EM Preview for the Week of June 5, 2022

June 05, 2022

EM FX was mixed last week as the dollar regained some traction on firm U.S. data. RUB, COP, and CLO outperformed while TRY, PHP, and ARS underperformed. The backdrop for EM remains shaky, with global liquidity continuing to tighten rapidly. The Fed remains on track to continue hiking aggressively, while the ECB is widely expected to set the table for liftoff July 21 at this Thursday’s meeting. Other central banks likely to hike this week are the RBA in DM along with EM central banks in Chile, Peru, Poland, and India. China and Russia are the outliers here as policymakers there are trying to boost their struggling economies.

AMERICAS

Chile central bank meets Tuesday and is expected to hike rates from 8.25% currently. Analysts polled by Bloomberg are evenly split between a 75 or 100 bp move. Chile also reports May trade data Tuesday. May CPI will be reported Wednesday, with headline expected at 11.4% y/y vs. 10.5% in April. If so, it would be the highest since July 1994 and further above the 2-4% target range. As such, we see risks of a hawkish surprise. Looking ahead, the swaps market is pricing in 150 bp of tightening over the next 3 months that would see the policy rate peak near 9.75%, followed by the start of an easing cycle in the subsequent 3 months.

Peru central bank meets Thursday and is expected to hike rates 50 bp to 5.5%. May CPI inflation came in at 8.09% y/y vs. 7.96% in April, the highest since May 1998 and further above the 1-3% target range. The central bank has been hiking rates at 50 bp clips all year and this is expected to continue for the time being.


Mexico reports May CPI Thursday. Headline is expected at 7.63% y/y vs. 7.68% in April, while core is expected at 7.25% y/y vs. 7.22% in April. If so, it would be the first deceleration in headline since January but still well above the 2-4% target range. Next Banco de Mexico meeting is June 23 and a 50 bp hike to 7.5% is expected. However, there are risks of a 75 bp if inflation continues to rise. Looking ahead, the swaps market is pricing in 250 bp of tightening over the next 12 months that would see the policy rate peak near 9.5%. April IP will be reported Friday and is expected at 1.6% y/y vs. 2.6% in March.

Brazil reports May IPCA inflation Thursday. Headline is expected at 11.88% y/y vs. 12.13% in April. If so, it would be the first deceleration since December but still well above the 2-5% target range. Next COPOM meeting is June 16 and a 50 bp hike to 13.25% is expected. Looking ahead, the swaps market is pricing in 100 bp of tightening over the next 3 months that would see the policy rate peak near 13.75%, followed by the start of an easing cycle in H1 23. April retail sales will be reported Friday and are expected at 2.5% y/y vs. 4.0% in March.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports April industrial and construction output and trade data Monday. Retail sales and Q1 average real monthly wages will be reported Tuesday. May CPI will be reported Friday, with headline expected at 15.5% y/y vs. 14.2% in April. If so, it would be the highest since December 1993 and further above the 1-3% target range. Czech National Bank delivered a hawkish surprise at the last meeting May 5 with a 75 bp hike to 5.75% vs. 50 bp expected. Next meeting is June 22 and we think another 75 bp hike to 6.5% is likely. The swaps market is pricing in only 50 bp of tightening over the next 6 months that would take the policy rate to 6.25%, which we think is too low if inflation continues to rise. May unemployment will be reported Wednesday and is expected to fall a tick to 3.2%.

South Africa reports Q1 GDP data Tuesday. Growth is expected at 1.2% q/q and 1.8% y/y vs. 1.2% and 1.7% in Q4, respectively. The economy remains sluggish even as the SARB continues its tightening cycle. Next policy meeting is July 21 and a 25 bp hike to 5.0% seems likely. The swaps market is pricing in 300 bp of tightening over the next 36 months that would take the policy rate to 7.75%. Q1 current account and April manufacturing production data will be reported Thursday. The current account surplus is expected at 1.6% of GDP vs. 1.9% in Q4, while production is expected at -3.6% y/y vs. -0.8% in March.

Hungary reports May CPI, April IP, and trade data Wednesday. Headline inflation is expected at 10.4% y/y vs. 9.5% in April. If so, it would be the highest since June 2001 and further above the 2-4% target range. National Bank of Hungary just delivered the expected 50 bp hike to 5.90% last week. Next meeting is June 28 and another 50 bp hike to 6.40% is expected, with risks of a larger move. The swaps market is pricing in 125 bp of tightening over the next 6 months that would see the policy rate peak 7.15%, which we also think is too low if inflation continues to rise. IP is expected at 6.4% y/y WDA vs. 4.2% in March. Prime Minister Orban issued a set of decrees that hiked corporate taxes and cut government spending. The moves became necessary after the EU blocked disbursement of aid but should help cool demand as monetary tightening has so far been timid.

National Bank of Poland meets Wednesday and is expected to hike rates 75 bp to 6.0%. A couple of analysts look for a smaller 50 bp move. The swaps market is pricing in another 125 bp of tightening over the next 12 months that would see the policy rate peak near 6.5%, but we see upside risks here as well. Minutes from the May 5 meeting will be released Friday. At that meeting, the bank delivered a dovish surprise with a 75 bp hike to 5.25% vs. 100 bp expected. Since then, May CPI inflation came in at 13.9% y/y in May, the highest since October 1997 and further above the 1.5-3.5% target range.

Russia reports May CPI Wednesday. Headline is expected at 17.35% y/y vs. 17.83% in April, while core is expected at 19.90% y/y vs. 20.37% in April. If so, it would be the first deceleration in headline since April 2021 but still well above the 4% target. The central bank meets Friday and is expected to cut rates 100 bp to 10.0%. However, the market is all over the place with several analysts looking for cuts ranging from 200 bp to no cuts all. The bank just cut rates 300 bp at an unscheduled meeting May 26, a mere two weeks ahead of this week’s scheduled meeting. The bank said after the May cut that inflation has been slowing in recent week and that it will consider further cuts at its next meetings.

ASIA

China reports May money and loan data sometime this week. New loans are expected at CNY1.21 trln vs. CNY645 bln in April, while aggregate financing is expected at CNY1.975 trln vs. CNY910 bln in April. Caixin reports May services and composite PMIs Monday. Services is expected at 46.0 vs. 36.2 in April, which should drag the composite significantly higher from 37.2 in April. May trade data will be reported Thursday. Exports are expected at 8.0% y/y vs. 3.9% in April, while imports are expected at 2.5% y/y vs. 0.0% in April. CPI and PPI will be reported Friday. CPI is expected at 2.2% y/y vs. 2.1% in April, while core is expected at 6.5% y/y vs. 8.0% in April. If so, CPI inflation would be the highest since November but still below the 3% target. Policymakers remain focused on boosting growth and so further monetary easing is likely in the coming weeks.

Thailand reports May CPI Monday. Headline is expected at 5.85% y/y vs. 4.65% in April, while core is expected at 2.20% y/y vs. 2.00% in April. If so, headline would be the highest since September 2008 and further above the 1-3% target range. Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.50%. However, a couple of analysts polled by Bloomberg look for liftoff with a 25 bp hike to 0.75%. The Bank of Thailand delivered a dovish hold at the last meeting March 30, with Assistant Governor Piti saying “It’s not worth weighing on the economy to bring inflation back within the target. We don’t want to use a tool that has wide impact now to deal with short-term problem.” The swaps market sees liftoff over the next 3 months, which implies a hike at the next meeting August 10.

Philippines reports May CPI Tuesday. Headline is expected at 5.4% y/y vs. 4.9% in April. If so, it would be the highest since November 2018 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike to 2.25% May 19. Governor Diokno said then that “The pace and timing of further monetary policy actions by the BSP shall be guided by data outcomes.” Bloomberg consensus sees a modest tightening cycle of quarterly hikes, at least for now. Next policy meeting is June 23 and as Diokno said, the decision will depend on how the data come in over the next couple of weeks. April trade data will be reported Thursday. Exports are expected at 10.6% y/y vs. 5.9% in April, while imports are expected at 26.8% y/y vs. 27.7% in April.

Taiwan reports May CPI Tuesday. Headline is expected at 3.37% y/y vs. 3.38% in April. While the central bank does not have an explicit inflation target, high price pressures are likely to see it continue its tightening cycle after liftoff was seen at the March 17 meeting. Next policy meeting is June 16 and another 25 bp hike to 1.625% seems likely. Trade data will be reported Wednesday. Exports are expected at 18.0% y/y vs. 18.8% in April, while imports are expected at 23.0% y/y vs. 26.7% in April. Korean trade data for May showed surprising strength but weak Taiwan exports orders warn of weakness ahead.

Reserve Bank of India meets Wednesday and is expected to hike rates 50 bp to 4.90%. However, a handful of analysts look for smaller moves ranging from 25-40 bp. The bank just started the tightening cycle with a 50 bp intra-meeting hike May 4. At that time, Governor Das warned that persistent inflation pressures were becoming more acute and that “Inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth.” The RBI also increased the cash reserve ratio by 50 bp to 4.5%, which would drain INR870 bln of liquidity from the banking system. CPI rose 7.79% y/y in April, the highest since and May 2014 further above the 2-6% target range. The swaps market is pricing in nearly 300 bp of tightening over the next 24 months that would see the repo rate peak near 7.25%. April IP will be reported Friday and is expected at 5.4% y/y vs. 1.9% in March.

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