EM FX was mixed last week despite the dollar’s broad-based gains against the majors. HUF, CLP, and RON outperformed while ZAR, KRW, and BRL underperformed. However, risk appetite is likely to remain weak after Russia cut off gas shipments to Europe over the weekend and so EM FX should remain under pressure..
AMERICAS
Colombia reports August CPI Monday. Headline is expected at 10.37% y/y vs. 10.21% in July. If so, it would be the highest since April 1999 and further above the 2-4% target range. At the last policy meeting July 29, the bank hiked rates 150 bp for the second straight time to 9.0%, as expected. Governor Villar said the bank will weigh whether further hikes are needed and added that if so, the moves will be smaller. Next meeting is September 30 and a smaller 100 bp hike to 10.0% seems likely. The swaps market is pricing in 225-250 bp of tightening over the next 12 months that would see the policy peak between 11.25-11.50%.
Chile central bank meets Tuesday and is expected to hike rates 75 bp to 10.5%. However, nearly half the analysts polled by Bloomberg see a smaller 50 bp move. At the last meeting July 13, the bank delivered a hawkish surprise with a 75 bp hike to 9.75% vs. 50 bp expected. The vote was unanimous and the bank said more hikes will be needed while removing a reference in the previous statement about reducing the size of future moves. The bank releases its quarterly monetary policy report Wednesday, while August trade data will be reported. August CPI will be reported Thursday, with headline expected at 13.8% y/y vs. 13.1% in July. If so, it would be the highest November 1992 and further above the 2-4% target range. The swaps market is pricing in 125 bp of tightening over the next 3 months that would see the policy rate peak near 11.0%. The proposed Constitution appears to have been overwhelmingly rejected; with nearly 50% of the votes counted, 37% were in favor and 63% were against. This is likely to be positive for Chilean assets due to the strong popular pushback against moving too far left.
Mexico reports August CPI Thursday. Headline is expected at 8.66% y/y vs. 8.15% in July, while core is expected at 8.04% y/y vs. 7.65% in July. If so, headline would be the highest since December 2000 and further above the 2-4% target range. At the last meeting August 11, the bank hiked 75 bp to 8.5%, as expected. The minutes were very hawkish, with members noting that extra rate hikes will be needed and that inflation expectations are starting to de-anchor. Members noted that core inflation is showing “significant persistence” and the upward trend is “concerning.” Next policy meeting is September 29 and another 75 bp hike to 9.25% 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 10.0%, up from 9.75% at the start of last week. July IP will be reported Friday and is expected at 3.1% y/y vs. 3.8% in June.
Peru central bank meets Thursday and is expected to hike rates 50 bp to 7.0%. August inflation came in at 8.40% y/y vs. 8.74% in July. This was the second straight month of deceleration but inflation remains well above the 1-3% target range.
Brazil reports August IPCA inflation Friday. Headline is expected at 8.70% y/y vs. 10.07% in July. If so, it would be 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.” The central bank is wary of persistent price pressures from fiscal stimulus ahead of the October elections, noting that “The Committee assesses that the possibility that fiscal policies that support aggregate demand become permanent heightens the upside risks of the inflationary scenario.” Markets are not pricing in any further tightening at this point. Next meeting is September 21 and steady rates seem likely if inflation continues to moderate.
EUROPE/MIDDLE EAST/AFRICA
Hungary reports July retail sales Monday. Sales are expected at 6.1% y/y vs. 4.5% in June. IP will be reported Wednesday and is expected at 2.9% y/y WDA vs. 4.8% in June. August CPI and July trade data will be reported Thursday. Headline inflation is expected at 15.9% y/y vs. 13.7% in July. If so, it would be the highest since April 1998 and further above the 2-4% target range. The central bank just hiked rates 100 bp to 11.75% last week, as expected, and also raised reserve requirements for commercial banks. It said CPI risks warrant “decisive continuation” of rate hikes. Next policy meeting is September 27 and another 10 bp hike to 12.75% 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 13.5%.
Turkey reports August CPI Monday. Headline is expected at 81.20% y/y vs. 79.60% in July, while core is expected at 65.50% y/y vs. 61.69% in July. If so, headline would be the highest since August 1998 and further above the 3-7% target range. The decision to cut rates 100 bp last month was inexplicable. Next policy meeting is September 22 and no change is expected. Even though the bank signaled no further easing as “the updated level of policy rate is adequate under the current outlook,” it seems there is now always some risk of a dovish surprise.
Bank of Israel releases its minutes Monday. At the August 22, meeting, the bank delivered a hawkish surprise with a 75 bp hike to 2.0% vs. 50 bp expected. The hawkish message was received as the swaps market is now pricing in a terminal rate between 3.0-3.25% vs. 2.25% right before that meeting, which we thought was too low. At the previous meeting in July, bank researchers saw the policy rate at 2.75% in Q2 2023 but that rate path has likely steepened now. Next policy meeting is October 3 and updated macro forecasts will be released then.
South Africa reports Q2 GDP data Tuesday. GDP is expected at -0.7% q/q vs. 1.9% in Q1, while the y/y rate is expected at 0.8% vs. 3.0% in Q1. If so this would be the slowest y/y growth since Q1 2021. With SARB on a prolonged tightening cycle, the growth outlook remains poor. Q2 current account and July manufacturing production will be reported Thursday. The current account surplus is expected at 0.9% of GDP vs. 2.2% in Q1. This surplus has narrowed steadily from the 5.2% of GDP peak in Q3 2020. Elsewhere, manufacturing is expected at 4.1% y/y vs. -3.5% in June.
National Bank of Poland meets Wednesday and is expected to hike rates 25 bp to 6.75%. However, a handful of analysts look for a larger 50 bp move. At the last meeting July 7, the bank delivered a dovish surprise with a 50 bp hike to 6.5% vs. 75 bp expected. August CPI came in higher than expected at 16.1% y/y vs. 15.6% in July, the highest since October 1996 and further above the 1.5-3.5% target range. As such, we see risks of a hawkish surprise. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 7.0%.
Russia reports August CPI Friday. Headline is expected at 14.3% y/y vs. 15.1% in July, while core is expected at 17.5% y/y vs. 18.4% in July. If so, headline would decelerate for the fourth straight month to the lowest since February but still well above the 4% target. At the last policy meeting July 22, the bank delivered a dovish surprise and cut rates 150 bp to 8.0% vs. 50 bp expected. Governor Nabiullina said there was room for further easing in the medium-term, with the bank predicting that the policy rate will average between 7.4-8.0% from then until year-end. Next meeting is September 16 and another cut seems likely given continued disinflation.
ASIA
Caixin reports its August services and composite PMIs Monday. Services PMI is expected at 54.0 vs. 55.5 in July; if so, the composite PMI would fall significantly from 54.0 in July. China reports August trade and foreign reserves Wednesday. Exports are expected at 12.6% y/y vs. 18.0% in July, while imports are expected at 1.2% y/y vs. 2.3% in July. August CPI and PPI will be reported Friday. CPI is expected at 2.8% y/y vs. 2.7% in July, while PPI is expected at 3.2% y/y vs. 4.2% in July. If so, CPI inflation would be the highest since April 2020 and nearing the 3% target range.
Thailand reports August CPI Monday. Headline is expected at 7.90% y/y vs. 7.61% in July, while core is expected at 3.27% y/y vs. 2.99% in July. If so, headline would be the highest since July 2008 and further above the 1-3% target range. No wonder the Bank of Thailand just started its tightening cycle August 10 with a 25 bp hike to 0.75%. However, the pace of tightening is likely to be cautious as the bank noted “Monetary policy normalization should be done in a gradual and measured manner consistent with the growth and inflation outlook in the period ahead.” Next policy meeting is September 28 and another 25 bp hike seems likely if inflation continues to rise. The swaps market is pricing in 175 bp of tightening over the next 12 months that would take the policy rate to 2.5%, followed by another 25 bp of tightening over the subsequent 24 months.
Philippines reports August CPI Tuesday. Headline is expected to remain steady at 6.4% y/y. At the last policy meeting August 18, the central bank hiked rates 50 bp to 3.75%, as expected. If so, it would remain at the peak and well above the 2-4% target range. New Governor Medalla warned “The inflation target remains at risk. Elevated inflation expectations likewise highlight the risk of further second-round effects.” He added that future policy moves will remain data-dependent and Fed-dependent. Next policy meeting is September 22 and another 50 bp hike seems likely. 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. July trade data will be reported Friday. Exports are expected at 2.4% y/y vs. 1.0% in July, while imports are expected at 24.3% y/y vs. 26.0% in July.
Bank Negara Malaysia meets Thursday and is expected to hike rates 25 bp to 2.50%. July CPI was just reported last week at 4.4^ y/y, the highest since May 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 July 6, the bank hiked 25 bp to 2.25% and noted 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 to support a sustainable economic growth in an environment of price stability.” The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. July IP and manufacturing sales will be reported Friday.
