EM FX was mixed last week despite the broad-based dollar rally against the majors. THB, HUF, and RUB outperformed while CLP, ARS, and COP underperformed. We believe the global backdrop for EM remains difficult. Strong U.S. data supports our view that the Fed will continue to hike rates aggressively and then keep them high for quite some time. Elsewhere, data out of Europe and China suggest a weakening global growth outlook despite the still-firm U.S. economy.
AMERICAS
Chile reports July CPI and trade data Monday. Inflation is expected at 13.0% y/y vs. 12.5% in June. If so, it would be the highest since March 1994 and further above the 2-4% target range. At the last policy meeting July 13, the central bank hiked rates 175 bp to 9.75% vs. 150 bp expected. More hikes are likely as the bank noted “The board estimates that new increases in the monetary policy rate will be necessary to ensure the convergence of inflation to 3% in two years.” The bank also removed language in its statement about reducing the size of future rate hikes. Next policy meeting is September 6 and another large hike is expected. The swaps market is pricing in 100 bp of further tightening over the next 6 months that would see the policy rate peak near 10.75% but we see some upside risks.
Mexico reports July CPI Tuesday. Headline is expected at 8.14% y/y vs. 7.99% in June, while core is expected at 7.59% y/y vs. 7.49% in June. If so, headline would be the highest since December 2000 and further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to hike rates 75 bp to 8.50%. At the last policy meeting June 23, the bank hiked rates 75 bp to 7.75%. The vote was unanimous and the bank said “For the next policy decisions, the Board intends to continue raising the reference rate and will evaluate taking the same forceful measures if conditions so require.” The swaps market is pricing in 175 bp of further tightening over the next 6 months that would see the policy rate peak near 9.50% but we see some upside risks. June IP will also be reported Thursday and is expected at 3.8% y/y vs. 3.3% in May.
Brazil central bank minutes will be released Tuesday. COPOM just hike rates 50 bp to 13.75% last week and hinted at more tightening ahead as “The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting. The COPOM emphasizes that it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” July IPCA inflation will also be reported Tuesday. Headline is expected at 10.10% y/y vs. 11.89% in June. If so, it would be the lowest since December but still well above the 2-5% target range. June retail sales will be reported Wednesday and are expected at 0.1% y/y vs. -0.2% in May. Next COPOM meeting is September 21 and one last 25 bp hike is priced in that would see the policy rate peak near 14.0%.
Peru central bank meets Thursday and is expected to hike rates 50 bp to 6.50%. The bank has been hiking rates all year in 50 bp clips and we see no reason why it would change now. CPI rose 8.74% y/y in July, just below the cycle high of 8.81% in June and well above the 1-3% target range. As such, it is too soon to be thinking about the end of the tightening cycle.
EUROPE/MIDDLE EAST/AFRICA
Czech Republic reports June construction and industrial output, and trade Monday. July CPI will be reported Wednesday. Headline is expected at 17.8% y/y vs. 17.2% in June. If so, it would be the highest since December 1993 and further above the 1-3% target range. Yet the Czech National Bank just delivered a dovish surprise last week and kept rates steady at 7.0% vs. an expected 25 bp hike. The vote was 5-2, with the two dissents in favor of a 100 bp hike. This was the first meeting led by new Governor Michl, who voted against every hike in this cycle. Making things worse, the makeup of the board shifted drastically as three hawks were replaced by doves and so the dovish outcome shouldn’t be too shocking. Next policy meeting is September 29 and the bank said it will decide then whether to keep rates steady or hike. The swaps market sees steady rates over the next 6 months, followed by the start of an easing cycle over the subsequent 6 months. We think this pricing is too dovish.
Hungary reports June trade data Monday. July CPI will be reported Tuesday. Headline is expected at 12.9% y/y vs. 11.7% in June. If so, it would be the highest since August 1998 and further above the 2-4% target range. Central bank minutes will be released Wednesday. At the July 26 meeting, the bank hiked the base rate 100 bp to 10.75%, as expected. It promised to continue the tightening until CPI warrants an end. Next policy meeting is August 30 and another large hike is likely. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the base rate peak near 11.25% but we see upside risks.
Russia reports July CPI Wednesday. Headline is expected at 15.3% y/y vs. 15.9% in June. If so, it would be the third straight month of deceleration from the 17.83% peak in April but still well above the 4% target. Q2 GDP data will be reported Friday and is expected at -4.8% y/y vs. 3.5% in Q1. At the last policy meeting July 22, the central bank cut rates 150 bp to 8.0% vs. 50 bp expected. Governor Nabiullina said then that there was further room for easing in the medium-term. Next policy meeting is September 16 and another cut seems likely. The swaps market is pricing in 25 bp of easing over the next 12 months but we see room for a dovish surprise.
ASIA
China reports July money and new loan data sometime this week. New loans are expected at CNY1.16 trln vs. CNY2.81 trln in June, while aggregate financing is expected at CNY1.325 trln vs. CNY5.17 trln in June. July trade and foreign reserves data were reported over the weekend. Exports came in at 18.0% y/y vs. 14.1% expected and 17.9% in June, while imports came in at 2.3% y/y vs. 4.0% expected and 1.0% in June. CPI and PPI will be reported Wednesday. CPI is expected at 2.9% y/y vs. 2.5% in June, while PPI is expected at 4.9% y/y vs. 6.1% in June. If so, CPI would be the highest since April 2020 and nearing the 3% target. However, the focus for policymakers is clearly on boosting growth even as this year’s target of “around 5.5%” will be impossible to meet.
Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 0.75%. At the last meeting June 8, the bank delivered a hawkish hold as the vote was 4-3 with the dissents in favor of a 25 bp hike to 0.75%. The bank noted that “Headline inflation would increase and remain elevated for longer than previously estimated. The committee will assess the appropriate timing for a gradual policy normalization.” Assistant Governor Piti added “MPC wants to withdraw the accelerator as members don’t want the economy to recover strongly and put pressure on inflation next year. If that happens, we may need to use strong dose of medicine later, which is not good for the economy.” CPI rose 7.61% y/y in July, slightly below the 7.66% peak in June that was the highest since July 2008 and well above the 1-3% target range. The swaps market sees 175 bp of tightening is priced in over the next 12 months that would see the policy rate peak near 2.25%.
India reports July CPI and June IP Friday. CPI is expected at 6.77% y/y vs. 7.01% in June. If so, inflation would be down for the third straight month from the 7.79% peak in April and moving closer to the 3-6% target range. The RBI just hiked rates 50 bp to 5.4% and signaled that the tightening cycle will continue. Governor Das said “Inflationary pressures are broad based and core inflation remains elevated,” noting that inflation will remain above the 2-6% target range for the current FY ending in March. He stressed that “It’s now basically a whatever-it-takes approach going into third year in succession.” Next policy meeting is September 30 and another 50 bp hike then seems likely, with risks of a smaller move if inflation continues to fall. The swaps market is pricing in 120 bp of tightening over the next 12 months that would see the policy rate peak near 6.60%.
