EM FX was broadly lower last week as the dollar mounted a strong comeback on heightened Fed tightening expectations. RUB and PEN eked out small gains last week while HUF, THB, and BRL were the worst performers at -2%. This week will be just as challenging for EM. Not only is the Fed expected to hike rates 75 bp Wednesday, but several other major central banks are also delivering higher rates. The Riksbank is expected to hike rates 75 bp Tuesday, while the SNB is expected to hike 75 bp and the BOE and Norges Bank both by 50 bp Thursday. Tighter global liquidity will lead to slower global growth and so the backdrop will remain very negative for EM and other risk assets.
AMERICAS
Brazil COPOM meets Wednesday and is expected to keep rates steady at 13.75%. August IPCA inflation came in at 8.73% y/y vs. 10.07% in July, the lowest since June 2021 but still above the 2-5% target range. COPOM hiked rates 50 bp to 13.75% at the last policy meeting August 3 and said “The Committee will evaluate the need for a residual adjustment, of lower magnitude, in its next meeting. The COPOM emphasizes that it will remain vigilant and that future policy steps could be adjusted to ensure the convergence of inflation towards its targets.” With inflation falling rapidly, it appears that the tightening cycle is nearing an end. However, the swaps market is pricing in one final hike to 14.0% over the next 6 months.
Mexico reports mid-September CPI Thursday. Headline is expected at 8.71% y/y vs. 8.62% in mid-August. If so, it would be the highest since November 2000 and further above the 2-4% target range. At the August 11 meeting, the bank hiked rates 75 bp to 8.5%, as expected. The decision was unanimous but the bank said future moves will depend on prevailing conditions. Perhaps the minutes will provide more clues. Next policy meeting is September 29 and another 75 bp hike seems likely. The swaps market is pricing in 175 bp of tightening over the next 6 months that would see the policy rate peak near 10.25%.
Chile central bank releases its minutes Thursday. At that September 6 meeting, the bank delivered a hawkish surprise with a 100 bp hike to 10.75% vs. 75 bp expected. There was one dissent in favor of an even larger 125 bp move. The bank noted then that “The next move in rates will depend on the macroeconomic scenario. The board will pay special attention to the risk of higher inflation.” August CPI came in at 14.1% y/y vs. 13.8% expected 13.1% in July. It was the highest since September 1992 and further above the 2-4% target range. The swaps market is pricing in 50 bp of tightening over the next 3 months that would see the policy rate peak near 11.25% but there are clear upside risks.
EUROPE/MIDDLE EAST/AFRICA
Poland reports August IP, PPI, employment, and wages Tuesday. IP is expected at 10.0% y/y vs. 7.6% in July, PPI is expected at 24.5% y/y vs. 24.9% in July, and average gross wages are expected at 13.6% y/y vs. 15.8% in July. Real retail sales and construction output will be reported Wednesday. Sales are expected at 3.3% y/y vs. 2.0% in July, while construction is expected at 4.1% y/y vs. 4.2% in July. The economy is clearly slowing and so the central bank is trying to end its tightening cycle. Even with CPI rising 16.1% y/y in August, the bank only hiked rates 25 bp to 6.75% at the last meeting September 7. Governor Glapinski said that the tightening cycle hadn’t formally ended and that future moves will be data dependent. Next policy meeting is October 5 and we expect another 25 bp hike to 7.0% with risks of a dovish surprise.
South Africa reports August CPI Wednesday. Headline is expected at 7.6% y/y vs. 7.8% in July, while core is expected to remain steady at 4.6% y/y. If so, headline would decelerate for the first time since January but still far above the 3-6% target range. SARB meets Thursday and is expected to hike rates 75 bp to 6.25%. At the last meeting July 21, the bank delivered a hawkish surprise and hiked rates 75 bp to 5.5% vs. 50 bp expected. The vote was 3-1-1, with one dissent in favor of a 50 bp hike and one in favor of a 100 bp hike. 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. However, the swaps market is pricing in a peak policy rate near 8.0% over the next 12 months. Governor Kganyago said that “Our assessment now is that this inflation risk is no longer transitory, but that there is persistence that is emerging.” He added that the bank is concerned about widespread wage settlements that are consistently above inflation expectations that could prompt a wage-price spiral.
Turkey central bank meets Thursday and is expected to keep rates steady at 13.0%. However, a few analysts look for cuts of 50 or 100 bp. At the last meeting August 18, the bank delivered a dovish surprise and cut rates 100 bp to 13.0%. The bank was clearly worried about slowing growth as it said “It is important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk.” However, it seemed to signal no further easing as it noted that “the updated level of policy rate is adequate under the current outlook.” Still, the move suggests risks of a dovish surprise at every meeting.
ASIA
China’s commercial banks set their 1- and 5-year Loan Prime Rates Tuesday. Rates are expected to be kept steady at 3.65% and 4.30%, respectively, after the PBOC left its key 1-year MLF unchanged at 2.75% last week. The central bank had just cut that rate 10 bp August 15 and so another cut so soon seems unlikely. However, we see further stimulus ahead after August inflation data surprised to the downside. We continue to see downside risks to the economic outlook as policymakers are only adding modest stimulus. That said, monetary policy divergence continues to widen and that means a weaker yuan. Last week, both USD/CNY and USD/CNH broke above 7 and are on track to test 7.1775 and 7.1965 highs from May 2020, respectively.
Malaysia reports August trade data Tuesday. Exports are expected at 34.3% y/y vs. 38.0% in July, while imports are expected at 49.1% y/y vs. 41.9% in July. August CPI will be reported Friday and is expected at 4.7% y/y vs. 4.4% in July. If so, it would be the highest since April 2021. While the bank does not have an explicit inflation target, rising price pressures should keep the tightening cycle going for now. At the last meeting September 8, Bank Negara Malaysia hiked rates 25 bp to 2.50%, as expected. The bank noted that “The economy is stronger. It doesn’t need large support like it did during the pandemic.” It said policy is “not on any pre-set course” and added that “Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative.” Next policy meeting is November 3 and another 25 bp hike to 2.75% seems likely. The swaps market is pricing in 75 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%.
Taiwan reports August export orders Tuesday. Orders are expected at 1.1% y/y vs. -1.9% in July. The central bank meets Thursday and is expected to hike rates 12.5 bp to 1.625%. At the last meeting June 16, the bank delivered a dovish surprise and hiked rates 12.5 bp to 1.50% vs. 25 bp expected. However, it also raised reserve requirements 25 bp, which the bank estimated would drain TWD120 bln from the system. Governor Yang said then that “This was a very difficult decision. Inflation is certain to rise further but we also had to consider the potential hurt to sectors reliant on domestic demand so that’s why we decided to raise the rate by a little less and implement liquidity controls.” The swaps market is pricing in only 75 bp of tightening over the next 24 months that would see the policy rate peak near 2.25%. August IP will be reported Friday and is expected at 0.33% y/y vs. 1.12% in July.
Korea reports trade data for the first 20 days of September Wednesday. The slowdown in mainland China has had a direct impact on regional activity and trade, with Korea getting hit hard. Recent yen weakness has also hurt Korea’s competitiveness, with the JPY/KRW cross remaining below the key 10 level. That said, we do not think Korean policymakers want to encourage further won weakness as it would feed into already high inflation of 5.7% y/y in August, well above the 2% target. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 3.75%. Next policy meeting is October 12 and another 25 bp hike to 2.75% is expected.
Philippine central bank meets Thursday and is expected to hike rates 50 bp to 4.25%. At the last meeting August 18, the bank hiked rates 50 bp to 3.75%, as expected. New Governor Medalla warned “The inflation target remains at risk. Elevated inflation expectations likewise highlight the risk of further second-round effects.” The central bank raised its inflation forecast for this year to 5.4% vs. 5.0% previously but cut its forecast for next year to 4.0% vs. 4.2% previously and for 2024 to 3.2% vs. 3.3% previously. Medalla said future policy moves will remain data-dependent and Fed-dependent. The swaps market is pricing in another 75 bp of tightening over the next 6 months that would see the policy rate peak near 4.5%, but we see upside risks.
Bank Indonesia meets Thursday and is expected to hike rates 25 bp to 4.0%. A few analysts look for larger 50 bp move. At the last meeting August 23, the bank delivered a hawkish surprise with a 25 bp hike to 3.75%. Governor Warjiyo said “This decision is a preemptive and forward looking step to mitigate the risk of rising core inflation and inflation expectations due to the increase in non-subsidized fuel prices and volatile food inflation, as well as to strengthen the rupiah exchange rate stabilization policy amid high global uncertainty and increasingly strong domestic economic growth.” The bank raised its core inflation forecast for this year to 4.15% vs. 2-4% previously and raised its headline inflation forecast to 5.24% vs. 4.5-4.6% previously. Warjiyo said the bank is seeing evidence of second-round effects. We also believe some administered prices will be raised soon after President Joko Widodo warned that the budget could no longer maintain heavy subsidies.
