EM and risk recovered nicely from the Brexit turmoil last week. Yet we think markets are getting too carried away with the “low rates forever” theme and are likely underestimating the capability of the Fed to tighten before 2018. This Friday, the June jobs data could spark a shift in sentiment with a strong reading. Consensus is currently 175k jobs created, up from 38k in May.
We don’t think individual EM stories matter that much in the current environment. We would stress that we feel most EM policymakers have shifted to a more dovish stance in light of Brexit, and that Banxico’s decision to hike rates by a larger than expected 50 bp was not warranted.
Turkey
Turkey reported June CPI today, and at 7.6%, it was a larger rise from the 6.6% in May than expected. It may cut the overnight lending rate again at the next policy meeting on July 19, but the benchmark rate is likely to be kept steady at 7.5%. Still, if inflation resumes its fall, the bank will come under greater pressure to ease in H2.
Singapore
Singapore reported June PMI today. It unexpectedly fell to 49.6. Most anticipated it to be unchanged at 49.8. With the economy remaining sluggish, we think there is a good chance that the MAS will ease policy again at its October meeting.
Taiwan
Taiwan reports June CPI Tuesday, which is expected to rise 1.1% y/y vs. 1.2% in May. It reports trade on Friday, with exports and imports both seen at -3% y/y. The economy is basically in recession. The central bank just cut rates 12.5 bp last week, and the easing cycle is likely to continue into year-end.
Philippine
The Philippines reports June CPI Tuesday, which is expected to rise 1.8% y/y vs. 1.6% in May. This is still below the 2-4% target range. The central bank has been on hold since its last 25 bp hike to 4.0% back in September 2014. Given how low inflation is, the bank will have leeway to cut rates if the economy slows this year. Next policy meeting is August 11, no action is seen then.
Hungary
Hungary reports May retail sales Tuesday, which are expected to rise 5.9% y/y vs. 6.7% in April. It reports May IP Thursday (5.5% y/y expected), followed by June CPI (-0.1% y/y expected) and May trade (EUR732 mln surplus expected) on Friday. The central bank paused and kept the policy rate at 0.90% at the June meeting. However, further rate cuts as well as other unconventional measures are possible in H2 if the economic outlook worsens. The next policy meeting is July 26, and no changes are seen then.
Colombia
Colombia reports June CPI Tuesday, which is expected to rise 8.4% y/y vs. 8.2% in May. Central bank minutes will be released Friday. At that meeting, the bank hiked rates 25 bp to 7.5%, but official comments suggested that the cycle had ended. Both CPI and the minutes this week will go a long way in determining if the tightening is indeed over. The next policy meeting is July 29, and as things stand, no move is seen then.
Poland
National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.5%. The central bank has been on hold at 1.50% since its last 50 bp cut in March 2015. With new central bank chief Glapinski at the helm, we think the bank will ease in H2 if the outlook worsens. Indeed, some MPC members are already starting to talk of easing after coming aboard spouting hawkish views.
Czech Republic
Czech Republic reports May trade (CZK16.7 bln surplus expected) Thursday. It then reports construction and industrial output (9.1% y/y expected) Friday, along with retail sales (10.4% y/y expected). Last week, the central bank maintained its forward guidance for maintaining current policies to mid-2017. The next meeting is August 4 and will be the first under Governor Rusnok. The bank may start preparing markets then for an eventual push out in forward guidance if the Brexit fallout warrants it.
Chile
Chile reports June trade Thursday. It then reports June CPI Friday, which is expected to rise 4.1% y/y vs. 4.2% in May. While still above the 2-4% target range, it is the lowest since November, and the continued disinflation gives the bank leeway to end the tightening cycle for now. The central bank has been on hold since the last 25 bp hike to 3.5% in December. Next policy meeting is July 14, no change is expected then.
Mexico
Mexico reports June CPI Thursday, which is expected to rise 2.58% y/y vs. 2.60% in May. This comes after Banxico hiked rates last week by a larger than expected 50 bp to 4.25%. Clearly, there are no price pressures to speak of, with CPI inflation well below the 3% target. The economy is sluggish (PMI readings fell below 50 in June), while oil prices are getting toppy. We didn’t agree with the aggressive 50 bp hike. Next policy meeting is August 11.
Brazil
Brazil reports June IPCA inflation Friday, which is expected to rise 8.9% y/y vs. 9.3% in May. While still above the 2.5-6.5% target range, this was the lowest since June 2015. However, IGP-M wholesale and PPI measures of inflation have started to accelerate again. BCB has been on hold since its last 50 bp hike to 14.25% back in July 2015. The first quarterly inflation report from Goldfajn was quite hawkish, and recent developments suggest August 31 is the earliest it will cut rates rather than July 20.
Win Thin is a senior currency strategist with over fifteen years of investment experience. He has a broad international background with a special interest in developing markets. Prior to joining BBH in June 2007, he founded Mandalay Advisors, an independent research firm that provided sovereign emerging market analysis to institutional investors. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983. Feel free to contact the Zurich office of BBH
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