EM Preview for the week of July 11, 2021

Here's a look at the main drivers in Emerging Markets this week.

EM FX came under great pressure last week as broad risk off sentiment hit global markets. BRL, COP, and PHP were the worst performers last week while TRY, ZAR, and INR were the best. The PBOC RRR cut helped risk sentiment recover on Friday, but this is likely to remain short-lived if the delta variant continues to spread. There are also downside risks to China’s data this week given the abrupt RRR cut, which would tend to hurt the reflation trade and overall regional sentiment. Lastly, the dollar is likely to be underpinned by U.S. data this week that should support further Fed tapering discussions.

AMERICAS

Mexico reports May IP Monday. IP is expected to rise 0.3% m/m vs. -0.2% in April. AMLO’s nominee to head up the central bank Arturo Herrera said the recent inflation spike is likely to prove temporary. Herrera is currently Finance Minister, and the switch to Banxico when current Governor Diaz de Leon’s term expires always struck us as bad optics. Next policy meeting is August 12 and no change is expected then. The surprise 25 bp hike last month was a split 3-2 vote, and Deputy Governor Esquivel has since called it “erratic and unpredictable behavior.” Herrera is sounding very dovish but a lot can happen between now and year-end, when he takes over.

Chile central bank meets Wednesday and is expected to keep rates steady at 0.5%. At the last meeting June 8, the bank delivered a hawkish hold as it said “The strong dynamism already present in consumption and the additional boost to private spending are an important change for the macroeconomic scenario of the coming months, which makes it necessary to recalibrate the expansiveness of monetary policy going forward.” Regarding QE, the bank said that the period of reinvestment of bank bond coupons concluded in early June and that “From now onwards, the stock will be gradually reduced as the assets in the portfolio are extinguished.” Bloomberg consensus sees 25 bp of tightening in Q3 and another 50 bp in Q4 that would take the policy rate to 1.25% by year-end, followed by more hikes that take the rate to 2.0% by mid-2022 and between 2.25-2.5% by end-2022.

EUROPE/MIDDLE EAST/AFRICA

Poland central bank releases its quarterly inflation report Monday. The bank just delivered a dovish hold last week. While it raised its inflation forecasts, Governor Glapinski said the projections show “favorable development” in the economy and added “There are no local effects generating any excessive inflation and there are no signs of any overheating in the economy, which is only at the start of its recovery path.” Next policy meeting is September 8 and much will depend on how the numbers come in. May trade and current account data will be reported Wednesday.

South Africa reports May manufacturing production Monday. Production is expected to rise 1.2% m/m vs. -1.2% in April. May retail sales will be reported Wednesday, which are expected to rise 0.9% m/m vs. -0.8% in April. The economy continues to face headwinds due to the pandemic. Next policy meeting is July 22 and no change is expected then. Bloomberg consensus sees the policy rate steady at 3.5% through year-end, rising to 3.75% by mid-2022 and 4.25% by end-2022. Of note, the arrest of former President Zuma last week has led to pro-Zuma protests that have turned violent and impacted key trade routes across the nation.

Czech Republic reports June CPI Tuesday. Inflation is expected to ease to 2.8% y/y vs. 2.9% in May. If so, it would be the second straight month of deceleration and would move back within the 1-3% target range. At the last meeting June 23, the Czech National Bank started the tightening cycle and delivered the expected 25 bp hike to 0.5%. Governor Rusnok said rates will continue rising in H2 and warned that hikes are possible at “every coming meeting” even as he hoped that wouldn’t be necessary. Bloomberg consensus sees the policy rate at 0.75% by year-end, rising to 1.5% by end-2022. Next policy meeting is August 5 and no change is likely so soon in light of the improved CPI data.

Turkey reports May IP Tuesday. IP is expected to fall -0.4% m/m vs. -0.9% in April. The central bank then meets Wednesday and is expected to keep rates steady at 19.0%. June CPI came in higher than expected at 17.53% y/y, the highest since May 2019 and further above the 3-7% target range. With the lira remaining vulnerable, a cut at this meeting would be a disaster, though this hasn’t stopped President Erdogan for calling for one either this month or next. Bloomberg consensus sees the policy rate between 18.25-18.50% in Q3, 15.75% by year-end, between 13.0-13.25% by mid-2022, and 13.0% by end-2022.

Israel reports June trade data Tuesday. June CPI will be reported Thursday, with inflation expected to pick up to 1.6% y/y vs. 1.5% in May. If so, this would be the highest since December 2013 and nearing the center of the 1-3% target range. Last week, the bank kept policy steady. Its staff sees the policy rate at the current 0.10% in a year, and cut this year’s growth forecast and boosted next year’s. Next policy meeting is August 23 and no change is expected then. For now, the bank will continue its policy of FX interventions at its main policy lever. It bought $3.2 bln in June and $25 bln in H1, which is nearing the total $30 bln planned for 2021. As a result, the bank has already said the program will likely exceed that limit.

ASIA

India reports May IP and June CPI Monday. IP is expected to rise 32.0% y/y vs. 134.4% in April, while CPI is expected to rise 6.59% y/y vs. 6.30% in May. If so, inflation would be the highest since November and would move further above the 2-6% target range. June WPI will be reported Wednesday and is expected to rise 12.18% y/y vs. 12.94% in May. Yet the RBI has remained dovish. At the last meeting June 4, it boosted its QE program and announced additional liquidity provisions to some lockdown-impacted sectors. The bank said it would maintain its accommodative policy for as long as necessary to achieve growth on a durable basis. Consensus sees steady rates through 2021, with the first hike seen by Q2 2022 and another one by end-2022. Next policy meeting is August 6 and no change is expected then. June trade data will be reported Thursday.

China reports June trade data Tuesday. Exports are expected to rise 23.1% y/y vs. 27.9% in May and imports are expected to rise 29.8% y/y vs. 51.1% in May. June retail sales, IP, and Q2 GDP will be reported Thursday. Sales and IP are expected to rise 10.9% y/y and 8.0% y/y, respectively, both slowing significantly from May. Q2 GDP is expected to grow 1.0% q/q vs. 0.6% in Q1. Last week’s cut in the RRR suggests the economy is slowing more than desired and so there are downside risks to this week’s real sector data. We also suspect the PBOC will tolerate a weaker yuan, which would be a natural by-product of its easing stance.

Singapore reports advance Q2 GDP Wednesday. GDP is expected to contract -2.0% q/q vs. 3.1% growth in Q1. June trade data will be reported Friday, with NODX expected to rise 8.6% y/y vs. 8.8% in May. If so, growth would continue to slow from the January peak of 12.6% y/y. USD/SGD rose to its highest level last week since early November near 1.3555. Currency weakness should help boost exports but the slowdown in the mainland economy will likely be the dominant driver for regional trade and activity. We expect the MAS to remain cautious and maintain its current accommodative policy stance at its next policy meeting in October.

Bank of Korea meets Thursday and is expected to keep rates steady at 0.50%. At the last meeting May 27, BOK delivered a hawkish hold as Governor Lee said the bank is preparing for an “orderly” exit from its record-low interest rate at some point as the economy recovers. To perhaps emphasize his point, the BOK released strong upward revisions to its growth forecasts. We don’t think they will be in too much of a hurry. Indeed, Governor Lee made it clear that policy will remain accommodative “for a while.” While Governor Lee has tipped a rate hike in H2, we think the recent lockdown of Seoul warrants some near-term caution. Consensus sees the first hike to 0.75% in Q4, followed by a very shallow tightening cycle in 2022.

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