Despite the dollar selloff Friday, EM FX was broadly weaker last week. MYR, TRY, and RON outperformed while ZAR, COP, and BRL, underperformed. The jobs report was mixed and while we did not think it moved the needle on Fed policy, the market took it as an excuse to take profits on long dollar positions. This week brings CPI and PPI data that may put Fed tightening back on the table and that should keep EM FX on its back foot. Data out of China is likely to remain weak, further souring EM sentiment.
AMERICAS
Chile reports July trade data Monday. July CPI will be reported Tuesday. Headline is expected at 6.4% y/y vs. 7.6% in June. If so, it would be the lowest since September 2021 but still above the 2-4% target range. At the last policy meeting July 28, the central bank delivered a dovish surprise and cut rates 100 bp to 10.25% vs. 75 bp expected. Next meeting is September 5 and another 100 bp cut seems likely. The swaps market is pricing in 175 bp of easing over the next three months followed by another 200 bp of easing over the subsequent three months.
Colombia reports July CPI Tuesday. Headline is expected at 11.60% y/y vs. 12.13% in June. If so, it would be the lowest since September 2022 but still above the 2-4% target range. The central bank just kept rates steady at 13.25% last week. Governor Villar noted that inflation has eased faster than expected but would not provide any forward guidance on interest rates. Next meeting is September 29 and it seems too soon to cut then. We favor a cut at the October 31 meeting. The swaps market is pricing in 50 bp of easing over the next three months followed by another 125 bp of easing over the subsequent three months.
Brazil central bank minutes will be released Tuesday. It just delivered a dovish surprise last week with a 50 bp cut to 13.25% vs. 25 bp expected. It said cuts of the same magnitude are likely in the coming months if the data come in as expected. Next meeting is September 20 and another 50 bp cut to 12.75% is expected. The swaps market is pricing in 100 bp of easing over the next three months followed by another 125 bp of easing over the subsequent three months. Brazil reports June retail sales Wednesday and are expected at 0.6% y/y vs. -1.0% in May. July IPCA inflation and June GDP proxy will be reported Friday. Headline inflation is expected at 3.95% y/y vs. 3.16% in June. If so, it would be the first acceleration since June 2020 and the highest since April but still within the 1.75-4.75% target range.
Mexico reports July CPI Wednesday. Headline is expected at 4.78% y/y vs. 5.06% in June, while core is expected at 6.66% y/y vs. 6.89% in June. If so, headline would be the lowest since March 2021 but still above the 2-4% target range. Banco de Mexico then meets Thursday and is expected to keep rates steady at 11.25%. At the last meeting June 22, the bank kept rates steady and officials said rates would remain steady for 2-3 meetings. That suggests no change at the September 28 meeting either and leaves the November 9 meeting as the earliest we can expect to see easing. The swaps market is pricing in no easing over the next three months followed by a cautious 25 bp of easing over the subsequent three months. June IP will be reported Friday and is expected at 2.9% y/y vs. 3.9% in May.
Peru central bank meets Thursday and is expected to keep rates steady at 7.75%. At the last policy meeting July 13, the bank left rates steady and said “We forecast that annual inflation will remain on its downward trend over the next months, being close to the target range at the end of the year and within the range at the start of 2024.” Inflation came in at 5.88% y/y in July, the lowest since January 2022. Bloomberg consensus sees the start of the easing cycle with a 25 bp cut in Q3. Next policy meeting after this one is September 14 and the bank will have the August CPI data in hand. If disinflation continues, a cut then is possible.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports June trade, construction, and industrial output Monday. July CPI will be reported Thursday. Headline is expected at 8.7% y/y vs. 9.7% in June. If so, it would be the lowest since December 2021 but still well above the 2-4% target range. The central bank just left rates steady at 7.0% last week and signaled steady rates for the time being. Governor Michl said inflation risks don’t allow for a rate cut debate now but may start discussing this in the fall. Vice Governor Frait later said that while the next move is likely to be cut, the bank will not be rushed into easing. Next policy meeting is September 27 and no change in policy is likely then. The swaps market is pricing in 50 bp of easing over the next three months followed by another 50 bp over the subsequent three months.
Hungary reports July CPI and June trade data Tuesday. Headline is expected at 17.7% y/y vs. 20.1% in June. If so, it would be the lowest since August 2021 but still well above the 2-4% target range. Central bank minutes will be released Wednesday. At the July 25 meeting, the bank left the base rate steady at 13.0% but cut the 1-day deposit rate 100 bp to 15.0%, as expected. Next policy meeting is August 29 and we expect the bank to keep the base rate steady at 13.0% while cutting the 1-day deposit rate 100 bp again to 14.0%. When the two rates are lined up at the end of September, we expect the bank to continue cutting both. The swaps market is pricing in 125 bp of easing over the next three months followed by another 250 bp over the subsequent three months.
Turkey reports June IP Wednesday. IP is expected at -3.0% y/y vs. -0.2% in May. June current account and retail trade data will be reported Thursday. A surplus of $30 mln is expected vs. a deficit of -$7.93 bln in May. If so, the 12-month total would fall to -$57.35 bln and would be the first significant drop in quite some time. Still, the twin deficits will remain difficult to finance until the central bank hikes rates more. The swaps market is pricing in a peak policy rate near 27.25% over the next twelve months. With inflation near 50% and rising, this would not be enough to get it back to the 3-7% target range and stabilize the lira.
ASIA
China reports July money supply and new loan data sometime this week. New loans are expected at CNY755 bln vs. CNY3.05 trln in June, while aggregate financing is expected at CNY1.1 trln vs. CNY4.2 trln in June. July trade data will be reported Tuesday. Exports are expected at -12.6% y/y vs. -12.4% in June, while imports are expected at -5.5% y/y vs. -6.8% in June. July CPI will be reported Wednesday. CPI is expected at -0.5% y/y vs. 0.0% in June, while PPI is expected at -4.0% y/y vs. -5.4% in June. If so, China will have entered deflation for the first time since it briefly did from November 2020-February 2021. Given the worsening economic backdrop, there is a big risk that this period of deflation will last much longer.
Thailand reports July CPI Monday. Headline is expected at 0.66% y/y vs. 0.23% in June, while core is expected at 0.90% y/y vs. 1.32% in June. If so, it would be the first acceleration in headline since December but still below the 1-3% target range. The Bank of Thailand just hiked rates 25 bp to 2.25% last week but signaled that the cycle in nearing an end as it dropped its reference to the need for “gradual and measured” rate hikes going forward. Assistant Governor Piti also noted that overall financial conditions have turned less accommodative. Next policy meeting is September 27 and rates are likely to be kept steady. Elsewhere, political uncertainty is dragging on despite reports that Thaksin-linked Pheu Thai party will try to form a coalition without the Move Forward party. The expected vote last week was postponed and House Speaker Wan Muhamad Noor Matha said it might be held after August 16, when the Constitutional Court will review the rejection of Move Froward leader Pita’s nomination as Prime Minister.
Taiwan reports July trade data Tuesday. Exports are expected at -19.6% y/y vs. -23.4% in June, while imports are expected at -24.5% y/y vs. -29.9% in June. Export orders remain weak and so there is little relief on the horizon for shipments. July CPI will be reported Wednesday. Headline inflation is expected at 1.83% y/y vs. 1.75% in June. While the central bank does not have an explicit inflation target, low price pressures should allow it to keep rates steady at 1.875% at the next policy meeting September 21.
Reserve Bank of India meets Thursday and is expected to keep rates steady at 6.5%. At the last policy meeting June 8, the bank kept rates steady but flagged risks of further tightening by keeping its bias towards “removal of accommodation” by a 5-1 vote. Governor Das stressed “Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. The continuation of the stance of withdrawal of accommodation should be seen from this perspective.” Das repeated his statement from the last hold that the decision remains a “pause, not a pivot.” The swaps market is pricing 25 bp of tightening over the next three months, with some risks of another 25 bp over the subsequent three months.
