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Balancing US rates and global growth as competing drivers for the EM outlook

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T: +44(4)387 5031
E: soojin.kim@uk.mufg.jp

 

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Better-than-expected global economic activity continues to support EMs though lingering price pressures risks a shallower US easing cycle presents EMs with a conundrum of higher terminal domestic rates or a hit to their currencies. What does this mean for EMs going forward? Our 2024 conviction that we catalogued in our annual outlook signals that pivot from a top-down to a bottom-up examination is warranted to differentiate winners and laggards across the EM complex (see here). We contextualise three filters in our EM criteria to pick out outperformers – in essence comprise one of the three “S’s”, namely, “strong” fundamentals, “structural” narratives and “sizable” risk premiums, and recommend macro stabilisation markets (Brazil, Mexico, Poland and Turkey) and structural growth narratives (GCC region, India and Indonesia).

FX views

EM FX continues to trade on stronger footing after USD recently lost upward momentum. The week ahead looks set to be important in determining whether the USD will weaken or regain upward momentum. Market participants will be closely scrutinising the releases of the latest US PPI (Tuesday) and CPI (Wednesday) reports in the week ahead. Within EMEA EM FX, the Central European currencies of CZK, HUF & PLN have continued to strengthen supported by building evidence of economic recovery in Europe after the euro-zone economy recorded its strongest growth in Q1 2024 since Q3 2022.

Week in review

Czech Republic cut rates by 50bp to 5.25% but signalled a higher interest rate trajectory than previously assumed. Inflation in Turkey rose to 69.8% y/y in April with this week’s CBRT inflation report in focus on what’s in store for anticipated price expectations for the rest of this year. Flash Q1 2024 GDP readings in Hungary and the Czech Republic pointed to a rebound in economic activity. Finally, Fitch Ratings upgraded Turkey from B to B+ (positive) citing effective policymaking since the pivot in June 2023.

Week ahead

The coming week will be busy for economic data/events. There will be a monetary policy meeting in Romania (13 May). Inflation prints will be released in the Czech Republic (13 May), Romania (14 May), Poland (15 May), Israel (15 May), Russia (17 May). Q1 GDP data will be released in Romania (13 May), Poland (13 May), Russia (13 May) and Israel (14 May). Finally, current account data will be released in Turkey (13 May).

Forecasts at a glance

Growth across the EM universe is set to stabilise as domestic fundamentals offset external drags, with some rotation from the largest to smaller EMs. Inflation and interest rates are both “over the hump” – disinflation is progressing, and the decline in rates will continue and broaden in 2024 (see here).

Core indicators

According to the IIF, EM fund flows attracted USD1.2bn of inflows in the week ending 3 May – the second consecutive week of increases.