EM Preview for the week of June 6, 2021

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

EM FX ended the week on a strong note as the soft jobs data weighed broadly on the dollar. Yet we believe that the Fed will continue with its tapering discussions at the upcoming June 15-16 FOMC meeting and that those discussions will continue throughout the summer. Consensus sees Fed tapering in 2021 and rate hikes in 2022, which are ultimately dollar-supportive. In a piece due out this week, we will show that global liquidity is approaching an inflection point, after which it is no longer as supportive for EM as it was at peak liquidity. Investors should be working to determine which countries are best-positioned for it.

AMERICAS

Chile reports May trade data Monday. CPI will be reported Tuesday, with headline inflation expected to accelerate to 3.7% y/y from 3.3% in April. If so, it would be the highest since March 2020 and nearing the top of the 2-4% target range. The central bank meets Tuesday and is expected to keep rates steady at 0.50%. However, it has already started to hint at normalizing monetary policy in the coming months. Minutes from the May 13 meeting show the bank sees a “significantly improved” economic outlook compared to March due to fiscal stimulus and reduced risks. However, “The Board agreed that the moment the normalization process would begin remained highly uncertain.” 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.

Brazil reports April retail sales Tuesday. Sales are expected to fall -1.0% m/m vs. -0.6% in March. May IPCA inflation will be reported Wednesday, with headline inflation expected to accelerate to 7.93% y/y from 6.76% in April. If so, it would be the highest since September 2016 and further above the 2.25-5.25% target range. Next COPOM meeting is June 16 and another 75 bp hike to 4.25% is expected. Bloomberg consensus sees another 100 bp of hikes in Q3, followed by 50 bp more in Q4 that would take the policy rates to 5.75% by year-end. Complicating matters is a severe drought that is likely to lead to considerable food price inflation ahead.

Mexico reports May CPI Wednesday. Headline inflation is expected to decelerate to 5.84% y/y from 6.08% in April. If so, it would be the lowest since March but still well above the 2-4% target range. Next Banco de Mexico meeting is June 24 and rates are expected to remain steady at 4.0%. Bloomberg consensus sees no more easing now, with the first 25 bp hike likely by late 2021 or early 2021. April IP will be reported Friday Thursday and is expected to rise 0.2% m/m vs. 0.7% in March. Mid-term elections were held Sunday. As of this writing, no exit polls are available. At stake are the 500-seat lower house, 15 gubernatorial races (nearly half of the 32 states), and many state and local posts. The vote is widely seen as a referendum on President Lopez Obrador and his Morena party at the halfway point of his one and only 6-year term.

Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. CPI rose 2.5% y/y in May, near the cycle high of 2.7% in January but still within the 1-3% target range. Bloomberg consensus sees steady rates through early next year, with the first 25 bp hike priced in by Q2 22 and another 25 bp in Q3 22. The second round presidential election was held over the weekend. As of this writing, no exit polls are available. The last polls ahead of the vote showed Fujimori and Castillo in a dead heat.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports April industrial and construction output and trade Monday. Retail sales will be reported Tuesday and are expected to jump 25.2% y/y vs. 13.0% in March. May CPI will be reported Thursday, with headline inflation expected to remain steady at 3.1% y/y. If so, it would still be the highest since September 2020 and above the 1-3% target range. Next central bank policy meeting is June 23 and the tightening cycle is likely to start with a 25 bp hike to 0.50%. The bank delivered a hawkish hold at the last meeting May 6, as the bank signaled lift-off was likely by “roughly the middle of this year.” 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 1.25% by Q3 22.

Russia reports May CPI data Monday. Headline inflation is expected to accelerate to 5.8% y/y from 5.5% in April. If so, it would be back at the cycle high from March and further above the 4% target. Central Bank of Russia meets Friday and is expected to hike rates 25 bp to 5.25%. About a quarter of the analysts polled by Bloomberg look for a larger 50 bp hike to 5.5%. April trade data will also be reported Friday. The planned meeting between Presidents Putin and Biden June 16 may provide an opportunity for the two to reset relations, which remain tense. 

South Africa reports Q1 GDP data Tuesday. It is expected to grow 3.1% annualized vs. 6.3% in Q4. Q1 current account data will be reported Thursday, and a surplus equal to 4.0% of GDP is expected vs. 3.7% in Q4. April manufacturing production will also be reported Thursday and is expected to rise 0.5% m/m vs. 3.4% in March. Next SARB meeting is July 22 and rates are likely to be kept steady at 3.5%. Even though the bank’s model suggest a hike in Q2 followed by another hike in Q4, rates were kept steady at the June meeting. Bloomberg consensus sees steady rates through year-end, with the first 25 bp hike priced in by Q1 22 and another 25 bp in Q2 22.

Hungary reports April IP Tuesday. It is expected to jump 68.9% y/y WDA vs. 16.2% in March. May CPI will be reported Wednesday, with headline inflation expected to accelerate to 5.2% y/y from 5.1% in April. If so, it would be the highest since November 2012 and further above the 2-4% target range. Next central bank policy meeting is June 22. Deputy Governor Virag flagged a rate hike this month. However, it’s possible that it increases the 1-week deposit rate currently at 0.75% at its weekly meetings rather than the base rate currently at 0.60%. Central bank minutes will also be released Wednesday and will be watched for clues to policy.

National Bank of Poland meets Wednesday. While no change is expected then, we expect a hawkish hold that may challenge the steady rate narrative. MPC member Hardt just called for a symbolic 15 bp hike at this meeting, but we think any hikes are unlikely until QE has first been halted. Headline inflation accelerated to 4.8% y/y from 4.3% in April, the highest since November 2021 and further above the 1.5-3.5% target range. Minutes from its May 5 meeting will be released Friday and may contain some clues about tapering or ending QE. Markets are particularly sensitive to the notion that Poland may be falling behind the curve after Hungary and Czech Republic flagged outright rate hikes this month. Of note, Bloomberg consensus sees the policy rate steady at 0.10% until Q2 2022, when the tightening cycle is expected to begin.

ASIA

China reports May trade data Monday. Exports are expected to rise 32.1% y/y vs. 32.3% in April, while imports are expected to rise 53.5% y/y vs. 43.1% in April. Foreign reserves will also be reported and are expected to rise slightly to $3.315 trln. CPI and PPI will be reported Wednesday. CPI is expected to rise 1.6% y/y vs. 0.9% in April, while PPI is expected to rise 8.5% y/y vs. 6.8% in April. New loan and money supply data may be released this week but no date has been set. New loans are expected to fall to CNY1.4 trln from CNY1.47 trln in April, while aggregate financing is expected to rise to CNY2 trln from CNY1.85 trln in April. With policymakers still pushing for deleveraging and rebalancing, we expect monetary stimulus to ebb in H2.

Taiwan reports May CPI and trade data Tuesday. Headline inflation is expected at 2.20% y/y vs. 2.09% in April, while exports are expected to rise 30.5% y/y vs. 38.7% in April and imports are expected to rise 29.8% y/y vs. 26.4% in April. Last week, the government revised its 2021 growth forecast to 5.46% from 4.64% previously. Tensions across the Taiwan Strait are likely to remain tense after a bipartisan group of U.S. Senators visited over the weekend to meet with Taiwan officials. The group announced that the U.S. will donate 750,000 doses of Covid vaccines to Taiwan whilst underscoring that US-Taiwan ties remain important.  

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