This Week's Emerging Market Highlights

(from my colleague, Dr. Win Thin)

China official manufacturing PMI will be reported Wednesday, and is expected to drop to 50.7 from 50.9. HSBC final manufacturing PMI will be reported Thursday, and is expected at 50.5 vs. flash reading of 50.6 and 51.6 final in March. We continue to believe that China growth will stabilize around the 8% level, but the risks are tilted more towards 7.5-8.0% than 8.0-8.5%. A slowdown below 7.5% would probably lead to another round of stimulus by China. China markets are closed through Wednesday. PBOC yuan fix last Friday was at cycle highs against the dollar, but we do not think it can continue appreciating at this pace.

The rest of the EM manufacturing PMIs will also come out this week, and most are seen weakening from March. April inflation readings will come out for many EM countries this week too, with most readings expected to show easing price pressures.

Czech central bank holds policy meeting Thursday, with no change in policy expected. Policy rate is stuck at the record low 0.05%, but we know policymakers are debating whether to use more unorthodox measures to stimulate the economy. Weakening the koruna remains an option, but the market is doing the heavy lifting already, taking EUR/CZK to new highs for the cycle near 26.00 earlier this month. However, renewed optimism regarding the euro zone has seen the CEE currencies start this week on a firm note. Further koruna gains would force the central bank to consider weakening the koruna sooner rather than later.

Korea will provide the first trade readings for April on Wednesday, which will be quickly followed by Brazil on Thursday. Consensus is for both countries to see a rebound in exports. March global trade data was mixed, disappointing those looking for a palpable improvement in the global outlook. Early China data for April suggests the global and regional slowdown is carrying over into Q2, and so there is scope for disappointment with the trade reports. Note, however, that Korea’s current account data for March released overnight showed a sizable surplus.

The Reserve Bank of India holds its policy meeting Friday, and is expected to cut policy rates 25 bp while keeping reserve requirements steady. Price pressure have eased recently, enough to warrant cautious easing but still elevated. Combined CPI eased to 10.4% y/y in March from 10.9% y/y in February, while WPI eased to 6% y/y from 6.8% y/y in February. RBI has been unhappy that fiscal consolidation has not been more aggressive, and yet it cut policy rates by 25 bp each in February and March and cut reserve requirements 25 bp in January. We expect further easing to remain very cautious, though lower commodity prices will be good for India’s inflation outlook. 

The Israeli shekel is in play.  Keep an eye on the shekel as it trades below 3.60. USD/ILS was making new lows below 3.60 back in early April before central bank intervention drove the pair back near 3.65 from below 3.60. Now that we are testing that level again, we would expect more intervention on a clean break below. That said, we think Israel is only trying to lean against the wind, and we do not expect more aggressive Brazil-type measures. Governor Fischer steps down at the end of June, so it will be interesting to see if his replacement will have a different strategy with regards to the exchange rate and interest rates.