EM Preview for the Week of August 4, 2024

August 04, 2024

Win Thin

EM FX was mixed last week despite broad dollar weakness. MYR, THB, and KRW outperformed while MXN, COP, and BRL underperformed. While the dollar is likely to remain pressure due to absence of any major U.S. data releases this week, we believe it will be difficult for EM to gain much traction amidst growing risk-off impulses stemming from weak economic data in the U.S. and China.

AMERICAS

Colombia central bank minutes will be released Monday. At last week’s meeting, the bank cut rates 50 bp to 10.75%. The vote was 5-2, with the two dissents in favor of a larger 75 bp cut. Governor Villar tilted dovish, noting that inflation pressures have eased in recent months and that the risks related to a weak peso have dissipated. Villar added that the wider budget deficit doesn’t undercut monetary policy. The market is pricing in 325 bp of easing over the next 12 months. July CPI will be reported Thursday. Headline is expected at 6.98% y/y vs. 7.18% in June, while core is expected at 7.36% y/y vs. 7.64% in June. If so, headline would be the lowest since January 2022 but still well above the 2-4% target range.

Brazil central bank minutes will be released Tuesday. At last week’s meeting, the bank kept rates steady at 10.5% and noted that it sees unanchored inflation estimates as well as resilience in economic activity. It warned that it’s closely following fiscal developments even as several core inflation gauges remain above target. Yet despite these risks, the bank gave no hint that it was getting ready to hike rates. The swaps market is pricing in the start of the tightening cycle over the next three months and 125 bp of total tightening over the next 12 months. July trade data will also be reported Tuesday. July IPCA inflation will be reported Friday. Headline is expected at 4.47% y/y vs. 4.23% in June. If so, it would accelerate for the third straight month to the highest since February and near the top of the 1.5-4.5% target range.

Chile reports July CPI Thursday. Headline is expected at 4.4% y/y vs. 4.2% in June. If so, headline would accelerate four straight months to the highest since February and move further above the 2-4% target range. This trend warrants caution. Last week, the central bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut to 5.5%. The decision was unanimous, which was surprising since the vote to cut rates 25 bp back in July was 4-1, with the dissent in favor of a larger 50 bp move then. The bank stressed that the policy rate will continue to fall but added that the bulk of the easing was already seen in H1 of this year. The market is pricing in 100 bp of easing over the next 12 months.

Mexico reports July CPI Thursday. Headline is expected at 5.50% y/y vs. 4.98% in June, while core is expected at 4.02% y/y vs. 4.13% in June. If so, headline would accelerate for the fifth straight month to the highest since May 2023 and move further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 10.75%. If so, it would be the first cut since it started the easing cycle back in March. However, nearly a quarter of the analysts polled by Bloomberg see steady rates. At the last meeting June 27, the bank kept rates steady at 11.00% by a 4-1 vote, with the dissent in favor of a 25bps cut. Governor Rodriguez later said rates cuts will be “on the table” in the next meetings. The bank could cut rates due to falling core inflation, but we see risks of a hawkish surprise if headline picks up as much as expected. The swaps market is pricing in 50 bp of easing over the next three months and 175 bp of total easing over next 12 months. June IP will be reported Friday.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 5.5%. The central bank has kept rates steady at 5.75% for two straight meetings due to persistent core inflation. Last week, July headline inflation came in at 2.13% y/y vs. 2.29% in June and core inflation came in at 3.02% y/y vs. 3.12% in June. This should allow the bank to restart the easing cycle this week.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports June trade data Monday. Retail sales will be reported Tuesday. IP will be reported Wednesday. Central bank minutes will also be released Wednesday. At the July 23 meeting, the bank cut rates 25 bp to 6.75% by a unanimous vote, as expected. Deputy Governor Virag said that market bets for one or two more rate cuts this year are “realistic,” adding that a “careful and patient” approach was warranted. However, the swaps market is pricing in 100 bp of easing over the next six months. July CPI will be reported Thursday, with headline expected at 4.0% y/y vs. 3.7% in June. If so, it would move back to the top of the 2-4% target range. Next meeting is August 27, and a hold seems likely if inflation does pick up.

Turkey reports July CPI Monday. Headline is expected at 61.95% y/y vs. 71.60% in June, while core is expected at 60.0% y/y vs. 71.41% in June. If so, headline would be the lowest since October. At the last meeting July 23, the central bank kept rates steady at 50.0% but said it would continue to mop up liquidity. The bank also warned that m/m inflation “will rise temporarily” in July and vowed to maintain tight policy until it sees a lasting slowdown in inflation. It added that “In addition to the high level of and the stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflationary pressures alive.” The market is pricing in the start of an easing cycle over the next three months. Next meeting is August 20, and no change is expected then. Central bank presents its quarterly inflation report Thursday. June IP will be reported Friday.

ASIA

Caixin reports July services and composite PMIs Monday. Services is expected at 51.5 vs. 51.2 in June. However, Caixin manufacturing PMI sank to 49.8 in July vs. 51.8 in June and so its composite PMI is likely to fall from 52.8 in June. We believe the Caixin PMIs have been overstating growth in China and will eventually move towards the weaker official readings that are likely closer to the mark. China reports July trade data Wednesday. Exports are expected at 10.0% y/y vs. 8.6% in June, while imports are expected at 3.3% y/y vs. -2.3% in June. July CPI and PPI will be reported Friday. CPI is to pick up a tick to 0.3% y/y, while PPI is expected to fall a tick to -0.9% y/y. Overall, muted CPI inflation reflects weak domestic demand activity which remains a structural drag on the economy.

Philippines reports July CPI Tuesday. Headline is expected at 4.1% y/y vs. 3.7% in June. If so, this would be the highest since November and back above the 2-4% target range. 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. Of note, the market is pricing in 75 bp of easing in H2. Next meeting is August 15, and we expect no change if inflation does pick up. Q2 GDP data will be reported Thursday.

Taiwan reports July CPI Tuesday. Headline is expected at 2.53% y/y vs. 2.42% in June while core is expected at 1.90% y/y vs. 1.83% in June. While the central bank does not have an explicit inflation target, rising price pressures will keep it cautious. At the last meeting June 13, the central bank kept rates steady at 2.0% but tightened liquidity by raising commercial bank reserve ratios 25 bp. Next meeting is September 19, and no change is expected then. The swaps market still sees some odds of one more hike over the next 12 months. Trade data will be reported Thursday. Exports are expected at 5.8% y/y vs. 23.5% in June, while imports are expected at 10.0% y/y vs. 33.9% in June.

Thailand reports July CPI Wednesday. Headline is expected at 0.70% y/y vs. 0.62% in June, while core is expected at 0.40% y/y vs. 0.36% in June. At the last meeting June 12, Bank of Thailand kept rates steady at 2.5%. It was a less dovish hold compared to previous meetings, as only one MPC member dissented in favor of a 25 bp cut vs. two members at the last two meetings in April and February. Furthermore, the statement scrapped the phrase that “uncertainties on the Thai economy remain high.” Next meeting is August 21, and no change is expected. However, the swaps market is pricing in 50% odds of a 25 bp rate cut over the next three months that becomes fully priced in over the subsequent three months.

Reserve Bank of India meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting June 7, the bank kept rates steady, but the vote split suggests the bar to loosen policy is falling. The vote was 4-2 to keep rates on hold versus 5-1 in April, as Goyal joined Varma in voting for a 25 bp cut. The swaps market is pricing in steady rates over the next three months followed by the start of an easing cycle over the subsequent three months as inflation falls towards the mid-point of the RBI’s 2-6% target range.

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. 2024. All rights reserved..