EM Preview for the Week of July 31, 2022

July 31, 2022

EM FX was mixed last week despite broad-based dollar weakness against the majors. BRL, CLP and COP outperformed while RUB, HUF, and ARS underperformed. Risk sentiment improved on what we believe is an incorrect view of a Fed pivot. As such, we believe markets are underestimating the Fed’s resolve to fight inflation and hike rates. In addition, global growth is slowing and that is negative for EM. We remain defensive on EM.

AMERICAS

Chile reports June GDP proxy Monday. Growth is expected at 3.7% y/y vs. 6.4% in May. Last week, June retail sales and IP came in at -6.1% y/y and -1.5% y/y, respectively. Nominal wages will be reported Friday. The economy is slowing from a combination of aggressive rate hikes and lower copper prices, which have fallen nearly 30% from the March peak and nearly 25% from early June. The central bank next meets September 6 and is likely to hike rates but is nearing the end of the cycle. We agree with swap market pricing that suggests another 100 bp of tightening over the next 6 months that would see the policy rate peak near 10.75%.

Peru reports July CPI Monday. Headline is expected at 8.42% y/y vs. 8.81% in June. If so, it would be the first deceleration since January but still well above the 1-3% target range. At the last policy meeting July 7, the bank hiked rates 50 bp to 6.0%, as expected. Next meeting is August 11 and another 50 bp hike to 6.5% seems likely. That said, the economy is also slowing from rate hikes and lower copper prices. Bloomberg consensus sees the policy rate peaking at 6.5% in Q3 but we think the tightening cycle may go on for another quarter.

Brazil reports July trade data Monday. June IP will be reported Tuesday and is expected at -0.3% y/y vs. 0.5% in May. COPOM meets Wednesday and is expected to hike rates 50 bp to 13.75%. IPCA inflation came in at 11.39% y/y in mid-July, the lowest since March but still well above the 2-5% target range. If inflation continues to fall, we believe Brazil is nearing the end of the cycle. We agree with swap market pricing that suggests another 75 bp of tightening over the next 3 months that would see the policy rate peak near 14.0%.

Colombia central bank minutes will be released Tuesday. At that meeting last Friday, the bank hiked rates 150 bp to 9.0%, as expected. July CPI will be reported Friday. Headline is expected at 9.97% y/y vs. 9.67% in June. If so, headline would be the highest since May 2000 and further above the 2-4% target range. Next meeting is September 30 and another 150 bp hike to 10.5% seems likely. The swaps market is pricing in another 325 bp of tightening over the next 6 months that would see the policy rate peak near 12.25%.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports June retail sales Wednesday. Sales are expected at 8.3% y/y vs. 11.1% in May. June IP will be reported Friday and is expected to remain steady at 3.4% y/y WDA. The bank just hiked rates 100 bp to 10.75% in late July. CPI rose 11.7% y/y in June, the highest since October 1998 and further above the 2-4% target range. However, the economy is slowing from a combination of rate hikes and slower eurozone growth and so the bank may be nearing the end of its tightening cycle. Next policy meeting is August 30 and another 100 bp hike to 11.75% seems likely. The swaps market is pricing in another 125-150 bp of tightening over the next 6 months that would take the base rate to between 12.0-12.25%.

Turkey reports July CPI Wednesday. Headline is expected at 80.10% y/y vs. 78.62% in June, while core is expected at 61.20% y/y vs. 57.26% in June. If so, headline would be the highest since September 1998 and further above the 3-7% target range. At the last meeting July 21, the central bank kept rates steady at 14.0%, as expected. Next policy meeting is August 18 and the bank is likely to keep rates steady at 14.0%. Last week, the central bank revised its year-end inflation forecast to 60.4% from 42.8%, which still seems too low. Governor Kavcioglu has shown no pivot from unorthodox policy but came under greater criticism from business at a meeting last week of the Istanbul Chamber of industry. We continue to believe that the nation will eventually face a balance of payments crisis that morphs into a full-blown economic crisis.

Czech National Bank meets Thursday and is expected to keep rates steady at 7.0%. However, the market is split as nearly half the analysts polled by Bloomberg look for either a 25 or 50 bp hike. At the last meeting June 22, the bank delivered a hawkish surprise and hiked rates 125 bp to 7.0%. CPI rose 17.2% y/y in June, the highest since December 1993 and further above the 1-3% target range. June retail sales will be reported Friday and ex-autos are expected at -7.5% y/y vs. -6.9% in May. Here too, the economy is slowing from a combination of rate hikes and slower eurozone growth and so the bank may be nearing the end of its tightening cycle. The swaps market is pricing in no more tightening in this cycle. We don’t think we are quite there yet and so look for a hawkish surprise this week.

ASIA

Korea reports July trade data Monday. Exports are expected at 10.0% y/y vs. 5.2% in June, while imports are expected at 22.7% y/y vs. 19.4% in June. July CPI will be reported Tuesday. Headline is expected at 6.3% y/y vs. 6.0% in June. If so, headline would be the highest since November 1998 and further above the 2% target. At the last meeting July 13, the Bank of Korea hiked rates 50 bp to 2.25%, as expected. Next policy meeting is August 25 and another 50 bp hike to 2.75% seems likely. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 2.75%. We do not think we are at the end of the tightening cycle yet and look for further tightening after this meeting. June current account data will be reported Friday.

Caixin reports China July manufacturing PMI Monday. It is expected to come in at 51.5 vs. 51.7 in June. Its services and composite PMI readings will be reported Wednesday. Services is expected to come in at 54.0 vs. 54.5 in June. Over the weekend, weak official PMI readings were reported. Manufacturing came in at 49.0 vs. 50.2 in June, non-manufacturing came in at 53.8 vs. 54.7 in June, and the composite came in at 52.5 vs. 54.1 in June. As such, there are downside risks to the Caixin readings this week. U.S.-China relations remain rocky but U.S. officials said they are planning on an in-person summit between Presidents Biden and Xi after last week’s call between the two yielded no breakthroughs.

Indonesia reports July CPI Monday. Headline is expected at 4.82% y/y vs. 4.35% in June, while core is expected at 2.86% y/y vs. 2.63% in June. If so, headline would be the highest since November 2015 and further above the 2-4% target range. At the last meeting July 21, Bank Indonesia kept rates steady at 3.5%, as expected. Next policy meeting is August 23 and liftoff then seems likely with a 25 bp hike to 3.75%. Indeed, Bloomberg consensus sees 50 bp of tightening in Q3 followed by 25 bp in Q4 that would see the policy rate at 4.25% at year-end. Q2 GDP data will be reported Friday. Growth is expected at3.47% q/q vs. -0.96% in Q1, while the y/y rate is expected at 5.20% vs. 5.01% in Q1.

Hong Kong reports Q2 GDP data Monday. Growth is expected at 2.2% q/q vs. -3.0% in Q1, while the y/y rate is expected at 0.2% vs. -4.0% in Q1. June retail sales data will be reported Tuesday, with volume expected at -2.0% y/y vs. -4.9% in May. The economy is slowing due to the slowdown on the mainland as well as higher interest rates required under the HKD peg. Liquidity has been tightening due to HKMA intervention to defend the peg, which has driven HIBOR higher. Commercial banks have kept their prime rates steady despite 225 bp of Fed tightening but will have to eventually raise them as well. With the peg remaining under pressure, we see tighter liquidity weighing on the economy in the coming months.

Philippines reports July CPI Friday. Headline is expected to remain steady at 6.1% y/y, which was the highest since November 2018 and well above the 2-4% target range. At the last meeting July 14, the central bank delivered a hawkish surprise and hiked rates 75 bp to 3.25%. Next policy meeting is August 18 and another 50-75 bp hike seems likely. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 4.75%.

Thailand reports July CPI Friday. Headline is expected at 7.80% y/y vs. 7.66% in June, while core is expected at 2.63% y/y vs. 2.51% in June. If so, headline would be the highest since July 2008 and further above the 1-3% target range. At the last meeting June 8, Bank of Thailand kept rates steady at 0.5%, as expected. Next policy meeting is August 10 and we see risks of liftoff then. The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 2.25%. The baht remains the worst performer in emerging Asia at -9.25% YTD, due in large part to the Bank of Thailand’s dovish stance.

Reserve Bank of India meets Friday and is expected to hike rates 50 bp to 5.40%. At the last meeting June 8, the RBI delivered a hawkish surprise and hiked rates 50 bp to 4.90% vs. 40 bp expected. CPI rose 7.01% y/y in June, down for the second straight month from the 7.79% peak in April but still above the 3-6% target range. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 6.15%.

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