EM Preview for the Week of July 3, 2022

July 03, 2022

EM FX was broadly weaker last week as the broad dollar rally resumed. TRY, KRW, and MYR outperformed while ZAR, MXN, and BRL underperformed. We continue to believe that EM will suffer in the current environment of either higher DM rates or weaker global growth. We’ve alluded to this before, it's very much like the dollar smile except it's the EM frown. No matter how things turn out, it's bad for EM. Only BRL (4.5%), PEN (4%), and MXN (1%) are up YTD (we don't really count RUB) and eventually we think they all go negative.

AMERICAS

Brazil reports May IP Tuesday. IP is expected at 0.6% m/m vs. 0.1% in April. June IPCA inflation will be reported Friday. Headline is expected at 11.95% y/y vs. 11.73% in May. If so, it would be the highest since April and further above the 2-5% target range. The central bank just hiked rates 50 bp to 13.25% on June 15 and said it was appropriate to tighten policy “significantly into even more restrictive territory.” Next policy meeting is August 3 and another 50 bp hike to 13.75% is expected. Looking ahead, 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%.

Colombia reports June CPI Tuesday. Headline is expected at 9.71% y/y vs. 9.07% in May. If so, it would be the highest since May 2000 and further above the 2-4% target range. The central bank just hiked rates 150 bp to 7.5% on June 30. It said the tightening cycle would continue but might not be at the same pace. Next policy meeting is July 29 and another large hike seems likely. Looking ahead, the swaps market is pricing in 300 bp of tightening over the next 12 months that would see the policy rate peak near 10.5%.

Chile reports June trade data Thursday. June CPI will be reported Friday. Headline is expected at 12.7% y/y vs. 11.5% in May. If so, it would be the highest since June 1994 and further above the 2-4% target range. The central bank just hiked rates 75 bp to 9.0% on June 7. It said more hikes were needed but of smaller magnitude. Next policy meeting is July 13 and a 50 bp hike seems likely. Looking ahead, the swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 10.0%.

Mexico reports June CPI Thursday. Headline is expected at 7.98% y/y vs. 7.65% in May, while core is expected at 7.54% y/y vs. 7.28% in May. If so, headline would be the highest since January 2001 and further above the 2-4% target range. The central bank just hiked rates 75 bp to 7.75% on June 23 and signaled more hikes were needed. Next policy meeting is August 11 and another 75 bp hike seems likely. Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 6 months that would see the policy rate peak near 9.75%. Banco de Mexico minutes will also be released Thursday.

Peru central bank meets Thursday and is expected to hike rates 50 bp to 6.0%. CPI rose 8.81% y/y in June, the highest since July 1997 and further above the 1-3% target range. The bank just hiked rates 50 bp on June 9, as it has been all year. This pace is likely to continue for the time being.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports June CPI and PPI data Monday. Headline is expected at 79.95% y/y vs. 73.50% in May, while core is expected at 58.41% y/y vs. 56.04% in May. If so, it would be the highest since September 1998 and further above the 3-7% target range. The central bank just left rates steady at 14%, which was met with some relief as President Erdogan is still talking about cutting rates. May current account data will be reported Friday and a deficit of -$6.70 bln is expected vs -$2.74 bln in April. If so, the 12-month total would rise to -$29.1 bln and would be the highest since May 2021. We continue to believe that Turkey is headed towards a balance of payments crisis that will e exacerbated by too-loose monetary policy.

Bank of Israel meets Monday and is expected to hike rates 50 bp to 1.25%. At the last meeting May 23, the bank delivered a hawkish surprise by hiking rates 40 bp to 0.75% vs. 25 bp expected. CPI rose 4.15% y/y in May, the highest since June 2011 and further above the 1-3% target range. Looking ahead, the swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 2.5%.

Hungary reports May IP and retail sales Wednesday. Trade data will be reported Thursday. June CPI will be reported Friday. Headline is expected at 11.5% y/y vs. 10.7% in May. If so, it would be the highest since October 1998 and further above the 2-4% target range. The central bank just hiked the base rate 185 bp to 7.75% on June 28 and then hiked the 1-week deposit rate 50 bp to 7.75% at its weekly tender two days later. Next policy meeting is July 26 and another large hike seems likely. Looking ahead, the swaps market is pricing in 225 bp of tightening over the next 6 months that would see the policy rate peak near 10.0%.

National Bank of Poland meets Thursday and is expected to hike rates 75 bp to 6.75%. Markets are split, however, as a few analysts look for a 50 bp hike and several look for a 100 bp hike. The bank hiked rates 75 bp to 6.0% at the last meeting June 8. CPI rose 15.6% y/y in June, the highest since October 1996 and further above the 1.5-3.5% target range. Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 8.0%.

Russia reports June CPI Friday. Headline is expected at 16.0% y/y vs. 17.1% in May, while core is expected at 19.29% y/y vs. 19.87% in May. If so, headline would decelerate for the second straight month to the lowest since February but still well above the 3-7% target range. The central bank just cut rates 150 bp to 9.5% on June 10. Next policy meeting is July 22 and another cut seems likely. Looking ahead, the swaps market is pricing in 150 bp of easing over the next 12 months that would take the policy rate to 8.0%.

ASIA

Korea reports June CPI Tuesday. Headline is expected at 5.9% y/y vs. 5.4% in May, while core is expected at XX% y/y vs. 4.1% in May. If so, headline would be the highest since July 2008 and further above the 2% target. The central bank just hiked rates 25 bp to 1.75% on May 26. Next policy meeting is July 14 and another 25 bp hike seems likely. Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 3.75%.

Philippines reports June CPI Tuesday. Headline is expected at 6.0% y/y vs. 5.4% in May. If so, it would be the highest since November 2018 and further above the 2-4% target range. The central bank just hiked rates 25 bp to 2.5% on June 23. Next policy meeting is August 18 and another 25 bp hike seems likely. Looking ahead, the swaps market is pricing in 175 bp of tightening over the next 12 months that would take the policy rate to 4.25%.

Caixin reports June services and composite PMIs Tuesday. Services is expected at 49.6 vs. 41.4 in May. Last week, Caixin manufacturing PMI came in at 51.7 vs. 48.1 in May. As such, the Caixin composite should rise sharply from 42.2 in May. June CPI and PPI data will be reported Saturday. CPI is expected at 2.5% y/y vs. 2.1% in May, while core is expected at 6.0% y/y vs. 6.4% in May. If so, headline would be the highest since July 2020 and closer to the 3% target. The central bank has kept its key 1-year MLF rate steady at 2.85% since its last 10 bp cut in January. However, the bank is clearly in easing mode as growth takes priority over inflation.

Thailand reports June CPI Tuesday. Headline is expected at 7.5% y/y vs. 7.1% in May, while core is expected at 2.37% y/y vs. 2.28% in May. If so, it would be the highest since July 2008 and further above the 1-3% target range. The central bank just kept rate steady at 0.5% on June 8 but the vote was 4-3 with the dissents in favor of a 25 bp hike. Next policy meeting is August 10 and it’s likely that the bank starts a tightening cycle. Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months that would take the policy rate to 2.5%.

Bank Negara Malaysia meets Wednesday and is expected to hike rates 25 bp to 2.25%. The bank just hiked rates 25 bp to 2.0% on May 11. CPI rose 2.8% y/y in May, the highest since December. The central bank does not have an explicit inflation target but rising price pressures should keep it on its tightening path. Looking ahead, the swaps market is pricing in 150 bp of tightening over the next 24 months that would see the policy rate peak near 3.5%. May IP will be reported Friday.

Taiwan reports June CPI Wednesday. Headline is expected at 3.60% y/y vs. 3.39% in May, while core is expected at 2.80% y/y vs. 2.60% in May. If so, headline would be the highest since August 2008. The central bank does not have an explicit inflation target but rising price pressures should keep it on its tightening path. The central bank just hiked rates 12.5 bp to 1.5% on June 16. Next policy meeting is September 22 and a 25 bp hike seems likely. Looking ahead, the swaps market is pricing in 100 bp of tightening over the next 24 months that would see the policy rate peak near 2.5%. June trade data will be reported Friday. Exports are expected at 14.8% y/y vs. 12.5% in May, while imports are expected at 24.9% y/y vs. 26.7% in May.

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