EM Preview for the week of August 8, 2021

August 08, 2021

EM FX is likely to remain under pressure this week.  The strong jobs report underscored our belief that tapering is coming sooner than markets expect and that should continue to help boost the dollar.  Other major central banks are also removing or close to removing accommodation and this inflection point in global liquidity is typically bad for risk assets such as EM.  We continue to expect divergences within EM to continue, driven by vaccination programs and central bank tightening prospects.


Mexico reports July CPI Monday.  Headline inflation is expected at 5.76% y/y vs. 5.88% in June.  If so, it would be the third straight month of deceleration.  Inflation would also be the lowest since March but will well above the 2-4% target range.  June IP will be reported Wednesday and is expected to be flat m/m vs. 0.1% in May.  Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 4.5%.  Banco de Mexico announced a new communication effort last week, with each member’s vote to be revealed.  Furthermore, it will update its inflation forecasts at each meeting.  Deputy Governor Heath said the bank “screwed up” its inflation forecasts and so policy must be adjusted to send a message to the markets.  The first hike in June was a surprise vote that was split 3-2.

Chile reports July trade data Monday.  Last week, July CPI inflation came in much higher than expected at 4.5% y/y, the highest since March 2016 and above the 2-4% target range.  The central bank started the tightening cycle last month with a 25 bp hike to 0.75% and the data point for substantial hikes ahead.  Next policy meeting is August 31 and another 25 bp hike to 1.0% is expected.  Bloomberg consensus sees a year-end policy rate of 1.25-1.50%, a mid-2022 rate of 2.0-2.25%, and an end-2022 rate of 2.75%.

Brazil reports July IPCA inflation Tuesday.  Headline inflation is expected at 8.97% y/y vs. 8.35% in June.  If so, it would be the highest since August 2016 and further above the 2.25-5.25% target rate.  Central bank minutes will also be released.  Last week, COPOM delivered a 100 bp hike to 5.25% and promised another hike of the same magnitude at the next meeting September 22.  Bloomberg consensus sees the policy rate peaking at 6.75% by end-2021.  However, there are clear upside risks as inflation continues to accelerate.  June retail sales will be reported Wednesday and are expected to rise 0.4% m/m vs. 1.4% in May.

Peru central bank meets Thursday and is expected to keep rates steady at 0.25%.  However, with inflation spiking, we expect the bank to start laying the groundwork for an eventual hike.  CPI rose 3.8% y/y in July, the highest since March 2017 and well above the 1-3% target range.  Bloomberg consensus sees the policy rate steady for most H2, with some odds of a hike in Q4.  A hike is fully priced in by Q1 2022, followed by another 1-2 hikes in H2 2022.  Once political uncertainty clears up, we think the bank is likely to embark on a tightening cycle that is steeper than what markets have priced in.


Czech Republic reports July CPI Tuesday.  Headline inflation is expected at 2.9% y/y vs. 2.8% in June.  If so, it would be the first acceleration since April but would remain within the 1-3% target range.  The bank just delivered its second 25 bp hike of this cycle to 0.75%.  and said it was likely to hike at each of the meetings left this year, which will be held September 30, November 4, and December 22.  This would result in a year-end policy rate of 1.5% and suggests that the bank anticipates further acceleration in inflation. 

Hungary reports July CPI Tuesday.  Headline inflation is expected at 4.8% y/y vs. 5.3% in June.  If so, it would be the first deceleration since November 2020 and the lowest since March.  However, inflation would remain above the 2-4% target range.  Central bank minutes will be released Wednesday.  The bank delivered its second 30 bp hike of this cycle in the base rate in July and suggested monthly hikes will be seen until its inflation goal is reached.  Next policy meeting is August 24 and another 30 bp hike to 1.5% is expected.  After that, the next meetings will be held on September 21, October 19, November 16, and December 14.

Turkey central bank meets Thursday and is expected to keep rates steady at 19.0%.  Despite Erdogan’s interference, we believe the bank will do the right thing and keep rates steady.  With USD/TRY already moving higher, a cut now would simply add fuel to the fire.  CPI rose 18.95% y/y in July, the highest since April 2019.  PPI rose 44.9% y/y, the highest since December 2018 and suggesting upside risks to CPI ahead.  After this week’s meeting, the next ones will be held September 23, October 21, November 18, and December 16.  Ahead of the decision, Turkey reports June IP and is expected to rise 2.1% m/m vs. 1.3% in May. 


China reports July money and new loan data sometime this week.  New loans are expected at CNY1.2 trln vs. CNY2.1 trln in June, while aggregate financing is expected at CNY1.7 trln vs. CNY3.7 trln in June.  While the RRR cut took effect July 15, it may not start to show up in the lending numbers until August.  But make no mistake, policymakers will take further steps to make sure the economy doesn’t slow too much.  CPI and PPI will be reported Monday.  The former is expected at 0.8% vs. 1.1% in June, while the latter is expected at 8.6% y/y vs. 8.8% in June.  Price pressures are clearly easing but are not the focus for policymakers right now.

Philippines reports Q2 GDP Tuesday.  GDP is expected to contract -1.3% q/q vs. 0.3% in Q1.  Q3 doesn’t look much better as parts of the nation remain under lockdown.  The central bank meets Thursday and is expected to keep rates steady at 2.0%.  However, Governor Diokno said that an RRR cut is a real possibility and this dovish stance has weighed on the peso.  Rates have been kept steady since the last 25 bp cut back in November 2020.  Bloomberg consensus sees steady rates through most of next year, with the first 25 bp hike fully priced in for Q4 2022.

India reports July CPI and June IP Thursday.  Headline inflation is expected at 5.79% y/y vs. 6.26% in June.  Last week, the RBI left rates unchanged, with one dissent in favor of a hike.  However, the overall message was a dovish one as Governor Das said the bank is focused on supporting the economy as it recovers from the pandemic.  He noted “The supply-side drivers could be transitory while demand-pull pressures remain inert, given the slack in the economy.  A pre-emptive monetary policy response at this stage may kill the nascent and hesitant recovery that is trying to secure a foothold in extremely difficult conditions.”  Rates have been kept steady since the last 40 bp cut back in May 2020.  Bloomberg consensus sees steady rates through year-end, with a 25 bp hike seen in H1 2022 and another one in H2 2022 that would take the policy rate to 4.5% by end-2022.  

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