EM FX was mixed last week despite broad-based dollar weakness against the majors. HUF, PLN, and CLP outperformed while COP, TRY, and RUB underperformed. There are two competing themes impacting EM right now: lower DM tightening expectations and rising global recession risks. The two are obviously two sides of the same coin. We believe the latter will be more important near-term, while the former will come into play over the medium-term. At some point, the wide yield advantage for EM should lead to greater inflows but we do not think global investors are ready to take the plunge yet. For now, we remain defensive on EM.
AMERICAS
Mexico reports May GDP proxy Monday. Growth is expected at 1.69% y/y vs. 1.34% in April. Despite aggressive rate hikes, the economy is showing some signs of life. June trade data will be reported Wednesday. Q2 GDP will be reported Friday, with growth expected at 1.5% y/y vs. 1.8% in Q1. Last week, mid-July CPI came in higher than expected at 8.16% y/y, the highest since December 2000 and further above the 2-4% target range. Banco de Mexico hiked rates 75 bp to 7.75% at the June 23 meeting and hinted at another hike of the same magnitude at the next meeting August 11 by noting “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 another 200 bp of tightening over the next 6 months that would see the policy rate peak near 9.75%, followed by the start of an easing cycle over the subsequent 6 months.
Brazil reports June current account and FDI data Monday. July IPCA inflation will be reported Tuesday, with headline expected at 11.40% y/y vs. 12.04% in mid-June. if so, it would be the lowest since March but still well above the 2-5% target range. Next COPOM meeting is August 3 and a 50 bp hike to 13.75% is expected. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 14.25%, followed by the start of an easing cycle over the subsequent 6 months. June central government budget data will be reported Thursday and a primary surplus of BRL13.5 bln is expected vs. a -BRL39.4 bln deficit in May. May consolidated budget data will be reported Friday and a primary deficit of -BRL29.8 bln is expected vs. a BRL38.9 bln surplus in April.
Chile central bank releases its minutes Thursday. At the July 13 meeting, the bank delivered a hawkish surprise with a 75 bp hike to 9.75% vs. 50 bp expected and noted that “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.” Next policy meeting is September 6 and another 75 bp hike sems likely. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 10.75%, followed by the start of an easing cycle over the subsequent 6 months. Chile then reports June retail sales and IP Friday. Sales are expected at -6.1% y/y vs. -5.6% in May and IP is expected at -3.6% y/y vs. 1.8% in May. The economy is starting to slow sharply and so the bank is nearing the end of its tightening cycle.
Colombia central bank meets Friday and is expected to hike the base rate 150 bp to 9.0%. At the last meeting June 30, the bank hiked rates 150 bp to 7.5% and said the tightening cycle likely hasn’t ended. The swaps market is pricing in 375 bp of tightening over the next 6 months that would see the policy rate peak near 11.25%. CPI rose 9.67% y/y in June, the highest since June 2000 and further above the 2-4% target range. The economy remains robust and so the bank is likely to continue tightening in H2.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to hike the base rate 100 bp to 10.75%. However, the market is split as several analysts polled by Bloomberg look for 50, 75, and 125 bp hikes. The bank is also expected to hike the 1-week deposit rate at its weekly tender Thursday. At the June 28 meeting, the bank hiked rates 185 bp to 7.75% and two days later hiked the 1-week deposit rate 50 bp to match it. A week later, the bank hiked its 1-week deposit rate by 200 bp to 9.75% at its weekly tender and then the next week hiked the base rate 200 bp to match it. The swaps market is pricing in 125 bp of tightening over the next 6 months that would see the base rate peak near 11.0%, followed by the start of an easing cycle over the subsequent 6 months.
South Africa reports June PPI Thursday. It is expected at 15.6% y/y vs. 14.7% in May. Money supply, private sector credit, and budget data will be reported Friday. Trade data will be reported Saturday. SARB just delivered a hawkish surprise last week by hiking rates 75 bp to 5.5% vs. 50 bp expected and suggesting a steeper tightening path. 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. Next policy meeting is September 22 and another 75 bp hike is possible then. The swaps market is pricing in 250 bp of tightening over the next 12 months that would see the policy rate peak near 8.0%.
Poland reports July CPI Friday. Headline is expected to pick up two ticks to 15.7% y/y. if so, it would be the highest since October 1996 and further above the 1.5-3.5% target range. Next policy meeting is September 7 and another 50 bp hike to 7.0% seems likely. At the last meeting July 7, the bank delivered a dovish surprise and delivered a 50 bp hike to 6.5% vs. 75 bp expected. At that time, it raised its 2022 growth forecast to 3.9-5.5% vs. 3.4-5.5% previously and cut its 2023 growth forecast to 0.2-2.3% vs. 1.9-4.1% previously. It also raised its 2022 inflation forecast to 13.2-15.4% vs 9.3-12.2% previously and raised its 2023 inflation forecast to 9.8-15.1% vs 7-11% previously. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 7.0%.
ASIA
Singapore reports June CPI Monday. Headline is expected at 6.2% y/y vs. 5.6% in May, while core is expected at 4.1% y/y vs. 3.6% in May. If so, headline would be the highest since October 2008. While the MAS does not have an explicit inflation target, rising price pressures led to intra-meeting tightening this month and it will likely tighten again at its next scheduled meeting in October. IP will be reported Tuesday and is expected at 6.0% y/y vs. 13.8% in May.
Korea reports Q2 GDP Tuesday. Growth is expected at 0.5% q/q vs. 0.6% in Q1, with the y/y rate expected at 2.6% vs. 3.0% in Q1. June IP will be reported Friday and is expected at 2.0% y/y vs. 7.3% in May. Domestic activity has held up relatively well even as the Bank of Korea continues its tightening cycle, while export growth has slowed sharply. The bank last hiked rates 50 bp to 2.25% July 14. Next policy meeting is August 25 and another 50 bp hike 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%.
China reports official July PMI readings Saturday local time. Manufacturing is expected to rise a tick to 50.3, while non-manufacturing is expected to fall a full point to 53.7. If so, the composite PMI would likely fall close to a point from 54.1 in June. Over the weekend, the State Council called on local governments to accelerate infrastructure projects in order to help stabilize employment and strengthen the economy. For now, policymakers are using targeted stimulus efforts but if the economy continues to slow in H2, we expect more large-scale stimulus efforts to emerge.
