EM Preview for the Week of May 26, 2024

May 26, 2024

EM FX was mostly softer last week as the dollar mounted a modest recovery on the back of firm U.S. data and hawkish Fed communications. HUF, INR, and TRY outperformed while CLP, ZAR, and THB underperformed. We believe data this week will underscore the Fed’s hawkish stance, which should help the dollar and keep EM FX under pressure.

AMERICAS

Brazil reports mid-May IPCA inflation Tuesday. Headline is expected at 3.73% y/y vs. 3.77% in mid-April. If so, inflation would move closer to the mid-point of its 1.5-4.5% target range. At the last meeting May 8, COPOM cut rates 25 bp to 10.5% by a 5-4 vote, with the dissents in favor of a larger 50 bp cut. No forward guidance was given, and the bank expressed concern about loose fiscal policy. Next meeting is June 19, and no change is expected as markets believe the policy rate has bottomed at 10.5%. Central government budget data for April will be reported sometime this week. A primary surplus of BRL12.8 bln is expected vs. a primary deficit of -BRL1.5 bln in March. Consolidated budget data will be reported Friday.

Banco de Mexico releases its quarterly inflation report Wednesday. At its last policy meeting May 9, the bank left rates unchanged at 11.0% and raised its inflation forecasts. It now sees end-2024 inflation at 4.0% vs. 3.6% previously and end-2025 at 3.0% vs. 3.1% previously. Since that meeting, inflation picked up in mid-May and so we expect this inflation report to maintain a hawkish tone. Next meeting is June 27, and the decision will depend on how inflation behaves in the coming weeks. The swaps market is pricing in 50 bp of easing over the next six months followed by another 50 bp over the subsequent six months.

Mexico elections will be held this coming Sunday. Polls show Morena candidate Claudia Scheinbaum well ahead of opposition candidate Xochitl Galvez in the race to replace President Andres Manuel Lopez Obrador. All 500 seats in the lower house will be contested, as well as all 128 seats in the Senate. With polls consistently showing Scheinbaum with a huge lead, markets have largely priced in a continuation of the policies of her long-time mentor and ally AMLO.

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting April 8, Bank of Israel kept rates steady at 4.5% and saw the policy rate at 3.75% in Q1 2025. Governor Yaron said, “In view of recent developments, which indicate a substantial increase in the geopolitical uncertainty, the Monetary Committee decided to side with caution and kept the interest rate unchanged.” The Governor will likely stick to that message this week, as inflation has come in higher than expected and accelerated to 2.8% in April, the highest since December. The swaps market is pricing in steady rates over the next six months followed by 25 bp of easing over the subsequent six months.

South African Reserve Bank meets Thursday and is expected to keep rates steady at 8.25%. At the last meeting March 27, the bank kept rates steady at 8.25% and Governor Kganyago said “Given extra inflation pressure, headline now reaches the target midpoint only at the end of 2025, later than previously expected. As a result, the policy rate in our baseline forecast also starts normalizing later.” Since then, inflation has slowed modestly to 5.2% y/y in April but remains near the top of the 3-6% target range. The market sees some odds of a rate over the next six months, but we believe rates will remain steady until early 2025.

South Africa elections will be held Wednesday. The results are expected to be announced three days after voting. Polls show the ruling African National Congress (ANC) is projected to lose its absolute majority but will probably have enough support to lead a coalition government with other parties. Over the long term, the trend in ZAR will be guided by how the next government tackles rising unemployment, stagnant growth, rampant corruption and deteriorating public infrastructure.

Poland reports May CPI Friday. Headline is expected at 2.9% y/y vs. 2.4% in April. If so, it would be the highest since January but still within the 1.5-3.5% target range. At the last policy meeting May 9, the bank left rates steady at 5.75%. Governor Glapinski said he does not see any rate cuts this year and said the bank sees inflation “significantly” above 5% by year-end. Next meeting is June 5, and no change is expected then. The swaps market is pricing in 25 bp of easing over the next 12 months.

ASIA

China reports official May PMIs Friday. Manufacturing is expected to remain steady at 50.4 while non-manufacturing is expected to rise three ticks to 51.5. If so, the composite is likely to rise a couple of ticks from 51.7 in April However, we cannot get excited about what we view as a modest cyclical recovery. Structurally, the economy remains constrained by a huge debt overhang and a burst property bubble.

Korea reports April IP Friday. IP is expected at 3.8% y/y vs. 0.7% in March. May trade data will be reported Saturday local time. Exports are expected at 14.8% y/y vs. 13.8% in April, while imports are expected at 1.7% y/y vs. 5.4% in April. If so, export growth would be the strongest since January but flattered by low base effects from 2023. While the economy is in modest recovery, the Bank of Korea is seen keeping rates steady over the next six months, followed by the start of a modest easing cycle over the subsequent six months.  

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2023. All rights reserved..

As of June 15, 2022 Internet Explorer 11 is not supported by BBH.com.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction