EM Preview for the Week of August 28, 2022

August 28, 2022

EM FX was mostly softer last week as the dollar enjoyed a broad-based rally against the majors. CLP, BRL, ZAR, and MXN were able to eke out some gains while HUF, RUB, ARS, and THB saw the largest losses. Sentiment was boosted China’s CNY1 trln stimulus package but the overall backdrop remains poor. Fed Chair Powell underscored his commitment to hiking rates at Jackson Hole while the global growth outlook remains weak. We expect the dollar to build on its recent gains.


Brazil reports July central government budget data Tuesday. A primary surplus of BRL18.4 bln is expected. Consolidated budget data will be reported Wednesday and a primary surplus of BRL20.9 bln is expected. The fiscal balances should worsen as the fiscal taps are opened ahead of the October elections. Polls continue to show Lula beating Bolsonaro easily in the runoff. Q2 GDP and August trade data will be reported Thursday. Growth is expected at 0.9% q/q vs. 1.0% in Q1, while the y/y rate is expected at 2.8% vs. 1.7% in Q1. If so, it would be the strongest since Q3 2021. July IP will be reported Friday and is expected at -0.3% y/y vs. -0.5% in June.

Chile reports July IP and retail sales data Wednesday. IP is expected at -1.0% y/y vs. -1.5% in June, while sales are expected at -9.3% y/y vs. -6.1% in June. July GDP proxy will be reported Thursday and is expected at 1.6% y/y vs. 3.7% in June. The economy is clearly slowing and Finance Minister Marcel recently noted significant drops in consumption. However, he acknowledged that this would help limit inflation and the current account deficit. 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 125-150 bp of tightening over the next 3 months that would see the policy rate peak between 11.0-11.25%. Next policy meeting is September 6 and a 50 bp hike seems likely now that the peso has strengthened back to around 900. However, there are risks of a hawkish surprise after CPI accelerated to 13.1% y/y in July.

Banco de Mexico releases its quarterly inflation report Wednesday. Minutes from the August meeting were very hawkish, with members noting that extra rate hikes will be needed and that inflation expectations are starting to de-anchor. Members noted that core inflation is showing “significant persistence” and the upward trend is “concerning.” With regards to growth, members noted private consumption has started to slow and that the recovery will continue at a slower pace than H1. Bottom line: the inflation report is likely to contain higher inflation forecasts, lower growth forecasts, and bias towards further tightening. Next policy meeting is September 29 and another 75 bp hike to 9.25% seems likely. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 10.0%, up from 9.75% at the start of last week.


Turkey reports July trade data Monday. A deficit of -$10.6 bln is expected vs. -$8.17 bln in June. if so, the 12-month total would rise to -$82.7 bln, the highest since July 2018. The twin deficits continue to balloon and without high interests to encouraging external financing, we believe Turkey is headed towards a balance of payments crisis that could easily morph into a broader economic crisis. Q2 GDP data will be reported Wednesday. Growth is expected at 1.5% q/q vs. 1.2% in Q1, while the y/y rate is expected at 7.4% vs. 7.3% in Q1.

National Bank of Hungary meets Tuesday and is expected to hike rates 100 bp to 11.75%. At the last meeting July 26, the bank hiked the base rate 100 bp to 10.75% in late July. The bank said “The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target in a sustainable manner.” It is expected to hike the 1-week deposit rate 100 bp Thursday to match the base rate. CPI rose 13.7% y/y in June, the highest since July 1998 and further above the 2-4% target range. The swaps market is pricing in another 225 bp of tightening over the next 6 months that would see the base rate peak near 13.0%.

Poland reports August CPI Wednesday. Headline is expected ta 15.4% y/y vs. 15.6% in July. If so, it would be the first deceleration since February but still well above the 1.5-3.5% target range. Minutes from the July 7 meeting show that some MPC members were concerned that loose fiscal policy could slow the disinflation process. Note that the bank delivered a dovish surprise then with a 50 bp hike to 6.5% vs. 75 bp expected. Next policy meeting is September 7 and another 50 bp hike to 7.0% seems likely. The swaps market sees the policy rate peaking near 7.25% over the next 12 months.


Malaysia reports July CPI Monday. Headline is expected at 4.4% y/y vs. 3.4% in June. If so, it would be the highest since May 2021. Bank Negara does not have an explicit inflation target but it would move further above its 2.2-3.2% forecast range for this year and so should lead to continued tightening. At the last meeting July 6, the bank hiked 25 bp to 2.25%, only the second hike of this cycle. The bank noted then that “Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.” Next policy meeting is September 8 and another 25 bp hike to 2.5% seems likely if inflation accelerates sharply in July. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%,

Korea reports July IP Wednesday. It is expected at 2.2% y/y vs. 1.4% in June. August trade data will be reported Thursday. Export are expected at 5.6% y/y vs. 9.2% in July, while imports are expected at 23.7% y/y vs. 21.8% in July. August CPI will be reported Friday. Both headline and core are expected to fall a tick to 6.2% y/y and 4.4%, respectively. Bank of Korea hiked rates 25 bp to 2.5% last week. Governor Rhee the bank would continue with 25 bp hikes going forward, adding that the policy rate has already reached the middle of what it considers to be its neutral range. Rhee said that after reaching the upper part of that range, the bank will then consider if it needs to go higher. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 3.5%, up from 2.75% at the start of last week.

China reports official August PMI readings Wednesday. Manufacturing is expected at 49.2 vs. 49.0 in July while non-manufacturing is expected at 52.3 vs. 53.8 in July. If so, the composite PMI should fall more than a point from 52.5 in July. Caixin reports its August manufacturing PMI Thursday and is expected at 50.1 vs. 50.4 in July. The economy is clearly slowing much faster than policymakers expected, which explains the CNY1 trln stimulus package announced last week as well as other policy measures. Despite recent stimulus, we believe the economy will continue slowing and that will have spillover effects to the rest of the region.

Indonesia reports August CPI Thursday. Headline is expected at 5.00% y/y vs. 4.94% in July, while core is expected at 2.98% y/y vs. 2.86% in July. If so, headline would be the highest since October 2015 and further above the 2-4% target range. No wonder Bank Indonesia started the tightening cycle last week with a 25 bp hike to 3.75%. The bank also raised its core inflation forecast for this year to 4.15% vs. 2-4% previously and raised its headline inflation forecast to 5.24% vs. 4.5-4.6% previously. There are upside risks to these forecasts as some administered prices may be raised soon after President Joko Widodo said recently that the budget could no longer maintain heavy subsidies. Next policy meeting is September 22 and another 25 bp hike seems likely.

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