Inflation Trends & CPI Analysis - The Consumer Price Index (CPI) increased by 03% month-over-month, aligning with estimates, while core CPI (excluding food and energy) rose by 02%, slightly below expectations [1] - Year-over-year, consumer inflation increased by 27%, and core inflation rose by 29% [1][2] - Inflation is heating up slightly compared to the previous month, where both headline and core inflation increased by only 01% [2] - Core CPI has been consistently lower than estimated for the fifth consecutive month [3] Tariff Impact & Business Strategies - Initial data suggests that tariff increases are contributing less than a third to the monthly CPI increase, with some pressure emerging in categories first exposed to tariffs [7] - Businesses are employing various strategies, including inventory management, alternative sourcing, cost spreading, and margin adjustments, to buffer the impact of tariffs and avoid passing costs directly to consumers [9] - Apparel prices rose by 04%, footwear increased by 07%, and furniture/furnishings prices also saw a rise [8][31] - The effective tariff rate in June was only 10%, while the average tariff rate was around 15%, indicating that the full impact of tariffs has yet to materialize [14] Federal Reserve & Monetary Policy - The Federal Reserve faces a challenging decision regarding interest rate cuts, amidst pressure from the White House and the need to maintain its 2% inflation target [4][17] - The current federal funds rate is considered moderately restrictive, putting downward pressure on demand [18] - There is a risk that prolonged elevated inflation could become ingrained in people's expectations, potentially settling around 3% [20] - The Fed is closely monitoring core services inflation, which has been stubbornly slow to decline, to ensure momentum towards the 2% target [21][25] - The FOMC is divided on future rate cuts, with varying opinions on the number of cuts in 2025 [29] Specific Price Changes - Beef prices saw a significant increase of 2%, while egg prices decreased by 74% [32][33] - New vehicle prices dropped by 03%, and used cars/trucks decreased by 07% [34] - Shelter costs moderated, increasing by 02% compared to May's 03% rise [35] - The energy index rose by 09% in June, with the gas index increasing by 1% [36]

Investment Rating - The report maintains an unchanged view on emerging markets (EM) inflows, driven by lower yields and a weaker USD, which are expected to support EM inflows [1][10]. Core Insights - A 1% decrease in the USD is projected to result in approximately US$360 million inflows into EM local markets [10][29]. - A 1% outflow from foreign US Treasury holdings into EM local markets could equate to around 3% of local debt market size, 48% of daily FX turnover, and 0.8% of GDP across GBIEM countries [10][39]. - Current valuations in sovereign credit show little risk premium for tariff policy, with idiosyncratic drivers being the main source of dispersion [10][44]. Summary by Sections EM Flows and USD Sensitivity - The analysis indicates that EM local flows are significantly influenced by USD movements, with historical data supporting this relationship [21][32]. - The report highlights that the relationship between USD weakness and EM inflows has been consistently negative and statistically significant over the past decade [32][36]. Sovereign Credit Strategy - The report notes that EMBI index spreads are trading close to historical lows, with minimal risk premium priced in for potential tariff impacts [44][45]. - Specific countries like Zambia are on the verge of a credit rating upgrade, which could enhance their debt carrying capacity [70][50]. Regional Strategies - In Latin America, the Mexican Peso (MXN) has shown mild long positioning despite recent rallies, with its performance linked to US risk appetite [3][62]. - The report emphasizes the importance of macroeconomic fundamentals in shaping currency performance, particularly in the context of upcoming elections in Chile [83]. Trade Recommendations - The report includes specific trade recommendations, such as buying Zambia's 2053 bond with a target price of 77, reflecting a positive outlook on its credit rating upgrade [70][61]. - It also suggests maintaining positions in Turkey's sovereign credit, anticipating gradual rate cuts and resilience against economic shocks [71][75].

Market Overview - The S\&P 500 and NASDAQ are at record highs, presenting a complex backdrop for the upcoming earning season [1] - Market sentiment has shifted from deeply negative to positive, with potential for further gains [2][3] - The S\&P 500 is trading at approximately 223 times forward earnings, near a 10-year high, while yield bond spreads are at 268 basis points, close to a 10-year tight [4] Economic Factors - The economy is in decent shape, supported by positive labor market data and low corporate defaults [3] - Disinflation, particularly from the housing market, is a significant factor [9] - Shelter represents about 23% of CPI readings, making it a crucial element [10] Housing Market Dynamics - The housing market is experiencing significant changes, with the largest supply since 2020 and slowing demand due to unaffordability and insurance costs [10] - Real-time measures of housing may lead to the Federal Reserve achieving its inflation target and resuming rate cuts [11] Bond Market Analysis - The market sees value in bonds at elevated rates, suggesting they are currently mispriced [8][11] - Disinflation from housing is considered more important than potential deficit increases in influencing bond market volatility [11] Earning Season Focus - The focus is shifting towards the earning season, with hopes that markets can move past political developments and concentrate on profits and earnings [6]

Investment Rating - The report has shifted its forecast for the next 25 basis point (bp) rate cut to September, previously expected in December, and has lowered the terminal funds rate forecast to 3-3.25% from 3.5-3.75% [2][3][22] Core Insights - The report indicates that the odds of a rate cut in September are somewhat above 50%, driven by underwhelming tariff effects, larger disinflationary offsets, and potential labor market softness [2][13][10] - The expectation is for three consecutive 25bp cuts in September, October, and December 2025, with additional cuts anticipated in March and June 2026 [3][22] - The report highlights that recent evidence suggests tariff effects on consumer prices are smaller than previously expected, contributing to a more favorable environment for rate cuts [5][4][10] Summary by Sections Rate Cut Forecast - The forecast for the next rate cut has been moved forward to September, with expectations of three 25bp cuts in September, October, and December 2025 [2][3][22] - The terminal rate forecast has been reduced to 3-3.25%, reflecting a change in outlook regarding the economy's performance at higher interest rates [14][18][22] Inflation and Tariff Effects - Recent comments from Fed officials indicate potential support for a cut in September if inflation data is not excessively high [4][6] - Evidence shows that tariff impacts on consumer prices are less significant than anticipated, with moderating wage growth and weak demand for travel providing additional disinflationary pressure [5][10][11] Labor Market Dynamics - The labor market remains healthy, but job openings are slowly declining, making it harder for unemployed individuals to find jobs, which could influence the timing of rate cuts [10][11][12] - Near-term risks to payrolls are noted due to changes in immigration policy and residual seasonality, which could prompt earlier cuts if employment data shows weakness [10][13]

Market Outperformance & Capital Reallocation - Emerging markets and non-dollar European equities/fixed income are expected to continue outperforming in the second half of the year [2] - Capital is being reallocated away from the US towards regions with larger fiscal stimulus, driving growth in European and emerging market economies [2] - This capital reallocation is pushing emerging market equities to record elevated levels [3] - Diversification away from the US into the rest of the world presents a target-rich environment for investment [6] - Low ownership in non-US markets creates great opportunities for investors allocating capital [7] Monetary Policy & Disinflation - A weaker US dollar is creating a disinflationary backdrop for the rest of the world [4][5] - Emerging market central banks are cutting rates more aggressively, with the percentage of countries cutting rates jumping from 28% to over 60% in one month [4][5] - The industry anticipates a multiyear, virtuous cycle where central bankers can lower rates and focus on growth [4] Trade & Geopolitics - Trade negotiations and the tariff backdrop are central to emerging markets investment performance [8][9] - The US administration's decisions regarding trade will send an important message to the rest of the world [9] - The US has effectively weaponized its current account and capital account, discouraging inward investment [10]

Market Risk & Investment Strategy - Markets are showing very little risk priced in, with investors chasing riskier assets like unprofitable mid-cap growth stocks and European equities [3] - High yield bond spreads are below 3%, suggesting markets are calling an "all clear," but the firm believes risk management is crucial [4] - The firm favors high-quality stocks with strong earnings potential, good ROE, and ample cash, finding opportunities in both growth sectors and defensive sectors like health care and utilities [5] - The firm suggests trimming risk and finds elevated yields in bonds attractive, viewing stocks as priced for perfection and bonds as mispriced for a disinflationary, slower growth environment [7] - The firm recommends "legging into duration" in fixed income, focusing on the intermediate part of the curve (around 6 years) with investment-grade corporate bonds and treasuries [17][18] - The firm advises fading the momentum-driven rally in growth stocks and European equities, redeploying capital into high-quality US stocks at reasonable prices [20] Economic Outlook & Fed Policy - US economic growth is not terrible but data has been disappointing, with cracks appearing in the labor market and consumer pressure evident in retail sales [6][7] - The firm believes the Fed may consider cutting rates more aggressively than markets expect later in the year, especially if disinflation continues [16] - Housing and shelter disinflation is slowing, potentially offsetting inflationary impacts of tariffs [12][13] - Elevated mortgage rates (around 7%) and high levels of credit card debt and auto loans are creating a self-limiting mechanism that could push growth lower [14] - The firm anticipates bond yields falling across the curve as growth decelerates and disinflation sets in [23]

Group 1: Inflation Trends in CEEMEA - Headline inflation in the CEE-3 countries showed significant declines: Poland decreased by 0.6pp to 4.3%yoy, Hungary down by 0.5pp to 4.2%yoy, and Czechia down by 0.9pp to 1.8%yoy[1][2] - In contrast, Israel experienced a notable increase in inflation from 3.3%yoy to 3.6%yoy, primarily due to a one-time 16% hike in airline fees[1] - Mixed inflation trends were observed in other regions, with Russia's inflation slightly down to 10.2%yoy, Turkey at 37.9%yoy, and South Africa up to 2.8%yoy[2] Group 2: Core Inflation Insights - Core inflation fell sharply in Czechia and Poland to 3.3%yoy and 3.6%yoy respectively, while it rose significantly in Ukraine to 11.5%yoy[3] - Core inflation remained stable in Hungary (5.2%yoy), Israel (3.1%yoy), Romania (4.7%yoy), Russia (9.4%yoy), South Africa (3.5%yoy), and Turkey (33.3%yoy)[3] Group 3: Economic Outlook and Forecasts - The CEEMEA outlook suggests a dovish stance due to ongoing disinflationary processes, with core inflation dynamics weakening across most countries except Russia, Ukraine, and Israel[4] - Average annual inflation forecasts for 2025 indicate lower expectations across several countries, with Czechia at 1.9%yoy, Hungary at 4.4%yoy, and Poland at 3.8%yoy, all below consensus[8][19][29]

Group 1 - Banco BBVA Argentina S.A. is positioned to benefit from the new economic cycle in Argentina, characterized by financial liberalization and disinflation [1] - The company is expected to capitalize on the changing economic landscape, which may present new investment opportunities [1]