EM Preview for the Week of July 7, 2024

July 07, 2024

EM FX was mostly firmer last week, taking advantage of broad dollar weakness stemming from softer U.S. data. BRL, HUF, and PLN outperformed while ARS, KRW, and TWD underperformed. Inflation data this week will be key for cementing the more dovish Fed narrative.

AMERICAS

Chile reports June CPI and trade data Monday. Headline is expected to pick up two ticks to 4.3% y/y. If so, it would be the third straight month of acceleration to the highest since February and further above the 2-4% target range. At the last meeting June 18, the central bank cut rates 25 bp to 5.75%, as expected. The vote was 4-1, with the dissent in favor of a larger 50 bp cut. The bank signaled that the end of the easing cycle is nearing by noting “The board estimates that, if the assumptions of the central scenario materialize, the monetary policy rate would have accumulated the bulk of the cuts planned for this year during the first half.” Next meeting is July 31 and another 25 bp cut seems likely. The market sees the policy rate bottoming near 5.0% over the next twelve months.

Colombia reports June CPI Monday. Headline is expected at 7.15% y/y vs. 7.16% in May, while core is expected at 7.69% y/y vs. 7.83% in May. If so, headline would be the lowest since January 2022 but still well above the 2-4% target range. At the last meeting June 28, the central bank cut rates 50 bp to 11.25% by a split 4-2 vote, with the two dissents in favor of a larger 75 bp cut and one absent that did not vote. Governor Villar said rate cuts would continue but stressed that the bank needs to see a faster drop in inflation in order to cut at a faster rate. Villar added that peso weakness doesn’t merit FX intervention. The market is pricing in around 275 bp of easing over the next twelve months that would see the policy rate bottom near 8.5%.

Mexico reports June CPI Tuesday. Headline is expected at 4.87% y/y vs. 4.69% in May, while core is expected at 4.14% y/y vs. 4.21% in May. If so, headline would accelerate for the fourth straight month to the highest since January and move further above the 2-4% target range. Banco de Mexico releases its minutes Thursday. At the June 27 meeting, the bank kept rates steady at 11.0% by a 4-1 vote, with the dissent in favor of a 25 bp cut. At the previous meeting May 9, the vote to hold rates was unanimous and so the door to a rate cut is slowly opening. Afterwards, Governor Rodriguez said rates cuts will be “on the table” in the next meetings and added “Going forward, what we’re seeing is that we’ll have space to reduce the degree of restriction. Reducing the rate does not mean that we will stop being restrictive.” The market is pricing in 25 bp of easing over the next three months and a total of 100 bp over the next twelve months. May IP will be reported Friday.

Brazil reports June IPCA inflation Wednesday. Headline is expected at 4.33% y/y vs. 3.93% in May. If so, headline would accelerate for the second straight month to the highest since February and near the top of the 1.5-4.5% target range. At the last meeting June 19, the central bank “interrupted” the easing cycle and kept rates steady at 10.5%. However, central bank chief Campos Neto pushed back against market expectations for rate hikes, stressing “It’s not our base case scenario.” The market disagrees and is pricing in 125 bp of tightening over the next twelve months. Campos Neto also downplayed recent BRL weakness by noting “There’s short-term noise.” However, there’s no denying that the deteriorating fiscal outlook is impacting Brazil asset values. May retail sales will be reported Thursday.

Peru central bank meets Thursday and is expected to keep rates steady at 5.75%. However a couple of analysts look for a 25 bp cut to 5.5%. At the last meeting June 13, the bank delivered a hawkish surprise and kept rates steady at 5.75% vs. an expected 25 bp cut. The bank justified standing pat by noting that “core inflation shows some persistence derived from some service components.” Core inflation rose to an 8-month high at 3.12% y/y in June from 3.10% in May and so it seems likely that the rate pause will be extended.

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel meets Monday and is expected to keep rates steady at 4.5%. At the last meeting May 27, the bank kept rates steady and warned that “there are several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.” Since then, the shekel has weakened about 2.5% and so the bank is likely to remain cautious. The market is pricing in steady rates over the next three months, with some odds of a cut over the subsequent three months.

Hungary reports June CPI Tuesday. Headline is expected to fall a tick to 3.9% y/y. If so, it would be the first deceleration since March and move further within the 2-4% target range. Central bank minutes will be released Wednesday. At that meeting June 18, National Bank of Hungary cut rates 25 bp to 7.0%, as expected. However, Deputy Governor Virag said “Monetary policy is entering a new era from June. The central bank will have more limited room for cutting the benchmark rate in this period.” He added that a pause in the easing cycle and small cuts may be considered going forward. Next meeting is August 27 and another 25 bp cut is possible if inflation continues to fall.

Czech Republic reports June CPI Wednesday. Headline is expected at 2.4% y/y vs. 2.6% in May. If so, it would be the lowest since March and moving closer to the 2% target. At the last meeting June 27, Czech National Bank delivered a dovish surprise and cut rates 50 bp to 4.75% vs. 25 bp expected. However, Governor Michl said the pace of easing was likely to slow in the coming meetings and added that next move was likely to be either a 25 bp cut or a pause. Next meeting is August 1 and a 25 bp cut to 4.5% seems likely.

ASIA

China reports June money and new loan data sometime this week. New loans are expected at CNY2.3 trln vs. CNY945 bln in May, while aggregate financing is expected at CNY3.42 trln vs. CCNY2.065 trln in May. The y/y rates for new loans and M2 have fallen significantly and this is expected to continue. CPI and PPI data will be reported Wednesday. CPI is expected at 0.4% y/y vs. 0.3% in May, while PPI is expected at -0.8% y/y vs. -1.4% in May. If so, CPI would be the highest since February but still well below the target of “around 3%.” Trade data will be reported Friday. Exports are expected at 8.0% y/y vs. 7.6% in May, while imports are expected at 2.5% y/y vs. 1.8% in May.

Bank of Korea meets Thursday and is expected to keep rates steady at 3.5%. At the last meeting May 23, Bank of Korea left rates steady at 3.5% unanimously and reiterated it will “maintain a restrictive monetary policy stance for a sufficient period of time.” Governor Rhee noted that “upside risks to inflation have increased due to better-than-expected growth and heightened volatility of the exchange rate. Moreover, geopolitical risks also persist.” We anticipate a similar message this week. The market now sees steady rates over the next three months, followed by 25 bp of easing over the subsequent three months and then 25 bp of further easing over the subsequent six months.

Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 3.0%. At the last meeting May 9, the bank kept rates steady at 3.0% and signaled that it is unlikely to shift to looser policy settings anytime soon despite low inflation of 1.8% y/y in March. First, it noted that “the latest indicators point towards higher economic activity in the first quarter of 2024.” Second, it forecast headline and core inflation to pick up over 2024 and average between 2.0-3.5% and 2.0-3.0%, respectively. Third, it warned “the ringgit currently does not reflect Malaysia's economic fundamentals and growth prospects.” The market continues to price in steady rates over the next three years.

India reports June CPI and May IP Friday. Headline inflation is expected at 4.80% y/y vs. 4.75% in May, while IP is expected to fall a tick to 4.9% y/y. At the last meeting June 7, the Reserve Bank of India kept rates steady at 6.5% but the voting split suggests the bar to ease policy is falling. The vote was 4-2 to keep rates on hold versus 5-1 in April. Goyal joined Varma in voting for a 25 bp cut. The market is pricing in steady rates over the next six months followed by the possible start of an easing cycle over the subsequent six months as inflation falls towards the mid-point of the RBI’s 2-6% target range.

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