EM Preview for the Week Ahead

EM and most risk assets came under pressure last week as rising virus numbers and weak economic data outweighed the favorable liquidity backdrop. This week brings preliminary PMI readings for much of the world, with further improvement from May expected. Some countries and states will continue to ease lockdowns this week, while Beijing struggles to contain an outbreak. The liquidity backdrop remains support for risk assets, but the tug of war between improved economic data and worsening virus numbers is likely to continue for the time being.

AMERICAS
Mexico reports mid-June CPI Wednesday. Headline inflation is expected at 3.06% y/y vs. 2.83% y/y in mid-May. If so, inflation would be the highest since March and back in the top half of the 2-4% target range. There appears to be some inflation pass-through from the weak peso. Banco de Mexico then meets Thursday and is expected to cut rates 50 bp to 5.0%, as the focus remains on boosting the economy. May trade data will be reported Friday.

Brazil central bank releases its minutes Tuesday and its quarterly inflation report Thursday. COPOM cut rates 75 bp to 2.25% last week and signaled potential for one last cut. CDI market is pricing in solid odds of a 25 bp cut to 2.0% at the next policy meeting August 5. Brazil reports May current account data Wednesday. Mid-June IPCA inflation will be reported Thursday and is expected at 1.86% y/y vs. 1.96% in mid-May. If so, inflation would be the lowest since January 1999 and further below the 2.5-5.5% target band.

EUROPE/MIDDLE EAST/AFRICA

South Africa reports Q1 unemployment Tuesday, which is expected at 29.7% vs.29.1% in Q4. May CPI and March retail sales will be reported Wednesday. Headline inflation is expected to ease to 3.0% y/y from 4.1% in April. If so, inflation would be the lowest since September 2010 and right the bottom of the 3-6% target range. Retail sales are expected to rise 1.9% y/y vs. +2.0% in February. Next SARB policy meeting is July 23 and another rate cut is expected then.

National Bank of Hungary meets Tuesday and is expected to keep policy steady. The bank just started asset purchases in May. However, the bank has cancelled several auctions in June despite rising bond yields. Since the end of May, the 10-year yield has risen around 35 bp and the 15-year yield by around 57 bp. We hope the bank gives some more clarity as to what it wishes to accomplish with its QE.

Czech National Bank meets Wednesday and is expected to keep rates steady at 0.25%. The bank last cut rates 75 bp to 0.25% in early May. Governor Rusnok signaled no urgent need for further easing, but also acknowledged that low rates will be maintained “for a long time.” Since that last cut, the koruna has strengthened around 2.5%, which takes back much of the impact of that last cut. The bank’s models suggest that a 1% move in the currency is equivalent to a 25 bp move in interest rates.

Turkey central bank meets Thursday and is expected to cut rates 25 bp to 8.0%. However, the market is split as a couple of analysts see no cut and several see a 50 bp cut. CPI rose 11.39% y/y, well above the 3-7% target range. However, this shouldn’t prevent another cut as inflation has remained above target for this entire easing cycle.

ASIA

Korea reports trade data for the first 20 days of June on Monday. Exports contracted -23.7% y/y and imports by -21.1% y/y in May. So far, the recovery in regional activity has been much weaker than hoped for given China’s reopening. Bank of Korea last cut rates 25 bp to 0.5% in late May but signaled that this was close to the effective lower bound. Governor Lee said the bank is considering unconventional policies to support growth but gave no further details. We do no think any new measures will be announced this week, but official could give some hints about what might be done at future meetings.

Singapore reports May CPI Tuesday, which is expected to decline -0.9% y/y vs. -0.7% in April. If so, this would be the deepest deflation since May 2016. Even core inflation is in deflationary territory of -0.3% y/y. The MAS does not have an explicit inflation target but deflationary conditions will remain supportive of further easing at the October policy meeting, if not sooner. May IP will be reported Friday and is expected to fall -7.1% m/m vs. +3.6% in April.

Bank of Thailand meets Wednesday and is expected to keep rates steady at 0.5%. CPI fell -3.44% y/y in May vs. -2.99% in April, falling further below the 1-4% target range. Bank of Thailand last cut rates 25 bp to 0.5% in late May but signaled steady rates were now likely for the time being. It also expressed concern about the strong baht. As such, the bank could continue to jawbone the exchange rate and perhaps take some action to weaken the baht.

Philippine central bank meets Thursday and is expected to cut rates 25 bp to 2.5%. However, the market is split as several analysts see no cut and one sees a 50 bp cut. CPI rose 2.1% y/y in May vs. 2.2% in April, the lowest since November and nearing the bottom of the 2-4% target range. The bank last cut rates 50 bp to 2.75% back in April. Given the strong peso and disinflationary forces in play, we see chances of a dovish surprise this week.