Asia week ahead: Policy meetings from China and Indonesia

Japan will release several data points next week and we think that the trend of weak manufacturing against a strong services sector should continue. Fresh PMI data for manufacturing will likely show the sector staying in contraction while services PMI could continue to gain modestly on the back of a better tourism and leisure outlook.

Meanwhile, March exports are expected to fall again mainly due to weak China and electronics exports. CPI inflation is expected to slow to 3.1% year-on-year in March due to base effects, but based on a monthly comparison, we believe service prices will post a modest gain.

China will release its GDP report for the first quarter and activity data for March. We expect GDP growth at 3.8%YoY, with consumption and infrastructure investment as the major drivers. Strong loan growth in March should support faster infrastructure investments. Retail sales should continue to recover. However industrial production will be affected by weak external demand.

We will be monitoring how quickly infrastructure investment grows amid strong loan growth. We will also look at the details of retail sales to find clues on consumption recovery, whether it is broad-based and how fast it can grow in the coming months.

The People's Bank of China (PBoC) will decide whether to change the 1Y Medium Lending Facility policy rate. The central bank should have most of the information it needs to make this decision even without the GDP data. A cut of 10bp is possible if the data is not as good as the government expects. Banks will follow the central bank's decision to decide on whether to cut the Loan Prime Rate. We expect that if there is a cut of 10bp by the PBoC then banks will cut the 1Y and 5Y Loan Prime rates by 5bp and 15bp, respectively.

Bank Indonesia will likely keep rates untouched at 5.75% given softening inflation and a relatively stable currency. Inflation has moderated and was last reported at 5% year-over-year while the Indonesian rupiah (IDR) is one of the best-performing currencies in the region for the month. These two factors should give the central bank enough room to maintain its current policy stance at its meeting next week. A sustained slowdown of inflation coupled with a strong IDR could even open the door for possible easing by Bank Indonesia in the coming months.