EM FX was mixed last week despite broad-based dollar weakness against the majors. ZAR, RON, and KRW outperformed while ARS, TRY, and CLP underperformed. Global liquidity continues to tighten even as global growth continues to slow and yet despite these headwinds, some investors are hoping to lock in peak yields in EM as some central banks are likely to start cutting rates in the coming weeks and months. Turkey is the outlier as it is expected to hike rates sharply this week as the new economic team is seen trying to move towards more orthodox policies. BOE, SNB, and Norges Bank are all expected to hike rates this week and so the negative backdrop for EM and risk should continue.
AMERICAS
Chile central bank meets Monday and is expected to keep rates steady at 11.25%. At the last meeting May 12, the bank kept rates on hold and stressed “The Board considers it appropriate to maintain the MPR at 11.25% until the state of the macro-economy indicates that the process of inflation convergence to the 3% target has been consolidated.” With inflation falling and the economy slowing, an easing cycle is expected this year. The swaps market is pricing in a Q3 start, with 100 bp of easing seen over the next three months and another 175 bp over the subsequent three months. This strikes us as overly aggressive in light of the bank’s cautious stance.
Brazil COPOM meets Wednesday and is expected to keep rates steady at 13.75%. At the last meeting May 3, it kept rates on hold but softened its language by acknowledging that “although a less likely scenario, it will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.” However, it saw lingering uncertainty regarding the new fiscal framework. The market is pricing in the start of the easing cycle at the August 2 meeting, with 50 bp of easing seen over the next three months and another 100 bp over the subsequent three months. This strikes us as just about right given the bank’s cautious stance.
Banco de Mexico meets Thursday and is expected to keep rates steady at 11.25%. At the last meeting May 18, the bank kept rates on hold. Since then, Governor Rodriguez said that the bank will hold rates for at least two meetings, adding that a U.S. recession would play a role in Banxico’s decision-making. Later, Deputy Governor Espinosa added that a rate cut was unlikely in September. That suggests no hike this week, August 10, and September 28 and leaves November 9 and December 14 for a possible cut. The swaps market sees steady rates for the next three months followed by the start of an easing cycle over the subsequent three months with a cautious 25 bp cut. This seems about right to us. Ahead of the decision, Mexico reports mid-June CPI. Headline is expected at 5.30% y/y vs. 5.67% previously and core is expected at 7.04% y/y vs. 7.32% previously. If so, headline would be the lowest since March 2021 and closer to the 2-4% target range.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. At the last meeting May 23, the bank kept the base rate on hold. However, it cut the more important 1-day deposit rate 100 bp to 17.0% on May 24 and signaled it was the start of a gradual easing cycle. This despite inflation still running well above 20%. The swaps market is pricing in cuts in the base rate over the next three months totaling 125 bp, followed by another 100 bp over the subsequent three months. This strikes us as way too aggressive given how stubbornly high inflation remains. Such an aggressive rate path would likely weight on the forint, which in turn would push up imported inflation.
South Africa reports June CPI Wednesday. Headline is expected at 6.4% y/y vs. 6.8% in April, while core is expected to remain steady at 5.3% y/y. If so, headline would fall for the second straight month to the lowest since April 2022 and move closer to the 3-6% target range. At the last meeting May 25, the South African Reserve Bank hiked rates 50 bp to 8.25%. After experiencing significant weakness through June 1, the rand has since gained nearly 10% against the dollar and this should help push down inflation further this month. Next policy meeting is July 20 and if the rand remains firm, no change in policy is expected.
Poland reports May PPI and IP Wednesday. PPI is expected at 4.6% y/y vs. 6.8% in April, while IP is expected at -3.0% y/y vs. -6.4% in April. Real retail sales will be reported Thursday and are expected at -5.7% y/y vs. -7.3% in April. The economy is clearly slowing and so the central bank is likely to follow Hungary in cutting rates soon despite above-target inflation. The swaps market sees steady rates over the next three months followed by 50 bp of easing over the subsequent six months. Much will depend on how quickly inflation falls in H2. At the last policy meeting June 6, Governor Glapinski said he hopes inflation will fall below 10% in September but this may be too optimistic.
Czech National Bank meets Wednesday and is expected to keep rates steady at 7.0%. At the last meeting May 3, the bank kept rates on hold but the vote was 4-3, with the 3 dissents in favor of a 25 bp hike. This was a surprisingly hawkish shift from the previous meeting March 29, when the vote was 6-1. Yet the economy is slowing sharply and so a hike at this juncture seems unlikely. Indeed, the swaps market is pricing in 50 bp of easing over the next three months, which strikes us as too aggressive given that inflation is still running so high.
Turkey central bank meets Thursday and is expected to hike rates 1150 bp to 20.0%. However, expectations are all over the place. Of the 21 analysts polled by Bloomberg, 1 sees 14.0%, 3 see 15.0%, 1 sees 17.0%, 8 see 20%, 2 see 22.50%, 4 see 25.0%, 1 sees 30.0%, and 1 sees 40.0%. At this point, it’s anybody’s guess but we suspect the hike will be on the smaller side but accompanied by a promise to hike more at the next meeting July 20. May trade data will be reported Friday. A deficit of -$12.7 bln is expected vs. -$8.74 bln in April. If so, the 12-month total would rise to another record high -$122.3 bln vs. -$120.3 bln in April. If interest rates are allowed to rise significantly, it should help Turkey finance its growing twin deficits.
ASIA
China commercial banks set their Loan Prime Rates 10 bp Tuesday. Both the 1-year and 5-year LPRs are expected to be cut 10 bp to 3.55% and 4.20%, respectively. With the economy slowing , there is likely to be growing pressure on policymakers to inject fiscal stimulus to help complement modest monetary stimulus. At this point, China is facing deflation risks and should be stimulating the economy. The problem is that sharply rising debt loads really limits the ability of policymakers to push the usual levers to boost the economy. As such, we expect the mainland economy to continue underperforming expectations.
Malaysia reports May trade data Tuesday. Exports are expected at -11.6% y/y vs. -17.4% in April, while imports are expected at -11.6% y/y vs. -11.1% in April. May CPI will be reported Friday. Headline is expected at 3.0% y/y vs. 3.3% in April. If so, it would be the lowest since May 2022. While Bank Negara does not have an explicit inflation target, falling price pressures would allow to keep rates steady for now. At the last policy meeting, Bank Negara delivered a dovish surprise and kept rates on hold vs. 25 bp hike expected. Next policy meeting is July 6 and no change is expected then.
Taiwan reports May export orders Tuesday. Orders are expected at -21.4% y/y vs. -18.1% in April and would suggest little relief for shipments over the next six months. Korea reports trade data for the first twenty days of June Wednesday. There’s no question that China reopening has done little for regional trade and activity. Making things more difficult for Taiwan and Korea is the weak yen, which is helping Japanese exports maintain their competitiveness. For instance, the JPY/KRW cross is trading at the lowest since mid-2015 near 9.0. Similarly, the TWD/JPY cross is trading near multi-decade highs.
Bank Indonesia meets Thursday and is expected to keep rates steady at 5.75%. At the last meeting May 25, the bank kept rates on hold and Governor Warjiyo said “We focus on policy to strengthen the rupiah to mitigate global spillover and curb imported inflation.” If that is the case, then we suspect the bank will not cut rates anytime soon for fear that the narrowing interest rate differential with the U.S. would weaken the rupiah. Bloomberg consensus sees rate cuts starting in H2 but we think this is unlikely if the Fed is still hiking rates, as we expect.
Philippine central bank meets Thursday and is expected to keep rates steady at 6.25%. At the last meeting May 18, the bank kept rates on hold and Governor Medalla said “Right now the economy is strong. That’s why pressure on us to cut is not so high.” He said that the bank has room to consider cutting rates once the Fed starts easing but added that he doesn’t expect that to happen this year, adding that “If I were in their shoes, I will be reluctant to cut.” We concur and yet the swaps market is pricing in 75 bp of easing over the next three months. This seems highly unlikely given Medalla’s forward guidance.
Singapore reports May CPI Friday. Headline is expected at 5.4% y/y vs. 5.7% in April, while core is expected at 4.8% y/y vs. 5.0% in April. If so, headline would be the lowest since April 2022. While the MAS does not have an explicit inflation target, falling price pressures would allow it to keep policy steady at the next policy meeting in October. At the last meeting in April, the MAS maintained steady policy and kept the slope, width, and midpoint of its S$NEER trading band unchanged.
