EM Preview for the Week of June 12, 2022

EM FX was broadly weaker as the dollar reasserted its underlying strength across the board. RUB was the only EM currency to gain, while BRL, CLP, TRY, and COP were the worst performers. With Fed tightening expectations rising ahead of this Wednesday's FOMC decision, ECB tightening expectations picking up after last week's decision, and BOE tightening expectations picking up ahead of its decision this Thursday, we expect EM and other risk assets to remain under pressure as global liquidity continues to recede.

AMERICAS

Colombia reports April manufacturing production and retail sales data Wednesday. Manufacturing is expected at 10.3% y/y vs. 12.3% in March, while sales are expected at 16.7% y/y vs. 12.0% in March. April trade and GDP proxy will be reported Friday. GDP is expected at 9.3% y/y vs. 7.6% in March. With the economic recovery still robust, all attention is on politics as Colombia holds its second round presidential vote Sunday June 19. Weekend polls suggest it's going to be close. The latest Yanhaas poll shows Petro with 45% support vs. 35% for Hernandez. This compares to a Guarumo and EcoAnalitica poll also released over the weekend that shows Hernandez with 48.2% support vs. 46.5% for Petro, which is within the margin of error. There will be no more polls published this week.

Brazil reports May trade data Monday. COPOM meets Wednesday and is expected to hike rates 50 bp to 13.25%. At the last meeting, COPOM hiked rates 100 bp to 12.75% but signaled future hikes would likely be smaller. The swaps market is pricing in another 75 bp of tightening over the next 3 months that would see the policy rate peak near 13.50%, which suggests a final 25 bp hike at the next meeting August 3. IPCA inflation eased to 11.73% y/y in May vs. 12.13% in April, the first deceleration since December but still well above the 2-5% target range.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports April current account, IP, and retail trade data Monday. The current account deficit is expected at -$3.2 bln, while IP is expected at 6.4% y/y. May central government budget balance will be reported Wednesday. The twin deficits should come further into focus this week and the trends are not good. Financing needs are growing and foreign inflows are not being attracted by relatively low interest rates. The central bank just left rates steady once again but we continue to believe that the country is nearing a turning point. If rates are not allowed to rise, then we believe Turkey will experience a significant balance of payments crisis that would see the lira weaken even more.

Israel reports May consumer confidence and trade data Monday. Q1 current account data will be reported Tuesday. May CPI will be reported Wednesday and headline is expected at 4.3% y/y vs. 4.0% in April. If so, it would be the highest since November 2008 and further above the 1-3% target range. The bank started the tightening cycle with a 25 bp hike April 11 and followed up with a 40 bp hike to 0.75% May 23. Both hikes were larger than expected. Next policy meeting is July 4 and another hike is expected then. The swaps market is pricing in another 175-200 bp of tightening over the next 12 months that would see the policy rate peak between 2.50-2.75%. Q1 GDP data will be reported Thursday.

ASIA

PBOC sets its 1-year MLF rate this week. Consensus sees steady rates at 2.85%. May new loans and aggregate financing picked up but more easing needs to be seen. May CPI inflation continues to run below the 3% target and so the focus will remain on boosting the economy. May IP and retail sales will also be reported Wednesday. IP is expected at -1.0% y/y vs. -2.9% in April, while sales are expected at -7.1% y/y vs. -11.1% in April. The economy should recover as movement restrictions are lifted but the recovery is likely to be uneven as restrictions will be enacted periodically to help limit any COVID outbreaks.

India reports May CPI Monday. Headline is expected at 7.10% y/y vs. 7.97% in April. If so, it would be the first deceleration since September but still well above the 2-6% target range. WPI will be reported Tuesday and is expected at 15.17% y/y vs. 15.08% in April. If so, that would suggest upward pressure on CPI may persist. The RBI just hiked rates 50 bp to 4.90% last week, as expected. Next policy meeting is August 4 and another 50 bp hike is expected then. Also, we would not rule out another intra-meeting hike if circumstances warrant. The swaps market is pricing in nearly 250 bp of tightening over the next 24 months that would see the policy rate peak near 7.40%.

Taiwan central bank meets Thursday and is expected to hike rates 25 bp to 1.625%. CPI rose 3.39% y/y in May, the highest since August 2012. While the central bank does not have an explicit inflation target, rising price pressures need to be addressed and so the tightening cycle will continue. The swaps market is pricing in 120 bp of tightening over the next 24 months that would see the policy rate peak near 2.60%. Regional tensions are likely to remain high on reports that China has claimed the Taiwan Strait is not international waters. The U.S. believes otherwise and has sent naval vessels through the strait. U.S. Defense Secretary Austin just warned China over the weekend to refrain from "provocative and destabilizing" activity near Taiwan following talks with China's Defense Minister Wei Fenghe.