EM Preview for the Week of December 3, 2023

December 03, 2023

Win Thin

EM FX was mixed last week despite the dollar’s broad-based losses against the majors. COP, CLP, and THB outperformed while ARS, MXN, and RON underperformed. We believe the risk rally driven by the dovish Fed narrative is getting overstretched but could certainly continue into 2024. That said, we see tight global liquidity and slower global growth prevailing next year, which is not support for EM.

AMERICAS

Brazil reports October current account and FDI data Monday. Q3 GDP data will be reported Tuesday. GDP is expected at -0.3% q/q vs. 0.9% in Q2, while the y/y rate is expected at 1.8% vs. 3.4% in Q2. October data have come in soft, suggesting the economy is likely to remain sluggish in Q4. The central bank has signaled that it remains comfortable with further easing. Next COPOM meeting is December 13 and another 50 bp cut to 11.75% is expected. The swaps market is pricing in 100 bp of easing over the next three months followed by another 100 of over the subsequent three months. October consolidated budget data will be reported Wednesday. A primary surplus of BRL17.2 bln is expected vs. a -BRL18.1 bln deficit in September.

Chile reports November CPI and trade data Thursday. Headline is expected at 4.2% y/y vs. 5.0% in October. If so, it would be the lowest since June 2021 and nearing the 2-4% target range. At the last policy meeting October 26, the central bank delivered a hawkish surprise and cut rates 50 bp to 9.0% vs. 75 bp expected. It also suspended its dollar purchase program. Since then, the peso has gained nearly 10% vs. the dollar. Next meeting is December 19 and if the peso remains firm, a larger 75 bp cut to 8.25% seems likely. The swaps market is pricing in 150 bp of easing over the next three months followed by another 100 bp over the subsequent three months.

Mexico reports November CPI Thursday. Headline is expected at 4.40% y/y vs. 4.26% in October, while core is expected at 5.32% y/y vs. 5.50% in October. If so, headline would accelerate for the first time since December and move away from the 2-4% target range. At the last policy meeting November 9, Banco de Mexico kept rates steady but softened its hawkish tone. Next meeting is December 14, and no change is expected. Last week, Governor Rodriguez said a rate cut in early 2024 was possible while Deputy Governor Espinosa was against the change in guidance, noting that inflationary risks remain and are growing. Upcoming inflation readings will be key in determining if a cut is possible at the February 8 or March 21 meetings. The swaps market is pricing in around 60% odds of a cut at the February meeting, while 50 bp of total easing is priced in over the next six months.

Colombia reports November CPI Thursday. Headline is expected at 10.14% y/y vs. 10.48% in October, while core is expected at 10.34% y/y vs. 10.51% in October. If so, headline would be the lowest since June 2022 but still well above the 2-4% target range. At the last policy meeting October 31, the central bank kept rates steady at 13.25% by a 5-2 vote and noted that “The majority of the board considers that, based on the available information, it still isn’t opportune to start a process of interest rate reduction, and that it is appropriate to wait for conditions that give greater confidence about the sustainability of this process.” Next meeting is December 19, and no change is expected then. The swaps market is pricing in 75 bp of easing over the next three months followed by another 75 bp over the subsequent three months. This seems too aggressive given the bank’s cautious tone.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports November CPI Monday. Headline is expected at 62.60% y/y vs. 61.36% in November, while core is expected at 71.40% y/y vs. 69.76% in October. If so, headline would reaccelerate to the highest since December 2022. At the last policy meeting November 23, the central bank delivered a hawkish surprise and hiked rates 500 bp to 4.0% vs. 250 bp expected. However, it said that “The current level of monetary tightness is significantly close to the level required to establish the disinflation course. Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time.” The swaps market is pricing in no more rate hikes in this cycle, which we do not think is enough to lower inflation and stabilize the lira. Next policy meeting is December 21 and is the lira continues to weaken, the bank will have to deliver another big rate cut.

South Africa reports Q3 GDP data Tuesday. GDP is expected flat q/q vs. 0.6% in Q2, while the y/y rate is expected at -0.1% vs. 1.6% in Q2. The SARB has kept policy tight and so there is little relief for the economy on the horizon. Indeed, the swaps market is pricing in only 50 bp of easing over the next twelve months. Q3 current account data will be reported Thursday. The deficit is expected at -1.1% of GDP vs. -2.3% in Q2. High interest rates and the improving external accounts should help support the rand, but the weak growth outlook will not help foreign equity inflows.

Hungary reports October IP and retail sales Wednesday. IP is expected at -2.1% y/y WDA vs. -5.8% in September, while sales are expected at -6.3% y/y vs. -7.3% in September. Central bank minutes will be released Wednesday too. At that November 21 meeting, the bank cut the base rate 75 bp for the second straight month to 11.5%. Deputy Governor Virag easing would continue at this pace in the months ahead as long as inflation continues to fall. Next policy meeting is December 19 and another 75 bp cut to 10.75% is likely. November CPI and October trade data will be reported Friday. Headline inflation is expected at 8.1% y/y vs. 9.9% in October. If so, it would be the lowest since December 2021 but still well above the 2-4% target range. The swaps market is pricing in 150 bp of easing over the next three months followed by another 150 bp over the subsequent three months.

Czech Republic reports October retail sales Wednesday. Sales ex-autos are expected at -1.6% y/y vs. -4.0% in September. October industrial and construction output and trade data will be reported Thursday. IP is expected at 5.0% y/y vs. -7.8% in September. The economy remains in recession, but the central bank has been reluctant to cut rates as the koruna would likely weaken. Next policy meeting is December 21 and rates are likely to be kept steady again at 7.0%. The swaps market is pricing in 75 bp of total easing over the next six months.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 5.75%. Minutes from the November 8 meeting will be released Friday. At that meeting, the bank delivered a hawkish surprise and kept rates steady vs. an expected 25 bp cut to 5.5%. Governor Glapinski said then that the scope for lower rates was limited as fiscal and regulatory risks had grown. The swaps market is pricing in less than 50% odds of a 25 bp cut over the next three months.

ASIA

Korea reports November CPI and Q3 GDP data Tuesday. Headline inflation is expected at 3.5% y/y vs. 3.8% in October while core is expected to fall a tick to 3.1% y/y. If so, headline would be the lowest since August but still well above the 2% target. Bank of Korea kept rates steady at 3.5% last week and Governor Rhee said the current policy rate was sufficiently restrictive but stressed that the bank is not thinking of adding stimulus at the moment. He said inflation was likely to converge with the 2% target by end-2024 or early 2025. The swaps market is pricing in steady rates over the next six months followed by some odds of 25 bp of easing over the subsequent six months.

Philippines reports November CPI Tuesday. Headline is expected at 4.3% y/y vs. 4.9% in October. If so, it would be the lowest since March 2022 and nearing the 2-4% target range. At the last scheduled meeting November 16, the bank kept rates steady at 6.5% and said “Guided by incoming data, the BSP remains prepared to resume monetary policy tightening as necessary to steer inflation towards a target-consistent path. The Monetary Board continues to deem it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes fully evident and inflation expectations are firmly anchored.” Since the surprise intra-meeting hike October 26, the peso has strengthened nearly 3% vs. the dollar and inflation has come down sharply and so we see steady rates for the time being. However, the swaps market is pricing in the start of an easing cycle over the next three months, which seems very unlikely given the bank’s hawkish tone.

Caixin reports November services and composite PMIs Tuesday. Services is expected at 50.7 vs. 50.4 in October. China reports November trade data Thursday. Exports are expected at -1.5% y/y vs. -6.4% in October, while imports are expected at 4.0% y/y vs. 3.0% in October. November CPI and PPI will be reported Saturday local time. CPI is expected to remain steady at -0.2% y/y while PPI is expected at -3.0% y/y vs. -2.6% in October. With deflation risks growing, we expect further stimulus in the coming weeks.

Taiwan reports November CPI Wednesday. Headline is expected at 2.70% y/y vs. 3.05% in October. While the central bank does not have an explicit inflation target, lower price pressures should allow it to remain on hold for the time being. The swaps market is pricing in steady rates over the next three years. November trade data will be reported Friday. Exports are expected at 4.9% y/y vs. -4.5% in October, while imports are expected at-2.0% y/y vs. -12.3% in October.

Thailand reports November CPI Thursday. Headline inflation is expected at -0.30% y/y vs. -0.31% in October, while core is expected at 0.60% y/y vs. 0.66% in October. If so, it would be the second straight month of headline deflation. Bank of Thailand kept rates steady at 2.5% last week and said that the current level of rates was appropriate “for supporting long-term sustainable growth” and added that “The committee will take into account growth and inflation outlook as well as associated risks in deliberating monetary policy looking ahead.” Assistant Governor Piti said rates are likely to remain steady for a while. The swaps market is pricing in steady rates over the next six months, with some odds of a rate cut over the subsequent six months.

Reserve Bank of India meets Thursday and is expected to keep rates steady at 6.5%. At the last meeting October 6, the bank kept rates steady at 6.5%. However, it was hawkish hold as Governor Das warned of inflation risks from excess liquidity in the system and said the RBI was considering selling bonds in order to soak up that extra cash. He said “I would like to emphatically reiterate that our inflation target is 4% and not 2-6%. Our aim is to align inflation to the target on a durable basis, while supporting growth.” The swaps market is pricing in some odds of a rate cut over the next three months, while 25 bp of easing becomes fully priced in over the subsequent three months. No easing is priced in over the next three years, which seems overly hawkish.

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