EM Preview for the Week of September 10, 2023

September 10, 2023

Win Thin

EM FX was largely weaker last week as the dollar extended its broad-based rally. COP was the only EM currency to gain against the dollar while CLP, PLN, and MXN were the worst performers. U.S. data this week should support our view that the Fed needs to tighten further, though most likely at the November meeting. Meanwhile, data out of China are likely to underscore the need for more stimulus in EM, including more rates cut like Poland delivered last week. This week, Peru is expected to join the easing club and EM FX is likely to remain under pressure.

AMERICAS

Brazil reports August IPCA inflation Tuesday. Headline is expected at 4.66% y/y vs. 3.99% in July. If so, it would be the second straight month of acceleration to the highest since February and approaching the top of the 1.75-4.75% target range. Next COPOM meeting is September 20 and the market is pricing in another 50 bp cut to 12.75%. July retail sales will be reported Friday and are expected at 2.0% y/y vs. 1.3% in June.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 7.5%. If so, it would mark the start of an easing cycle after the tightening cycle ended with the last 25 bp hike back in January. Bloomberg consensus sees another 75 bp of easing in Q4 followed by another 75 bp each in Q1 and Q2, 50 bp in Q3, and 25 bp in Q4 that would see the policy rate end next year at 4.5%. Such an aggressive easing cycle would take a toll on the sol. July GDP proxy will be reported Friday and is expected at -0.1% y/y vs. -0.6% in June.

Colombia reports July IP and retail sales Friday. IP is expected at -1.1% y/y vs. -2.1% in June, while sales are expected at -7.0% y/y vs. -11.9% in June. With the economy facing recession risks, no wonder markets are looking for the start of an easing cycle soon. Next central bank policy meeting is September 29 and a cut then is very possible. The swaps market is pricing in 25 bp of easing over the next three months followed by another 100 bp of easing over the subsequent three months.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports August CPI Monday. Headline is expected at 8.5% y/y vs. 8.8% in July. If so, it would be the lowest since December 2021 but still well above the 1-3% target range. Next central bank policy meeting is September 27 and after Poland delivered a dovish surprise last week, we believe Czech National Bank may start the easing cycle then. The market is pricing in 75 bp of easing over the next three months followed by another 50 bp over the subsequent three months.

Turkey reports July current account and IP data Monday. The current account is expected at -$4.5 bln vs. $670 mln in June. If so, the 12-month total would rise to -$57.5 bln vs. -$56.5 bln in June. The twin deficits are likely to remain wide in H2 and so interest rates will have to rise further in order to attract investors. The swaps market is pricing in a peak policy rate of 36% over the next three months, followed by the start of an easing cycle over the subsequent three months. We do not think this is enough to push inflation down and stabilize the lira. Retail trade will be reported Tuesday.

Israel reports August trade data Wednesday. Q2 current account data will be reported Thursday. August CPI will be reported Friday, with headline expected at 4.0% y/y vs. 3.3% in July. If so, it would be the first acceleration since January and moves further away from the 1-3% target range. At the last policy meeting September 4, Bank of Israel kept rates steady at 4.75% but warned that it “sees a real possibility of having to raise the interest rate in future decisions, if the inflation environment does not continue to moderate as expected.” Next meeting is October 23 and no change is expected. The swaps market is pricing in steady rates over the next six months, followed by the start of a modest easing cycle over the subsequent six months.

Hungary central bank minutes will be released Wednesday. At the August 29 meeting, the bank cut its 1-day repo rate 100 bp to 14.0% and is expected to do the same at the next meeting September 26 and will then equal the base rate. After that, both rates will likely be cut in unison, with the swaps market pricing in a rate of 11.5% in three months and 9.75% in six months. However, Deputy Governor Virag warned recently that the central bank would no longer be on “autopilot” after this month’s meeting and that further monetary easing would be “data-driven” and “cautious and gradual.”

ASIA

China reports August money and loan data sometime this week. New loans are expected at CNY1.275 trln vs. CNY346 bln in July, while aggregate financing is expected at CNY2.73 trln vs. CNY528 bln in July. PBOC sets its key 1-year MLF rate Friday and is expected to remain steady at 2.5%. China also reports August IP, retail sales, fixed asset investment, and property investment Friday. IP is expected at 3.9% y/y vs. 3.7% in July, while sales are expected at 3.0% y/y vs. 2.5% in July. FAI is expected at 3.3% YTD vs. 3.4% in July, while property investment is expected at -9.0% YTD vs. -8.5% in July. With stimulus very limited, we expect the economy to continue slowing.

India reports August CPI and July IP Tuesday. Headline inflation is expected at 7.10% y/y vs. 7.44% in July, while IP is expected at 5.3% y/y vs. 3.7% in June. If so, inflation would decelerate for the first time since May but would still be above the 2-6% target range. At the last policy meeting August 10, the Reserve Bank of India kept rates steady at 6.5% and kept its bias towards “removal of accommodation” by a 5-1 vote. Governor Das stressed that ““The MPC is prepared to act if the situation so warrants. Bringing headline inflation within the tolerance band is not enough. We need to remain firmly focused on bringing inflation within the 4% target.” Next meeting is October 6 and no change is expected then. WPI will be reported Thursday and is expected at -0.62% y/y vs. -1.36% in July.

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