EM Preview for the week of June 20, 2021

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

EM FX really took it on the chin last week as the dollar staged a broad-based rally based on the Fed’s hawkish hold. The high beta currencies were hit particularly hard, with the worst performers last week being ZAR, HUF, TRY, COP, and MXN. BRL was the best performer, helped by a hawkish COPOM. In this environment of receding global liquidity, we suspect that the EM currencies with more proactive central banks will outperform. Czech and Hungary are expected to start tightening cycles this week, joining Brazil and Russia. We suspect more and more are likely to follow in the coming weeks. However, we remain defensive on EM as we reach an inflection point in global liquidity.

 AMERICAS

Brazil central bank minutes will be released Tuesday. Brazil reports mid-June IPCA inflation and May current account data Friday. Headline inflation is expected at 8.16% y/y vs. 7.27% in mid-May. If so, this would be the highest since 2016 and further above the 2.25-5.25% target range. COPOM just delivered a 75 bp hike to 4.25% last week and flagged another hike of the same magnitude at the next meeting August 4. Markets are starting to price in the risk of a 100 bp hike , but we still think they stick to the current pace of 75 bp. The strong BRL appreciation and the frontloaded nature of the cycle should be enough to remove the sense of urgency necessary to scale up the size of hikes. However, it now looks like the terminal COPOM 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.

Banco de Mexico meets Thursday and is expected to keep rates steady at 4.0%. Ahead of the decision, Mexico reports mid-June CPI. Headline inflation is expected at 5.89% y/y vs. 5.80% in mid-May. If so, it would mean that inflation is accelerating again after a brief period of deceleration. Markets are no longer looking for rate cuts, but rather rate hikes. Bloomberg consensus sees no more easing now, with the first 25 bp hike seen as likely in Q4. The economic outlook has gotten more uncertain due to the recent increase in virus numbers, which led Mexico City to move up from the lowest Covid-19 alert level green to the higher level yellow.

EUROPE/MIDDLE EAST/AFRICA

Poland reports May IP and PPI Monday. IP is expected to fall -1.5% m/m while PPI is expected to rise 5.9% y/y. Real retail sales will be reported Tuesday and are expected to rise 6.4% m/m vs. -7.7% in April. The economy is recovering and price pressures are building, putting some pressure on the central bank to tighten. Last week, wages were reported up 10.1% y/y in May while employment was up 2.7% y/y. Next policy meeting is July 8. There is rising concerns about possible tapering after poor results for the second straight QE auction. If tapering is the intent, we think the bank needs to better communicate its policy stance. This is important since Governor Glapinski has said that QE would end first before any rate hikes are seen.

National Bank of Hungary meets Tuesday and is expected to hike the base rate 30 bp to 0.90%. However, the market is split. Of the 16 analysts polled by Bloomberg, 1 sees no hike, 3 see a 15 bp hike, 9 see a 30 bp hike, 2 see a 40 bp hike, and 1 sees a 50 bp hike. Monetary policy in Hungary is very opaque and so the wide range of expectations is not surprising. Of note, the bank snugged the 1-week deposit rate up by 15 bp to 0.75% back in September to lend some support to the forint and so it’s not totally clear which channel of tightening the bank will rely on going forward. However, officials have clearly flagged some form of tightening is coming this month.

South Africa reports June CPI Wednesday. Headline inflation is expected to pick up to 5.2% y/y from 4.4% in April. If so, it would be the highest since November 2018 and nearing the top of the 3-6% target range. However, core is expected to rise only 3.2% y/y vs. 3.0% in April. PPI will be reported Thursday and is expected to rise 7.4% y/y vs. 6.7% in April, which would point to further upside risks to CPI ahead. Next SARB meeting is July 22 and rates are expected to remain steady at 3.50%. The SARB’s models still suggest two hikes by year-end but we think this is unlikely given how weak the economy is.

Czech National Bank meets Wednesday and is expected to hike rates 25 bp to 0.50%. A couple of analysts look for steady rates but the bank has been pretty clear that it intends to hike sooner rather than later. Of note, the central bank’s model shows three hikes in 2021 but that seems too hawkish to us. Bloomberg consensus sees a year-end rate of 0.75%, rising to 1.5% by end-2022. Much will depend on the exchange rate. Central bank models suggest each 1 percentage point move in the currency is equivalent to a 25 bp move in the policy rate.

ASIA

Korea reports trade data for the first 20 days of June Monday. Of note, exports rose 41% y/y in the first 10 days of June. There was a calendar effect, and so when adjusted for working days, average daily exports rose 32.6%, which is still quite impressive. During the first 10 days, auto exports jumped 136.9% and mobile phone exports rose 18.9%. Geographically, exports to China rose 14.2%, to the U.S. rose 63.4%, and to the EU rose 85%. We expect regional trade and activity to remain strong as we move into H2.

Taiwan reports May export orders Monday. Orders are expected to rise 42.2% y/y vs. 42.6% in April. May IP will be reported Tuesday and is expected to rise 12.85% y/y vs. 13.62% in April. The central bank just left rates steady at 1.125% last week. it raised its GDP growth forecast for this year to 5.08% vs. 4.53% previously and boosted its inflation forecast to 1.6% vs. 1.07% previously. CPI rose 2.48% y/y in May, the highest since February 2013 as the ongoing drought has led to higher food prices. The central bank does not have an explicit inflation target and so it has the leeway to keep policy on hold for now on the belief that it is a transitory spike that it sees peaking in Q2.

Singapore reports June CPI Wednesday. Headline inflation is expected to remain steady at 2.1% y/y. The MAS does not have an explicit inflation target and so there is no need to response to what it likely views as a temporary spike in price pressures. That said, a lot can happen between now and the next policy meeting in October. May IP will be reported Friday and is expected to fall -0.9% m/m vs. 1.0% in April.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.5%. At the last meeting May 5, the bank delivered a dovish hold as it warned that due to the most recent viral outbreak, the economy will recover more slowly than previously expected and may impact its 3% growth forecast for this year. Of note, the Finance Ministry last month cut its 2021 growth forecast to 2.3% from 2.8% previously due to the impact of the latest wave, especially on tourist arrivals. We suspect that policy is likely to remain on hold well into 2022.

Philippine central bank meets Thursday and is expected to keep rates steady at 2.0%. At the last meeting May 12, the bank delivered a dovish hold as it stated that “The Monetary Board believes that sustained support for domestic demand remains a priority for monetary policy, especially as risk aversion continues to hamper credit activity despite ample liquidity in the financial system.” Of note, the bank lowered its inflation forecast for 2021 to 3.9% vs. 4.2% previously but raised its 2022 forecast to 3.0% vs. 2.8% previously. Inflation was 4.5% y/y in May, down from the 4.7% peak in February but still above the 2-4% target range. The new forecasts suggest the bank sees no need to hike rates and supports our view that policy is likely to remain on hold well into 2022.

More from Mind on the Markets

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved..

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction