Guest post from my colleague Dr. Win Thin
EM assets are again being pulled in two directions. EM equities are getting a boost from the PBOC rate cut over the weekend, while EM currencies are starting off soft this week as the strong US jobs report puts Fed lift-off back on the radar screen. US retail sales for April come out on Wednesday, and another strong report would likely lead to another leg higher for the greenback.
EM bonds are also vulnerable in light of the ongoing correction in global bond markets. Yet what’s encouraging for EM bulls is the fact that the carnage is nothing like the 2013 “Taper Tantrum.” The US 2-10 year curve has steepened 28 bp (Germany by 36 bp), and yet the worst hit in EM have only seen curve steepening of 25-30 bp. Back in 2013, the EM bond selloff was much worse.
Overall, we remain cautious on EM assets, and advise investors to maintain the divergence theme within EM. We see Asia as the best-positioned in the current environment, with EMEA and Latam less so.
China reports April money and loan growth sometime this week, with aggregate financing expected to remain strong at CNY1.2 trln. Over the weekend, PBOC cut rates after earlier reporting soft April CPI and PPI data. On Wednesday, China reports April retail sales and IP. The former is seen up 10.4% y/y vs. 10.2% in March, while the latter is seen up 6.0% y/y vs. 5.6% in March. The trade data was disappointing, and points to downside risks to this data. Even after the weekend cut, markets are pricing in further PBOC easing, and we agree. PBOC fixed USD/CNY at a cycle low last week, supporting our view that the authorities aren’t pushing a weak yuan policy.
Philippines reports March exports Tuesday, expected at -3.9% y/y vs. -3.1% in February. The central bank meets Thursday and is expected to keep rates steady at 4%. Governor Tetangco noted last week that April data shows the inflation outlook is manageable, and affirms that the current monetary stance is appropriate. Deputy Governor Guinigundo also noted that the 7-8% growth target for this year will likely be achieved, and that a similar growth rate could be seen next year too. We see steady rates in 2015, barring an unexpected slowdown in the economy.
Czech Republic reports April CPI Tuesday, expected to rise 0.4% y/y vs. 0.2% in March. It then reports Q1 GDP Friday, expected to rise 2.0% y/y vs. 1.4% in Q4. The central bank left policy and forward guidance unchanged last week, which seems prudent given the recent improvement in data. Base effects will start pushing y/y inflation higher in H2, while the real sector is robust.
