The dollar is coming off of its best week since March 2020. DXY rose 2.4% and also posted broad-based gains against EM FX. Of note, RUB and TWD outperformed while CLP and COP underperformed. Besides tighter global liquidity, EM FX is also struggling as global growth slows sharply. These negative drivers are likely to persist this week, with Fed Chair Powell expected to deliver a hawkish message at Jackson Hole and eurozone PMIs expected to show further softness in August.
AMERICAS
Mexico reports mid-August CPI Wednesday. Headline is expected at 8.56% y/y vs. 8.16% in mid-July. If so, inflation would be the highest since December 2000 and further above the 2-4% target range. Final Q2 GDP, Q2 current account data, and June GDP proxy will be reported Thursday. Banxico minutes will also be released Thursday. At the August 11 meeting, the bank hiked rates 75 bp to 8.5%, as expected. The decision was unanimous but the bank said future moves will depend on prevailing conditions. Perhaps the minutes will provide more clues. Net policy meeting is September 29 and another 75 bp hike seems likely. The swaps market is pricing in 125 bp of tightening over the next 6 months that would see the policy rate peak near 9.75%. July trade data will be reported Friday.
Brazil reports mid-August IPCA inflation Wednesday. 9.53% y/y vs. 11.39% in mid-July. If so, it would be the lowest since mid-August 2021 but still above the 2-5% target range. At the last meeting August 3, COPOM hiked rates 50 bp to 13.75% and said "The committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting." That policy meeting is September 21 and the swaps market is pricing in 50% odds of one last 25 bp cut then. However, with price pressures likely to remain high due to increased fiscal spending ahead of October elections, we do not think there will be a quick pivot to an easing cycle in H1 2023 that is priced in now. May current account and FDI data will be reported Friday.
EUROPE/MIDDLE EAST/AFRICA
Poland reports July construction output and real retail sales Monday. Construction is expected to remain steady at 5.9% y/y, while sales are expected to slow to 2.0% y/y vs. 3.2% in June. Central bank minutes will be released Thursday. At the July 7 meeting, the bank delivered a dovish surprise with a 50 bp hike to 6.5% vs. 75 bp expected. Next policy meeting is September 7 and no change is expected as the swaps market sees the policy rate peaking at the current 6.5%, with very small odds of a last 25 bp cut. With inflation running above 15%, we do not think the bank can pivot so quickly and so we see risks of a hawkish surprise, especially if the zloty continues to weaken.
Bank of Israel meets Monday and is expected to hike rates 50 bp to 1.75%. At the last meeting July 4, the central bank 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. Since then, inflation accelerated to 5.2% y/y in July vs. 4.6% expected and 4.4% in June, the highest since October 2008 and further above the 1-3% target range. The swaps market is pricing in only 100 bp of tightening over the next 6 months that would see the policy rate peak near 2.25% but this seems too low. Ahead of the decision, Israel reports July unemployment and June manufacturing production.
South Africa reports July CPI Wednesday. Headline is expected at 7.8% y/y vs. 7.4% in June, while core is expected at 4.5% y/y vs. 4.4% in June. If so, headline would be the highest since May 2009 and further above the 3-6% target range. PPI will be reported Thursday. At the last policy meeting July 21, SARB delivered a hawkish surprise and hiked rates 75 bp to 5.5% vs. 50 bp expected. The vote was 3-1-1, with one dissent in favor of a 50 bp hike and one in favor of a 100 bp hike. Its model now sees the policy rate at 5.61% by year-end vs. 5.3% previously, at 6.45% by end-2023 vs. 6.21% previously, and at 6.78% by end-2024 vs. 6.74% previously. Governor Kganyago said that “Our assessment now is that this inflation risk is no longer transitory, but that there is persistence that is emerging.” Next policy meeting is September 22 and a 50 bp hike seems likely then. Of note, the swaps market sees 200 bp of tightening over the next 12 months that would take the policy rate up to 7.5%, which is much more hawkish than the SARB’s expected rate path.
ASIA
Korea reports trade data for the first 20 days of August Monday. The economy is clearly slowing under the weight of slower mainland growth and tighter monetary policy. Bank of Korea meets Thursday and is expected to hike rates 25 bp to 2.5%. At the last meeting July 13, the bank hiked rates 50 bp to 2.25%, as expected. The vote was unanimous and Governor Rhee said that gradual 25 bp hikes were desirable going forward. He saw inflation peaking late this year and added that a policy rate of 2.75-3.0% by year-end seemed “reasonable.” The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 2.75% but we see upside risks.
China’s commercial banks set their loan rates Monday. After the PBOC surprised markets with a 10 bp cut in its key 1-year MLF rate last week, banks are expected to cut their 1- and 5-year Loan Prime Rates by the same magnitude to 3.60% and 4.35%, respectively. Yet these moves are largely symbolic. By most accounts, the demand for loans has slowed sharply due to weakness in the property sector and so the rate cuts are akin to pushing on a string. If the economy continues to slow, we expect fiscal stimulus to pick up the slack. August PMI readings out next week should give a better read of just how much the economy is slowing.
Taiwan reports July export orders Monday. Orders are expected at 5.5% y/y vs. 9.5% in June. If so, it would be the weakest since April and signal further weakness ahead for shipments. IP will be reported Tuesday and is expected at 1.12% y/y vs. 0.73% in June. The economy is slowing significantly, due largely to the slowdown in the mainland economy. Taiwan and the U.S. are hoping to boost trade relations but at the risk of inflaming tensions with China. Last week, the Biden administration announced talks would begin for the so-called U.S.-Taiwan Initiative on 21st-Century Trade, which focuses on increasing trade in 11 areas whilst also improving labor and environmental standards.
Bank Indonesia meets Tuesday and is expected to keep rates steady at 3.5%. However, nearly a quarter of the 22 analysts polled by Bloomberg look for a 25 bp hike to 3.75%. At the last meeting July 21, the bank kept rates steady at 3.5%, as expected. Governor Warjiyo noted that although headline inflation is now above the 2-4% target range, it is expected to return to target next year. He added that core inflation will remain within that range. While the bank did not sound like it was in any hurry to tighten, inflation picked up further in July and the rupiah has resumed weakening along with the rest of EM FX.
Singapore reports July CPI Tuesday. Headline is expected at 6.9% y/y vs. 6.7% in June, while core is expected at 4.8% y/y vs. 4.4% in June. If so, headline would be the highest since June 2008. While the MAS does not have an explicit inflation target, rising price pressures are likely to lead to another round of tightening at the next policy meeting in October. July IP will be reported Friday and is expected at 5.7% y/y vs. 2.2% in June. While the economy is clearly slowing, policymakers are putting more emphasis on lowering inflation, at least for now.
