EM Preview for the week of July 18, 2021

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

EM FX was mixed last week, buffeted by gyrations in the dollar as well as growing uncertainty about the global economic outlook. BRL, PEN, and TRY were the best performers last week while HUF, ZAR, and PLN were the worst. We believe the fundamental story continues to favor the dollar. This week, the ECB is likely to deliver a dovish hold while the BOJ last week issued updated forecasts that still imply no hikes until FY21 at the earliest. Contrast this with the Fed, which is widely expected to continue taper talks at the July 27-28 meeting. 

 
AMERICAS


Mexico reports mid-July CPI data Thursday. Headline inflation is expected at 4.8% y/y vs. 5.2% in mid-June. If so, it would be the lowest since March and closer to the 2-4% target range. Next policy meeting is August 12 and no change is expected if price pressures continue to ease. The decision to hike last month was 3-2 and so we think another move so soon would be very difficult to engineer. Meanwhile, new Finance Minister Ramirez is showing little willingness to utilize fiscal stimulus and so Banco de Mexico will be under great pressure not to remove accommodation too quickly.


Brazil reports mid-July IPCA inflation Friday. Headline inflation is expected at 8.50% y/y vs. 8.13% in mid-June. If so, it would be the highest since August 2016 and further above the 2.25-5.25% target range. Next COPOM meeting is August 4 and a 75 bp hike to 5.0% is expected. There is some chance of a 100 bp hike but for now, we think it sticks with the current 75 bp pace. President Bolsonaro was released from the hospital but returns to work facing increased political risks from a number of directions.

EUROPE/MIDDLE EAST/AFRICA


Poland reports June PPI and IP Tuesday. PPI is expected to rise 6.7% y/y vs. 6.5% in May, while IP is expected to rise 18.1% y/y vs. 29.8% in May. Real retail sales will be reported Wednesday and are expected to rise 9.2% y/y vs. 13.2% in May. Next policy meeting is September 8 and rates are likely to be kept steady at 0.10%. Headline CPI inflation eased to 4.4% y/y in June, the first deceleration since February that gives the central bank some breathing room. Bloomberg consensus sees steady rates through this year, with the first hike seen by mid-2022 and another hike by end-2022. Elsewhere, tensions with the EU remain high due to the so-called rule of law dispute. 

 
South Africa reports June CPI Wednesday. Headline inflation is expected at 4.8% y/y vs. 5.2% in May. If so, it would be the first deceleration since February and would move closer to the center of the 3-6% target band. SARB then meets Thursday and is expected to keep rates steady at 3.5%. The bank continues to talk about starting the tightening cycle this year but the market sees 2022 lift-off. The current environment is simply not conducive for tighter policy, with risks of further social unrest still high. Bloomberg consensus sees steady rates through this year, with the first hike seen in Q1 2022 and another two hikes by end-2022 that would take the policy rate to 4.25%.


Central Bank of Russia meets Friday and is expected to hike rates 75 bp to 6.25%. However, the market is split. Of the 17 analysts polled by Bloomberg, 7 see a 50 bp hike, 6 see a 75 bp hike, and 4 see a 100 bp hike. Bloomberg consensus sees no more hikes after this but much will depend on how inflation develops in H2. We cannot rule out more hikes in H2. Ahead of the central bank decision, Russia reports June IP Thursday. Oil prices are likely to moderate after OPEC+ finally agreed to an output increase. However, lower prices are likely to lead to a more sustainable global economic recovery.

ASIA


Taiwan reports June export orders Tuesday. Orders are expected to rise 29.0% y/y vs. 34.5% in May. Firm orders data suggest H2 growth will remain robust. The slowdown under way in the mainland China economy risks dragging the rest of the region down with it and so forward-looking data much be watched closely. The PBOC RRR cut is a good step and suggests policymakers won’t hesitate to add more stimulus if the slowdown intensifies. June IP will be reported Friday and is expected to rise 12.75% y/y vs. 16.51% in May. 

 
Korea reports trade data for the first 20 days of July Wednesday. Here too, the mainland slowdown is a growing risk that must be watched. BOK Governor Lee has tilted more hawkish this past month but growing uncertainty regarding the pandemic and the economy warrant caution. Next BOK meeting is August 26 and rates are expected to remain steady at 0.50%. Headline inflation eased to 2.4% y/y in June from the cycle peak of 2.6% in May, giving the BOK some breathing room to keep rates steady for now.


Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. However, the bank last week took the first small steps towards tightening and so this week’s statement will be very important. Headline CPI inflation eased to 1.33% y/y in June, the first deceleration since March that nearly matches the cycle low from last August. This remains well below the 2-4% target range and gives the central bank some breathing room. Bloomberg consensus sees steady rates through this year, with the first hike seen by mid-2022 and another hike by end-2022.


Malaysia reports June CPI Friday. Headline inflation is expected at 3.4% y/y vs. 4.4% in May. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to remain on hold for now until the current wave of the pandemic passes. Next policy meeting is September 9 and rates are expected to remain steady at 1.75%. Bloomberg consensus sees steady rates through this year, with the first hike seen around mid-2022 and another hike possible by end-2022.


Singapore reports June CPI Friday. Headline inflation is expected at 2.5% y/y vs. 2.4% in May. If so, it would be the highest since November 2013. While Monetary Authority of Singapore does not have an explicit inflation target, low price pressures should allow it to remain on hold for now until the current uncertainty passes. It is likely to maintain its current accommodative stance at the next semiannual policy meeting in October.

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