EM Preview for the Week of September 8, 2024

September 08, 2024

Win Thin

EM FX was mixed last week and largely mirrored the dollar’s mixed performance against the majors. THB, IDR, and PHP outperformed while CLP, PEN, and MXN underperformed. Despite the soft jobs data, the dollar posted a strong turnaround and ended Friday much firmer. That firmness should carry over into this week, but whether it can be sustained will depend very much on the August inflation data. The Fed media blackout is now in effect but comments ahead of the weekend suggest there is no consensus yet on a 25 or 50 bp cut at this month’s FOMC meeting.

AMERICAS

Mexico reports August CPI data Monday. Headline is expected at 5.06% y/y vs. 5.57% in July, while core is expected at 4.00% y/y vs. 4.05% in July. If so, it would be the first deceleration in headline since February but would remain well above the 2-4% target range. At the last meeting August 8, Banco de Mexico restarted the easing cycle with a 25 bp cut to 10.75%. The vote was 3-2, with the dissents in favor of steady rates. However, the bank believed that the inflation outlook would allow the discussion of more rate cuts. Next meeting is September 26 and much will depend on the inflation trajectory as well as the peso. The market is pricing in 200 bp of easing over the next 12 months. July IP will be reported Wednesday. The Senate will vote on judicial reforms sometime this week and the opposition believes they have the votes to block it. If so, the peso should stage a significant recovery.

Brazil reports August IPCA inflation Tuesday. Headline is expected at 4.27% y/y vs. 4.50% in July. If so, it would be the lowest since June and would move further within the 1.5-4.5% target range. At the last meeting July 31, COPOM kept rates steady at 10.5% and said that because of "an uncertain global scenario," this requires "diligent monitoring and even more caution." However, the bank did not give any hints of tightening cycle. Next meeting is September 18 and the market is pricing in a 25 bp hike to 10.75%. Looking ahead, the market is pricing in a total 175 of hikes that would see the policy rate peak near 12.25%. July retail sales data will be reported Thursday. July GDP proxy will be reported Friday.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 5.25%. At the last meeting August 8, the bank delivered a dovish surprise and cut rates 25 bp to 5.5% whilst noting that “Core inflation in July showed less persistence than in previous months.” The bank’s chief economist predicted that growth was 2.7% in H1 and did not rule out further cuts. Indeed, headline inflation is close to the center of the 1-3% target range. Since then, both headline and core inflation have continued falling and will allow the bank to continue cutting rates.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports August CPI data Tuesday. Headline is expected at 3.6% y/y vs. 4.1% in July. If so, it would be the lowest since March and back within the 2-4% target range. Central bank minutes will be released Wednesday. At that August 27 meeting, the National Bank of Hungary kept rates steady at 6.75% but said that “There may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.” Deputy Governor Virag added that he continues to see 1 or 2 more rate cuts this year. Next meeting is September 24 and if inflation resumes falling, a 25 bp cut seems likely. The market is pricing in 125 bp of easing over the next 12 months.

Czech Republic reports August CPI data Tuesday. Headline is expected at 2.0% y/y vs. 2.2% in July. If so, it would be the lowest since June and right at the center of the 1-3% target range. At the last meeting August 1, the Czech National Bank cut rates 25 bp to 4.5% after several 50 bp cuts. Governor Michl said there were still inflationary risks that warranted a cautious approach to further easing, adding “That is one of the reasons why the bank board regards it as necessary that we maintain a strict monetary policy and carefully weigh further rate reduction.” Next meeting is September 25. If inflation remains near target, another 25 bp cut seems likely. The market is pricing in 100 bp of easing over the next 12 months.

Bank of Israel releases its minutes Wednesday. At that meeting August 28, the bank kept rates steady and Deputy Governor Abir noted “I would be very surprised if the conditions are in place for an interest rate cut before the end of the year. The surprise has been how long the war has been going on. This has slowed growth but has also had an impact on inflation, and it’s one of the reasons it is now once again out of our target range.” Next meeting is October 9 and no change is expected then. Despite the hawkish hold, the swaps market is still pricing in 50 bp of total easing over the next 12 months.

ASIA

China reports August money and new loan data sometime this week. New loans are expected at CNY1.05 trln vs. CNY261 bln in July, while aggregate financing is expected at CNY3.017 trln vs. CNY772 bln in July. CPI and PPI will be reported Monday. CPI is expected at 0.7% y/y vs. 0.5% in July, while PPI is expected at -1.4% y/y vs. -0.8% in July. Trade data will be reported Tuesday. Exports are expected at 6.6% y/y vs. 7.0% in July, while imports are expected at 2.3% y/y vs. 7.2% in July. Real sector data will be reported Saturday local time. IP is expected at 4.6% y/y vs. 5.1% in July, sales are expected at 2.5% y/y vs. 2.7% in July, FAI is expected at 3.5% YTD vs. 3.6% in July, and property investment is expected at -10.0% YTD vs. -10.2% in July.

India reports August CPI and July IP Thursday. CPI is expected at 3.70% y/y vs. 3.54% in July, while IP is expected at 4.4% y/y vs. 4.2% in June. At the last meeting August 8, the Reserve Bank of India kept rates steady at 6.5%. It was a hawkish hold, as the bank voted to keep its stance at “withdrawal of accommodation.” Governor Das also warned that the bank “has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.” Next meeting is October 9 and no change is expected then. Despite the hawkish stance, the swaps market is pricing in 25 bp of easing over the next six months followed by another 25 bp over the subsequent six months.

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