EM FX was mostly firmer last week as the dollar came under pressure after lower than expected inflation data. However, the subsequent Fed messaging was clear: it does not put too much weight on one data point and it remains on track to continue hiking rates. As a result, the dollar got some traction as last week drew to a close and we expect recovery to continue this week. Meanwhile, signs are emerging that China policymakers are reluctant to add more stimulus, focusing instead on limiting inflation. All in all, the global backdrop of rising interest rates and slowing growth remains difficult for EM.
Brazil reports June GDP proxy Monday. Growth is expected at 2.70% y/y vs. 3.74% in May. The economy is struggling to recover as tight monetary policy weighs on activity. The good news is that the central bank is at or near the end of its tightening cycle, with markets pricing in very low odds of one last 25 bp hike to 14%. An easing cycle is seen starting sometime next year. Fiscal stimulus ahead of the October elections will provide some support for the economy but will also add to the inflationary pressures, meaning the bank may not be able to ease as soon as the market is projecting.
Chile reports Q2 GDP and current account data Thursday. Growth is expected at 0.3% q/q vs. -0.8% in Q1, while the y/y rate is expected at 5.7% vs. 7.2% in Q1. Copper prices have recovered from the July trough but are still down nearly 20% from the start of this year. That and significantly tighter monetary policy are weighing on the economy. However, the central bank may be nearing the end of its tightening cycle after hiking rates 75 bp to 9.75% July 13 in response to the peso plunging to 1060. The swaps market is pricing in 100 bp of tightening over the next 3 months that would see the policy rate peak near 10.75%. Next policy meeting is September 6 and a 50 bp hike seems likely now that the peso has strengthened back to around 876.
Israel reports July CPI Monday. Headline is expected at 4.6% y/y vs. 4.4% in June. If so, it would be the highest since October 2008 and further above the 1-3% target range. The central bank last hiked rates 50 bp to 1.25% July 4, the first 50 bp hike since 2011. The bank noted that “The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment.” It also stopped referring to the tightening cycle “gradual” and sees the policy rate at 2.75% in Q2 2023. Next meeting is August 22 and another 50 bp hike seems likely. Q2 GDP data will be reported Tuesday, with annualized growth expected at 2.2% vs. -1.8% in Q1.
Turkey central bank meets Thursday and is expected to keep rates steady at 14.0%. Inflation continues to rise but the central bank has shown no hints of reversing its ultra-dovish stance. Last week, Moody’s downgraded Turkey by a notch to B3 and noted “The authorities are having to resort to increasingly unorthodox measures in an attempt to stabilize the currency and restore foreign-currency buffers. It is unlikely that the increasingly complex set of regulatory, fiscal and macroprudential measures will be effective in restoring some degree of macroeconomic stability.” We concur.
Poland reports core CPI Tuesday. It is expected at 9.2% y/y vs. 9.1% in June. Q2 GDP data will be reported Wednesday. GDP is expected at -0.7% q/q vs. 2.5% in Q1, while the y/y rate is expected at 6.2% vs. 8.5% in Q1. July IP and PPI will be reported Friday. IP is expected at 7.8% y/y vs. 10.4% in June, while PPI is expected at 25.3% y/y vs. 25.6% in June. The central bank delivered a dovish surprise at its last meeting July 7 with a 50 bp hike to 6.5% vs. 6.75% expected. The bank raised its 2022 inflation forecast to 13.2-15.4% vs. 9.3-12.2% previously and raised its 2023 forecast to 9.8-15.1% vs. 7-11% previously. However, it also cut its GDP forecasts significantly and so the bank seems to be signaling a dovish pivot that focuses more on growth. No wonder the swaps market no longer sees any tightening ahead. However, with inflation running so much above the 1.5-3.5% target, it’s hard to believe that rate hikes have ended.
China reports July IP and retail sales Monday. IP is expected at 4.3% y/y vs. 3.9% in June, while sales are expected at 4.9% y/y vs. 3.1% in June. The economy is picking up as lockdowns ease but the recovery will be uneven as more outbreaks are seen. PBOC also sets its 1-year MLF rate the same day and is expected to remain steady at 2.85%. Last week, the PBOC pivoted more hawkish by focusing on rising inflation, which seems to preclude any further monetary easing. This came despite much weaker than expected July new loan and aggregate financing data. All the signs suggest policymakers are willing to accept weaker growth, at least for now. That means China’s economy won’t get close to this year’s growth target of “around 5.5%.”
Thailand reports Q2 GDP data Monday. Growth is expected at 0.9% q/q vs. 1.1% in Q1, while the y/y rate is expected at 3.1% vs. 2.2% in Q1. The Bank of Thailand finally started the tightening cycle last week as the economy recovers and inflation remains above target. Stronger growth should give the bank confidence to continue hiking rates, though it signaled that the pace of tightening would be gradual. The swaps market is pricing in only 125 bp of tightening over the next 12 months that would take the policy rate to 2.0%, followed by another 25 bp over the next 12-24 months. This seems too low to us.
Philippine central bank meets Thursday and is expected to hike rates 50 bp to 3.75%. A few analysts look for a smaller 25 bp move. At the last meeting June 23, the bank hiked 25 bp to 2.5% as expected and was only the second hike in the cycle. The bank also raised its 2022 inflation forecast to 5.0% vs. 4.6% previously and its 2023 forecast to 4.2% vs. 3.9% previously, and warned of upside risks. However, the bank subsequently delivered a surprise intra-meeting move July 14 and hiked 75 bp to 3.25%. Incoming Governor Medalla said that the surprise hike was warranted due to signs of sustained and broadening price pressures, adding that “By taking urgent action, the Monetary Board aims to anchor inflation expectations further and temper mounting risks to the inflation outlook.”