EM Preview for the Week of August 11, 2024

August 11, 2024

Win Thin

EM FX was mixed, reflecting a mixed performance overall for the dollar. BRL, CLP, and MXN outperformed while TRY, PLN, and ZAR underperformed. Key U.S. data this week should show that the economy remain far from recession and so market sentiment should improve further. As such, the dollar should eventually gain from repricing of Fed easing, which currently seems too dovish. This would likely keep EM FX under pressure.

AMERICAS

Brazil reports June retail sales Wednesday. Sales are expected at 5.6% y/y s. 8.1% in May. June GDP proxy will be reported Friday. Growth is expected at 2.5% y/y vs. 1.3% in May. With COPOM expected to begin a tightening cycle with a 25 bp hike at the next meeting September 18 and with 150 bp of total tightening seen over the next 12 months, the growth outlook is deteriorating.

Colombia reports June IP and retail sales Wednesday. IP is expected flat y/y vs. -2.4% in May, while sales are expected at 1.1% y/y vs. -1.7% in May. June GDP proxy and Q2 GDP will be reported Thursday. June growth is expected at 1.5% y/y vs. 2.5% in May, while Q2 growth is expected at 2.8% y/y vs. 0.7% in Q1. The central bank cut rates 50 bp to 10.75% in July by a 5-2 vote, with the dissents in favor of a larger 75 bp cut. Minutes show that the majority of board members felt that cuts larger than 50 bp might not be sustainable and would compromise its efforts to get inflation back to its 3% target. Next policy meeting is September 30 and another 50 bp cut to 10.25% seems likely. The swaps market is pricing in 350 bp of total easing over the next 12 months that would see the policy rate bottom near 7.25%.

Peru reports June GDP proxy Thursday. Growth is expected at 1.6% y/y vs. 5.0% in May. The central bank just resumed its easing cycle with a 25 bp cut to 5.5% last week and noted 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. Next policy meeting is September 12 and another 25 bp cut to 5.25% seems likely.

Chile central bank minutes will be released Friday. At the July 31 meeting, the bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut. The vote was unanimous, and the bank said it plans to “continue reducing the key rate during the horizon of monetary policy at a rhythm that takes into account macro-economic trends and their implication for inflation.” Since that decision, July CPI accelerated for the fifth straight month to 4.6% vs. 4.4% expected and 4.2% in June, the highest since November and further above the 2-4% target range. Next policy meeting is September 3, and we expect another hold then. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 4.5%.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports July CPI Monday. Headline is expected to pick up a tick to 2.1% y/y. If so, it would be the first acceleration since April but would remain well within the 1-3% target range. Central bank minutes showed that the weak koruna was a major factor behind smaller 25 bp cut on August 1 after four straight 50 bp cuts. Some board members highlighted persistent services inflation while other saw inflationary risks from fiscal policy next year. However, all agreed that downside risks to growth had increased substantially and due partly by the slowdown in the German economy. Next policy meeting is September 25 and another 25 bp cut is likely. Looking ahead, the market is pricing in 125 bp of easing over the next 12 months.

Israel reports July CPI Thursday. Headline is expected at 3.2% y/y vs. 2.9% in June. If so, it would be the third straight month of acceleration to the highest since November and back above the 1-3% target range. At the last meeting July 8, Bank of Israel left rates steady at 4.5% and said it expects the Gaza conflict to wind down in early 2025. The research department sees the policy rate at 4.25% in Q2 2025, with the bank noting that “Due to the revised assumption regarding the duration of the fighting, our assessment is that the risk premium, which rose due to the war, will decline more gradually than we assumed. A higher interest rate will be necessary in order to stabilize inflation.” Next policy meeting is August 28, and another hold seems likely. The swaps market is pricing in 75 bp of total easing over the next 12 months that would see the policy rate bottom near 3.75%.

ASIA

China reports July new loan and aggregate financing data sometime this week. New loans are expected at CNY427 bln vs. CNY2.13 trln in June, while aggregate financing is expected at CNY1.0 trln vs. 3.3 trln in June. PBOC sets its 1-year MLF rate Thursday and is expected to keep it steady at 2.30%. China also reports July IP, retail sales, FAI, and property investment Thursday. IP is expected to slow a tick to 5.2% y/y, sales are expected at 2.6% y/y vs. 2.0% in June, FAI is expected to remain steady at 3.9% YTD, and property investment is expected to pick up two ticks to -9.9% YTD. With the economy still facing headwinds, we expect further stimulus measures in the coming months.

India reports July CPI and June IP Monday. Headline is expected at 3.70% y/y vs. 5.08% in June. Elsewhere, IP is expected at 5.4% y/y vs. 5.9% in May. WPI will be reported Wednesday and is expected at 2.10% y/y vs. 3.36% in June. Last week, the Reserve Bank of India delivered a hawkish hold. The vote was 4-2 to keep rates on hold, with the dissents in favor of a 25 bp cut. The bank also voted to keep its stance at “withdrawal of accommodation.” Governor Das 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.” Despite the hawkish stance, the swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp over the subsequent three months.

Philippines central bank meets Thursday and is expected to cut rates 25 bp to 6.25%. However, the market is split as 6 of the 14 analysts polled by Bloomberg see steady rates. At the last meeting June 27, the central bank delivered a dovish hold as Governor Remolona said, “The balance of risks to the inflation outlook has shifted to the downside for 2024 and 2025 due largely to the impact of lower import tariffs on rice.” He added that this makes an August rate cut somewhat more likely than before and that a total 50 bp of easing this year was possible. Since then, inflation accelerated to 4.4% y/y in July, the highest since October and back above the 2-4% target range. As such, we look for steady rates this week. The market is pricing in the start of the easing cycle with 100 bp of easing over the next three months, with 200 bp of total easing seen over the next 12 months.

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