In this week's Podcast
- Jackson Hole Speech
- PCE Announcement
- Key Events for the Week Ahead in Emerging Markets
Jackson Hole speech
Fed Chair Powell emphasized labour market strength and hinted at potential easing cycles. Could this provide a positive backdrop for emerging markets?
PCE announcement
Core PCE Index surprised lower, supporting the outlook for a more pronounced Fed easing cycle, which is likely to drive carry allocations back toward emerging markets.
Key Events for the Week Ahead in Emerging Markets
- Monday: PMI prints and CPI release in Indonesia.
- Tuesday: Turkish CPI and Central Bank of Chile meeting.
- Wednesday: National Bank of Poland meeting.
- Thursday: Malaysian central bank and Thailand CPI print.
- Friday: Chilean CPI print.
Transcript
Matt Jones
Welcome to the long and short of the week ahead. A production of your Eurizon SLJ Capital. That takes a look at the macro economic themes of the week ahead. And has been recorded for professional investors. My name is Matt Jones, head of distribution for your Eurizon SLJ capital, and I'm joined today by Alan Wilson portfolio manager on our emerging markets desk.
Alan. Great to have you here.
Alan Wilson
Thank you very much Matt. It's great to be here.
Matt Jones
So last week we recorded the episode just before the Jackson hole speech. So let's have a look at what was said and the potential implications for emerging markets.
Alan Wilson
Yeah, thanks Matt. So I think that Chair Powell's remarks really reminded me of an old Scottish song by the band called Hugh and Cry, and that song was called 'Labour of Love', and in that context, the speech was almost exclusively about the labour market. I think Powell to managed to jump over the quite high dovish hurdle.
We did have some quite dovish FOMC minutes and we have had some quite dovish committee member interviews. So without doubt, the message here was that the balance of risks have shifted from the inflation fight to the labour market, which is the other half of the Fed's dual mandate. Powell stated that his confidence has grown that inflation is on a sustainable path to 2%, and with the labour market health, now the priority for the Fed, I think that Powell's comments on this were quite dovish. He said that he didn't welcome any further cooing in labor market conditions, and he said also would that he would do everything to ensure that labour market strength was maintained.
So that was a little bit of a nod to Drahgi, I think, " Whatever it takes" mantra. And at the same time, Powell has now signalled that the Fed easing cycle is going to come. He didn't give any hints on the timing of the cycle, but he didn't push back on the 50 basis point cuts, which the market is talking about and we have over 30 basis points of cuts each meeting, discounted over the last few meetings of the year.
So when he says that there is ample room to respond to unwelcome, easing of the labour market conditions. To me that suggests that he's not ruling out 50 basis points clips of easing.
In terms of the read through for EM, the positive momentum we've seen over the last few weeks continued the local bonds and the currencies continued to perform well in the wake of the Jackson Hole speech, and I think that can extend over the coming months. Under the surface, South Africa remains a standout, we continue to see a sharp repricing of local assets following the May election, which yielded a new business friendly coalition government.
Matt Jones
Fantastic. Thank you, Alan. So this time round, we are currently recording just after the announcement of the PCE. What is your take on that? And the potential impact for emerging markets?
Alan Wilson
Yeah, much less there. Jackson Hole speech last Friday, I think today's PCE print for July will shape the next week or so in EM. I think the data today is just yet another hint that the recent inflation storm in the US, and globally has all but past. The headline PCE index, for July came in at two and a half percent, which was in line with expectations. But I think that the the main point of note is that the core PCE index surprised slightly lower at 2.6% relative to expectations of a 2.7 number. This is much in line with Chair Powell's comments at Jackson Hole, the inflation fight seems like it's in its final stages and all eyes are now turning to the other half of the Fed's dual mandate, which is the labour market. I think the data today is much in line with our hard landing thesis for both US and global inflation, and that by extension could mean a more pronounced Fed easing sequel than what we see discounted at the moment. In terms of EM this is very likely to drive, carry allocations back towards the asset class.
Matt Jones
Interesting. Thank you, Alan. That's certainly a point to be watching out for in the coming weeks. Talking about the coming weeks. What events are on the horizon within emerging markets next week in particular?
Alan Wilson
Sure, as we move into the first week of September, it will be a really busy data week for EM, and it will provide a really timely health check on the underlying growth and efficient mix. On Monday, we have a flurry of PMI prints across Asia, CEMEA and LatAm, and that gives a good underlying update on the growth profile on EM.
We have data releases across China, Indonesia, Malaysia, India, Hungary, Poland, Czech, and Brazil. So there's no shortage of data points that start the week. And at the same time and Monday we'll have a CPI release in Indonesia. This would be important in the context of the Bank of Indonesia easing cycle. Earlier this month, the kept policy rates on hold at 6.25%. Now, this was a really finely balanced decision with a lot of the market pointing towards a rate cut. Expectations are building that with more downside inflation surprises, the window will open for more easing in Indonesia. And the market expects possibly two cuts over Q4 into the tail end of this year. But only after the Fed starts it's easing cycle.
On Tuesday, we have the Turkish CPI print for August, and this will give us further clarity on the disinflation process there. Now, we know that we've returned to an Orthodox monetary policy framework in Turkey over the last year or so. So it'd be interesting to see the impact of that. Elsewhere, on Tuesday we have the central Bank of Chile meeting. They're expected to resume their easing cycle after a hold last month. The market expects a 25 basis point cut at 5.5%.
On Wednesday, the main point of focus will be on the national bank of Poland meeting. They're expected to leave rates unchanged at 5.75. Policy rates there are almost certainly expected to remain unchanged for the remainder of this year. There's real underlying inflation risk via the fiscal spending that's going on in Poland, but also from the recent VAT hike. On Thursday, we have the Malaysian central bank meeting. They're very likely to leave rates unchanged at 3%. There are potential inflation risks in the pipeline given the removal of diesel subsidies in the mid June. Likewise on Thursday, we have the Thailand CPI print for August, which will be quite interesting in the context of the central bank. They have been firmly on hold and inflation continues to surprise on the downside, and it's now actually below the 1 to 3% tolerance band.
Finally on Friday, we have the Chilean CPI print for August, which will provide some context for the central bank decision earlier on in the week.
Matt Jones
Fantastic a lot to be looking out for in the week ahead. Thank you for joining us and for outlining your thoughts on the week ahead.
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