EM FX was mostly weaker last week despite a mixed dollar performance against the majors as weak Chinese data weighed on sentiment. PHP, CLP, and COP outperformed while TRY, ARS, and KRW underperformed. The greenback was helped by strong U.S. data and heightened Fed tightening expectations and that should continue this week in the lead up to the jobs reports Friday. Within EM, Caixin is likely to report weak data for China and that should keep downward pressure on the yuan and EM FX in general.
AMERICAS
Chile reports May GDP proxy Monday. It is expected at -1.7% y/y vs. -1.1% in April. Central bank minutes will be released Thursday. At the June 19 meeting, the bank kept rates steady but the vote was 3-2 and the dissents favored a 50 bp cut, suggesting a cut is coming sooner rather than later. The bank noted that if recent disinflationary trends continue, rates “will start a downward process in the short term. The magnitude and timing of its reduction will consider the evolution of the macroeconomic scenario and its implications for the inflation trajectory.” June CPI and trade data will be reported Friday. Headline inflation is expected at 7.9% y/y vs. 8.7% in May. If so, it would be the lowest since February 2022 but still well above the 2-4% target range. Next policy meeting is July 28 and a cut is now very possible. The swaps market is pricing in the start of an easing cycle with 125 bp of easing seen over the next three months and another 175 bp over the subsequent three months. This strikes us as overly aggressive in light of the bank’s cautious stance so far.
Banco de Mexico releases its minutes Thursday. At the June 22 meeting, the bank kept rates steady at 11.25% in a unanimous decision. The bank said rates need to remain on hold for a “prolonged period” due to risks from a weak peso and persistent core inflation. In recent weeks, bank officials have said that rates would be kept on hold for 2-3 meetings. With June out of the way, this suggests no change at the August 10 or September 28 meetings, leaving November 9 and December 14 as potential starts to the easing cycle. This lines up with the swaps market, which is pricing in steady rates for the next three months followed by the start of an easing cycle with a cautious 25 bp of easing over the subsequent three months. Of course, it will all depend on the data. June CPI will be reported Friday. Headline is expected at 5.07% y/y vs. 5.84% in May, while core is expected at 6.87% y/y vs. 7.39% in May. If so, headline would be the lowest since March 2021 but still well above the 2-4% target range.
Colombia central bank releases its minutes Thursday. At last Friday’s meeting, the bank kept rates steady at 13.25%, as expected. This was the first pause in the cycle and the vote was unanimous. Governor Villar said policy remains contractionary and added that the bank is focused on reaching its inflation target by end-2024. The swaps market is pricing in the start of the easing cycle with a 25 bp cut over the next three months, followed by another 100 bp over the subsequent three months. This seems a bit too aggressive to us but of course it will depend on how the data come in.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports June CPI Wednesday. Headline is expected at 39.00% y/y vs. 39.59% in May. If so, headline would be the lowest since December 2021 but still way above the 3-7% target range. At the last policy meeting June 22, the central bank under new Governor Hafize Gaye Erkan hiked rates 650 bp to 15.0% vs. 1150 bp expected. This hike was very disappointing to those looking for a bigger dose of orthodoxy, even though it was accompanied by a pledge to hike rates gradually. The next meeting is July 20 and much will depend on the lira and the data. If currency weakness continues, the central bank may be forced to deliver a much larger hike then. The swaps market is pricing in 775 bp of tightening over the next three months followed by another 250 bp over the subsequent three months that would take the policy rate up to a peak of 25.25%. With inflation still running near 40%, that would not be enough tightening to bring down inflation and stabilize the lira.
National Bank of Hungary releases its minutes Wednesday. At the June 20 meeting, the central bank kept the base rate steady at 13.0% but cut its key 1-day deposit rate by 100 bp for the second time. Next policy meeting is July 25 and the minutes may contain some clues on whether the base rate will be cut. The swaps market is pricing in cuts in the base rate totaling 100 bp over the next three months, followed by another 275 bp over the subsequent three months. This strikes us as way too aggressive given how stubbornly high inflation remains. Such an aggressive rate path would likely weigh on the forint, which in turn would push up imported inflation. May IP and retail sales will be reported Thursday and are expected at -6.5% y/y and -11.0% y/y, respectively. June CPI will be reported Friday, with headline expected at 20.0% vs. 21.5% in May. If so, it would be the lowest since August 2022 but still well above the 2-4% target range.
National Bank of Poland meets Thursday and is expected to keep rates steady at 6.75%. Minutes of its June 6 meeting will be released Friday. At that meeting, the bank kept rates steady and Governor Glapinski said rates wouldn’t be cut until the bank is sure that inflation is heading to the target. CPI rose 11.5% y/y in June vs. 13.0% in May and was the lowest since March 2022 but still well above the 3.5-5.5% target range. The swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months followed by another 50 bp of cuts in the subsequent three months.
ASIA
Caixin reports June manufacturing PMI Monday. It is expected at 50.0 vs. 50.9 in May. Caixin reports June services and composite PMIs Wednesday. Manufacturing is expected at 50.0 vs. 50.9 in May and services is expected at 56.2 vs. 57.1 in May. If so, Caixin’s composite PMI would likely fall a full point from 55.6 in May. Last week, official PMIs continued to soften. Manufacturing came in as expected at 49.0 vs.48.8 in May, while non-manufacturing came in at 53.2 vs. 53.5 expected and 54.5 in May. As a result, the composite fell to 52.3 vs. 52.9 in May and was the third straight monthly drop to the lowest since December. Of note, the Caixin readings have been running higher than the official ones in recent months. Either way, there is clearly a loss of momentum in the economy and will bring forth more calls for stimulus in H2. Lastly, the PBOC has a new head in Governor Pan Gongsheng. He is well-known and well-regarded and represents continuity with outgoing Governor Yi Gang.
Indonesia reports June CPI Monday. Headline is expected at 3.65% y/y vs. 4.0% in May, while core is expected at 2.65% y/y vs. 2.66% in May. If so, headline would be the lowest since May 2022 and back within the 2-4% target range. At the last policy meeting June 22, Bank Indonesia left rates steady at 5.75% and said its focus remains on keeping the rupiah stable to prevent imported inflation. Governor Warjiyo added that “The decision is consistent with the monetary policy stance to ensure inflation remains under control in the 2-4% range for the remainder of 2023 as well as 2024.” Next policy meeting is July 25 and no change is expected then. However, Bloomberg consensus sees the start of an easing cycle in Q4 with a 25 bp cut.
Korea reports June CPI Tuesday. Headline is expected at 2.8% y/y vs. 3.3% in May. If so, it would be the lowest since September 2021 but still above the 2% target. At the last policy meeting May25, Bank of Korea left rates steady at 3.5%. The vote was unanimous but Governor Rhee said the market should not think the bank won’t hike again as six members were open to a terminal rate of 3.75%. The bank said it would keep a restrictive policy stance in place for a “considerable time.” The bank raised its core inflation forecast for this year to 3.3% vs. 3.0% previously. Next policy meeting is July 13 and no change is expected then. The swaps market is pricing in steady rates over the next twelve months followed by the start of an easing cycle over the subsequent twelve months.
Philippines reports June CPI Wednesday. Headline is expected at 5.5% y/y vs. 6.1% in May. If so, it would be the lowest since May 2022 but still above the 2-4% target range. At the last policy meeting May18, the central bank left rates steady at 6.25%. Governor Medalla noted “Right now the economy is strong. That’s why pressure on us to cut is not so high.” He predicted that the bank would have room to consider a rate cut once the Fed starts easing, adding that he doesn’t expect that to happen this year. Next policy meeting is August 17 and no change is expected then. The swaps market is pricing in steady rates over the next twelve months followed by the start of an easing cycle over the subsequent twelve months.
Thailand reports June CPI Wednesday. Headline is expected at 0.15% y/y vs. 0.53% in May, while core is expected at 1.40% y/y vs. 1.55% in May. If so, headline would be the lowest since August 2021 and remain below the 1-3% target range. At the last policy meeting May 31, Bank of Thailand hiked rates 25 bp to 2.0%, as expected. The decision was unanimous and the bank maintained a hawkish bias as Assistant Governor Piti said “It’s still appropriate to continue the current strategy that we have adopted.” The bank noted that “The Committee recognizes upside risks to domestic growth, in part owing to forthcoming government economic policies. At the same time, there is a need to monitor the uncertain economic and monetary policy outlook of major economies.” Next policy meeting is July 25 and a 25 bp hike to 2.25% seems likely given the hawkish bias. The market is pricing in a policy rate peak near 2.5% over the next 12 months.
Bank Negara meets Thursday and is expected to keep rates steady at 3.0%. At the last policy meeting May 3, Bank Negara delivered a hawkish surprise and hiked rates 25 bp to 3.0% vs. an expected hold. The bank said “The balance of risk to the inflation outlook is tilted to the upside and remains highly subject to any changes to domestic policy including on subsidies and price controls, financial market developments, as well as global commodity prices.” The bank added that “In light of the continued strength of the Malaysian economy, the MPC also recognizes the need to ensure that the stance of monetary policy is appropriate to prevent the risk of future financial imbalances.” Most, including us, thought the tightening cycle was over after two straight holds in January and March after the last 25 bp hike in November. The swaps market is now pricing in 25 bp of tightening over the next six months that would see the policy rate peak near 3.25%.
