EM Preview for the Week of July 17, 2022

July 17, 2022

EM FX was mostly softer last week as the dollar continues to gain. Even with Friday’s dollar correction, only COP and TRY were able to notch any gains against the greenback, while BRL, KRW, and THB were the worst performers. Friday’s relief rally was fueled by the notion that the Fed would hike rates “only” 75 bp this month rather than 100 bp. That said, recent data suggest the Fed still has a long ways to go in terms of tightening. On the other hand, Chinese data came in weaker than expected and so the global backdrop for EM remains challenging. MSCI EM is trading at new cycle lows near 962 and is on track to test the March 2020 low near 752.


Mexico reports mid-July CPI Friday. Headline is expected at 8.11% y/y vs. 7.88% in mid-June. If so, it would be the highest since January 2001. Banco de Mexico hiked rates 75 bp to 7.75% at the last meeting June 23 and said flagged further large-scale hikes. Minutes from that meeting show that most board members were willing to consider further 75 bp hikes. Next policy meeting is August 11 and another 75 bp hike to 8.5% is expected. Swaps market is pricing in 200 bp of tightening over the next 6 months that would see the policy rate peak near 9.75%.


Poland reports June core CPI Monday. It is expected at 9.3% y/y vs. 8.5% in May. IP and PPI will be reported Wednesday. IP is expected at 11.5% y/y vs. 15.0% in May, while PPI is expected at 25.1% y/y vs. 24.7% in May. Real retail sales will be reported Thursday. Sales are expected at 5.8% y/y vs. 8.2% in May. Despite June inflation running at 15.6% y/y, the central bank delivered a dovish surprise at the last meeting July 7 by hiking rates 50 bp to 6.5% vs. 75 bp expected. Governor Glapinski said then that the bank is nearing the end of its tightening cycle but will continue hiking if needed. More recently, he said the bank may start cutting rates in 2023. Next meeting is September 7 and another 50 bp hike to 7.0% seems likely. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 7.5%, followed by the start of an easing cycle over the subsequent 12 months.

Turkey central bank meets Thursday and is expected to keep rates steady at 14.0%. There was some relief at the last meeting June 23 when the bank kept rates steady, as President Erdogan continues to push for rate cuts. The economy is nearing a tipping point, as the growing twin deficits are crying out for a policy response. If nothing else, interest rates have to move higher in order to encourage financing of both the budget and current account deficits. This will only happen after the nation enters a balance of payments crisis.

South Africa reports June CPI Wednesday. Headline is expected at 7.3% y/y vs. 6.5% in May, while core is expected at 4.3% y/y vs. 4.1% in May. If so, headline would be the highest since May 2009 and further above the 3-6% target range. The central bank meets Thursday and is expected to hike rates 50 bp to 5.25%. However, nearly a third of the 16 analysts polled by Bloomberg look for a larger 75 bp move. At the last meeting May 19, the bank hiked rates 50 bp to 4.75%, as expected. It flagged further hikes as its models showed the policy rate at 5.3% by year-end, 6.21% by end-2023, and 6.74% by end-2024. The swaps market is pricing in 325 bp of tightening over the next 12 months that would see the policy rate rise to 8.0%, followed by another 50 bp of tightening over the subsequent 24 months.

Russia central bank meets Friday and is expected to cut rates 75 bp to 8.75%. However, markets are split as an even greater number of analysts see cuts of 50 and 100 bp. At the last meeting June 10, the bank cut rates 150 bp to 9.5% vs. 100 bp expected. It flagged further cuts over the next meetings and saw the policy rate averaging 8.5-9.5% through year-end. Headline inflation decelerated for the second straight month in June to 15.9% y/y, the lowest since February but still well above the 4% target. The swaps market is pricing in 150 bp of easing over the next 6 months.


Singapore reports June trade data Monday. NODX are expected at 6.1% y/y vs. 12.4% in May. If so, this would be the weakest since August 2021. Markets are still digesting last week’s surprise tightening by the Monetary Authority of Singapore. It moved the midpoint of its targeted S$NEER trading band upward to its current value but kept the slope and width unchanged. This was the second intra-meeting move this year (the last one was in January). It also tightened at its scheduled meeting in April and is likely to do so again at the October meeting.

China commercial banks set their Loan Prime Rates Wednesday. Last week, the PBOC left its key 1-year MLF rate steady at 2.85%. Despite the larger than expected increase in new loans and aggregate financing in June, the real sector data last week came in mostly softer than expected, especially Q2 GDP growth of 0.4% y/y. For now, policymakers are relying targeted monetary easing but if the data continue to slow, we cannot rule out broader efforts to stimulate the economy.

Malaysia reports May trade data Wednesday. Exports are expected at 20.1% y/y vs. 30.5% in May, while imports are expected at 29.7% y/y vs. 37.3% in May. It then reports June CPI Friday, with headline expected at 3.3% y/y vs. 2.8% in May. If so, it would be the highest since November. At the last meeting July 6, Bank Negara hiked rates 25 bp to 2.25%, as expected. It said 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. 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%.

Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. However, nearly a third of the 25 analysts polled by Bloomberg look for liftoff with a 25 bp hike to 3.75%. At the last meeting June 23, the bank kept rates steady at 3.5% and noted that policy is line with its efforts to boost growth. However, it added that it would quicken the normalization of monetary policy but will be based on developments in the data. Since that meeting, CPI inflation picked up to 4.35% y/y in June, the highest since June 2017 and above the 2-4% target range.

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