EM Preview for the week of July 4, 2021

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

EM FX remained largely under pressure last week as the dollar continued with its broad-based recovery. PEN, TRY, and MXN outperformed while BRL, PHP, and RUB underperformed. We believe the dollar rally remains intact, as the strong economic data are giving Fed officials more confidence in calling for tapering sooner rather than later. FOMC minutes this week should underscore this.


Brazil reports May retail sales Wednesday. Sales are expected to rise 2.1% m/m vs. 1.8% in April. June IPCA inflation will be reported Thursday, with headline inflation expected to pick up to 8.42% y/y from 8.06% in May. If so, it would be the highest since September 2016 and further above the 2.25-5.25% target range. COPOM just delivered a 75 bp hike to 4.25% last month and flagged a similar hike to 5.0% at the next meeting August 4. CDI market is pricing in a 100 bp hike but we think it will stick with the current pace for now. That said, it now looks like the terminal policy rate for the cycle will be 7.0% or something close to it, and the risk is now for a curve flattening, despite the significant fiscal uncertainty.

Chile reports June trade data Wednesday. June CPI will be reported Thursday, with headline inflation expected to pick up to 4.0% y/y from 3.6% in May. At the last policy meeting June 8, the bank said that “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.” The next policy meetings are July 14, August 31, October 13, and December 14. Bloomberg consensus sees 25-50 bp of tightening in H2 that could take the policy rate to 1.0% by year-end, followed by 25 bp per quarter next year that takes the policy rate to 1.75% by Q3 22.

Mexico reports June CPI Thursday. Headline inflation is expected to ease to 5.84% y/y from 5.89% in May. if so, it would be the second straight month of deceleration but still well above the 2-4% target range. Banco de Mexico will also release its minutes Thursday. At the June 24 meeting, it delivered a surprise 25 bp rate hike to 4.25%. The decision was agreed by only three of the five members, so it was a close call. Banxico’s and the market’s base case is still for current inflation pressures to prove transitory, meaning that we probably shouldn’t expect a protracted tightening cycle, not even close to what we will get in Brazil for example. Next policy meeting is August 12.

Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. At the last meeting June 10, it kept rates on hold without any major changes in its guidance. Headline inflation rose to 3.25% in June vs. 2.45% in May, the highest since April 2017 and above the 1-3% target range. The bank is keeping to the line of transitory inflation risks to justify its dovish bias, even keeping the possibility of additional stimulus on the table, though we doubt it will be necessary. Of note, Governor Velarde will reportedly speak about his future role with President-elect Castillo once he has been declared the winner.


Turkey reports June CPI Monday. Headline inflation is expected to pick up to 16.80% y/y from 16.59% in May. If so, inflation would be back on an accelerating trend after decelerating only one month in May, and further above the 3-7% target range. Furthermore, PPI inflation is expected to pick up to 41.40% y/y vs. 38.33% in May, which suggests little relief ahead from price pressures. Next policy meeting is July 14, followed by August 12. While no change is warranted now with the lira near record lows, President Erdogan has called for rate cuts at either of those meetings. May current account data will be reported Friday, where a deficit of -$3.1 bln is expected.

Bank of Israel meets Monday and is expected to keep rates steady at 0.10%. At the last policy meeting May 31, the bank delivered a dovish hold as it said "The committee will...continue to conduct a very accommodative monetary policy for a prolonged time.” It noted that "The return to normal life in Israel supports rapid growth in the coming year. However, there are still challenges to economic activity in view of the health risks in Israel and abroad and the impact to the economy, particularly the labor market." CPI rose 1.5% y/y in May the highest since May 2019 and nearing the middle of the 1-3% target range. Rising inflation is unlikely to trigger a policy response from the central bank this year.

Hungary reports May retail sales Tuesday. Sales are expected to rise 7.0% y/y vs. 10.6% in April. IP will be reported Wednesday and is expected to rise 39.6% y/y WDA vs. 59.2% in April. Central bank minutes will also be released Wednesday. At that June 22 meeting, Hungary delivered the expected 30 bp hike in the base rate to 0.90%. However, the bank surprised markets by pledging monthly hikes going forward until “inflation risks become evenly balanced.” The bank will also phase out its funding program to provide cheap corporate loans but confirmed that it will maintain its government bond purchases for now. Next policy meeting is July 27 and another hike is likely given its unexpectedly hawkish stance. June CPI will be reported Thursday, with headline inflation expected to ease to 4.9% y/y from 5.1% in May. If so, it would be the first deceleration since November 2020 but still well above the 2-4% target range. May trade data will be reported Friday.

Russia reports June CPI Wednesday. Headline inflation is expected to pick up to 6.4% y/y from 6.0% in May. If so, it would be the highest since September 2016 and further above the 4% target. Last week, the central bank warned of the potential for bigger rate hikes. So far this year, the bank has delivered 25-50 bp moves, the last one being 50 bp to 5.5% back on June 11. Governor Nabiullina noted that inflation has accelerated “markedly” and that more rate hikes may be necessary, adding that policy now remains accommodative. Next policy meeting is July 23 and markets are split. Of the 12 analysts polled by Bloomberg, 6 see a 50 bp hike, 5 see a 75 bp hike, and 1 sees a 100 bp hike. We lean towards a 75 bp hike, especially if the ruble remains under pressure.

National Bank of Poland meets Thursday and is expected to keep rates steady at 0.10%. Minutes for the June 9 meeting will be released Friday. CPI inflation eased to 4.4% y/y in June vs. 4.6% expected and 4.7% in May. This was the first deceleration since February and gives the central bank some breathing room as it fits the narrative that the spike in inflation is transitory. The bank has been coming under pressure to tighten, but Governor Glapinski continues to push back against making an “hasty” moves. He also favors a weaker zloty, noting that FX intervention aimed at weakening the currency helped the economy recover from the pandemic and added that this tool should be used by all EM policymakers.


Caixin reports China services and composite PMI readings for June Monday. Services PMI is expected to drop two ticks from 54.9, but there are downside risks after the official non-manufacturing PMI dropped sharply to 53.5 from 55.2 in May. China reports June foreign reserves Wednesday. June CPI and PPI will be reported Friday. The former is expected to remain steady at 1.3% y/y, while the latter is expected to ease to 8.8% y/y vs. 9.0% in May. Inflation is not a concern right now for policymakers and so the data will have little impact either way. For now, they will continue to focus on rebalancing , deleveraging, and regulating, all of which carry downside risks to growth. Monetary policy is seen as appropriate by the PBOC.

Thailand reports June CPI Monday. Headline inflation is expected to ease to 1.12% y/y from 2.44% in May. If so, it would be the second straight month of deceleration from the 3.41% y/y peak in April. BOT officials believed that spike in inflation to be transitory, and the data are bearing this out. Next policy meeting is August 4 and rates are expected to remain on hold at 0.50%. Indeed, Bloomberg consensus sees steady rates through 2022 and we concur. As one of the economies most reliant on travel and tourism, Thailand is likely to continue suffering from sluggish growth well into next year.

Philippines reports June CPI Tuesday. Headline inflation is expected to ease to 4.3% y/y from 4.5% in May. If so, it would be the lowest since January and nearing the 2-4% target range. At the last policy meeting June 24 meeting, Bangko Sentral ng Pilipinas (BSP) offered no signs of a hawkish shift. The bank kept rates on hold at 2.0% for the fifth consecutive month and sees no prospects to change it as the economy is still facing many headwinds, including a weak credit outlook. We believe policy is likely to remain on hold well into 2022. Next policy meeting is August 12 and rates are likely to remain on hold. May trade data will be reported Friday, with exports expected to rise 33.6% y/y vs. 72.1% in May and imports expected to rise 49.0% y/y vs. 140.9% in May.

Taiwan reports June CPI and trade data Wednesday. Headline inflation is expected to ease to 2.25% y/y from 2.48% in May, while exports are expected to rise 33.0% y/y vs. 38.6% in May and imports are expected to rise 34.5% y/y vs. 40.9% in May. In a remarkable speech, President Xi Jinping said “we must take resolute action to utterly defeat any attempt toward Taiwan independence,” calling for “complete reunification.” Taiwan’s Mainland Affairs Council reacted to the speech by saying the government will not be intimidated and will “defend the nation’s sovereignty.” Needless to say, Taiwan will be the major geopolitical flashpoint for the region. With every rhetorical escalation, the risk of a policy mistake increases, along with the potential involvement of Western nations and further polarization.

Bank Negara Malaysia meets Thursday and is expected to keep rates steady at 1.75%. CPI rose 4.4% y/y in May, down from the 4.7% peak in April. Bank Negara does not have an explicit inflation target and so it has leeway to keep policy unchanged until price pressures ease. Malaysia returned to a hard lockdown June 1 and so there were headwinds to the economy in Q2. Q3 may improve, as five states will reportedly begin easing some curbs after meeting the necessary virus criteria. Bloomberg consensus sees steady rates through 2021, with some risks of a hike seen as we move through 2022.

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