9.1% y/y.  Taiwan then reports March CPI Tuesday, which is expected to rise 1.65% y/y vs. 2.19% in February.  While the central bank does not have an explicit inflation target, relatively low price pressures should allow it to remain on hold this year.

Chile reports March trade Monday, and a $900 mln surplus is expected.  Copper prices came under pressure last month, and so we see downside risks to exports.  We remain skeptical that the central bank will start hiking rates in H2, as inflation remains below target and the economy sluggish.  Next policy meeting is May 3, rates are likely to remain steady at 2.5%.

Mexico reports March CPI Monday, which is expected to rise 5.1% y/y vs. 5.34% in February.  It reports February IP Wednesday.  Banco de Mexico then meets Thursday and is expected to keep rates steady at 7.5%.  Easing inflation and a firm peso should allow the bank to stand pat for now, but market turmoil will likely rise as the July elections approach.

Czech Republic reports March CPI Tuesday, which is expected to rise 1.7% y/y vs. 1.8% in February.  If so, inflation would move further into the bottom half of the 1-3% target range.  February data was softer than expected, and should lead the central bank to hike rates cautiously this year.  Next policy meeting is May 3, rates are likely to be kept at 0.75% then in favor of a Q3 or Q4 move.  Timing will depend on how the data come in.

South Africa reports February manufacturing production Tuesday, which is expected to rise 2.1% y/y vs. 2.5% in January.  The economy is recovering even as inflation falls and the rand remains firm.  SARB resumed cutting rates in March, and could follow that up with another 25 bp cut to 6.25% at the next policy meeting May 24.

Brazil reports March IPCA consumer inflation Tuesday, which is expected to rise 2.71% y/y vs. 2.84% in February.  If so, this would move closer to the bottom of the 2.5-6.5% target range.  COPOM tilted more dovish and so markets are pricing in another 25 bp cut to 6.25% at the May 16 meeting.  February retail sales will be reported Thursday, which are expected to rise 3.8% y/y vs. 3.2% in January.  Political risk remains high despite Lula starting his prison sentence.

Turkey reports February current account data Wednesday, and a deficit of -$4.25 bln is expected.  If so, the 12-month total would rise to -$53.2 bln, the largest since April 2014.  The external accounts are worsening significantly even as EM comes under greater pressure.  Poor fundamentals are likely to keep Turkish assets in the underperforming camp.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.5%.  Inflation was 1.3% y/y in March, below the 1.5-3.5% target range.  This supports the central bank’s intent to keep rates steady in 2018, but we are not convinced it can stand pat in 2019 as well.  February trade and current account data will be reported Friday.

Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%.  CPI rose 1.3% y/y in March, further below the 2% target.  Given the building risks to global trade and regional growth, we think BOK will remain extra cautious on rates after starting the tightening cycle in November with a 25 bp hike.  Market is looking for the next hike in Q3 but we think much will depend on global developments.

Singapore reports February retail sales Thursday.  Singapore then reports advance Q1 GDP data Friday, with growth expected at 4.4% y/y vs. 3.6% in Q4.  The Monetary Authority of Singapore meets that same day.  CPI rose 0.5% y/y in February.  While the MAS does not have an explicit inflation target, we think low inflation and rising global trade tensions will keep it on hold this month in order to assess the outlook at its next policy meeting in October.

India reports March CPI and February IP Thursday.  CPI rose 4.4% y/y in February, which is in the upper half of the RBI’s 2-6% target range.  However, the RBI just cut its inflation forecast for the first half of FY2018/19 to 4.7-5.1% from 5.1-5.6% previously.  The RBI is likely to remain on hold for now, and markets are not pricing in a hike until early 2019.

Peru central bank meets Thursday and is expected to keep rates steady at 2.75%.  CPI rose 0.4% y/y in March, well below the 1-3% target range.  We think the easing cycle remains intact, but the central bank will likely stick to its recent pattern of cutting every other month.  Since it just cut 25 bp at the March meeting, we see the next cut in May.

Global Investor Insights

Win Thin is the Global Head of Emerging Markets Strategy and has over 25 years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. Prior to that, Win was a vice president and international economist, covering major emerging markets in Asia and Latin America for Alliance Capital Management

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