EM Preview for the Week of December 10, 2023

December 10, 2023

Win Thin

EM FX was mostly softer last week as the dollar made a broad-based recovery on the back of firm U.S. data that helped push U.S. yields higher. TWD, MYR, and PHP outperformed while CLP, HUF, and ZAR underperformed. This week is likely to bring a hawkish hold from the Fed as well as elevated core CPI readings in the U.S.; these should help the dollar continue to grind higher and maintain downward pressure on EM and other risk assets.

AMERICAS

Brazil reports November IPCA inflation Tuesday. Headline is expected at 4.70% y/y vs. 4.82% in October. If so, it would be the second straight month of deceleration to the lowest since August and back within the 1.75-4.75% target range. COPOM meets Wednesday and is expected to cut rates 50 bp to 11.75%. The swaps market is pricing in 200 bp of total easing over the next six months. October retail sales will be reported Thursday. October GDP prosy will be reported Friday.

Mexico reports October IP Tuesday. Banco de Mexico meets Thursday and is expected to keep rates steady at 11.25%. Governor Rodriguez recently hinted that a rate cut in early 2024 was possible but other policymakers remained more cautious. Looking ahead, the next meetings are February 8 and March 21. Much will depend on how quickly inflation falls in January and February. The swaps market is pricing in around 50% odds of a cut over the next three months, with 50 bp of total easing seen over the subsequent three months.

Peru central bank meets Thursday and is expected to cut rates 25 bp to 6.75%. It has cut 25 bp at every meeting since it started cutting in September as inflation is falling quickly back to the 1-3% target range. Bloomberg consensus sees the policy rate at 6% by the end of Q1, 5.25% by the end of Q2, and 4.75% by the end of Q3. October GDP prosy will be reported Friday.

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel releases its minutes Monday. At that November 27 meeting, the bank kept rates steady at 4.75% and said "Insofar as the recent stability in the financial markets becomes entrenched and the inflation environment continues to moderate toward the target range, monetary policy will be able to focus more on supporting economic activity.” This suggests an easing cycle is likely to be considered in 2024 but the bank warned that the rate path with be determined by the impact of the war and that remains very uncertain. Next policy meeting is January 1, and no change is expected then. The swaps market is pricing in 25 bp of easing over the next three months followed by another 50 bp over the subsequent three months. November trade data will be reported Wednesday. Q3 current account data will be reported Thursday. November CPI will be reported Friday and is expected at 3.6% y/y vs. 3.7% in October. If so, it would be the lowest since July but still above the 1-3% target range.

Czech Republic reports November CPI Monday. Headline is expected at 7.1% y/y vs. 8.5% in October. If so, it would still be well above the 1-3% target range. Next policy meeting is December 21, and it will be a close call. At the last meeting November 2, the bank unexpectedly kept rates steady vs. an expected 25 bp cut to start the easing cycle. The vote was 5-2, with the dissents in favor of a cut. Governor Michl said “If the majority of the board evaluates new data, which we will get a lot of by December, and decides that the inflationary risks have faded away, then it will be possible to lower rates. But for now we want to be hawkish and we still want to be restrictive for as long as possible, while at the same time being forward-looking.” The swaps market is pricing in 25-50 bp of easing over the next three months followed by another 150 bp over the subsequent three months.

South Africa reports November CPI and October retail sales Wednesday. Headline inflation is expected at 5.4% y/y vs. 5.9% in October, while core is expected to remain steady at 4.4% y/y. If so, headline would decelerate for the first time since July and remain within the 3-6% target range. PPI will be reported Thursday and is expected at 5.1% y/y vs. 5.8% in October. At the last policy meeting November 23, SARB kept rates steady at 8.25%. The vote was 5-0 3-2 at the past two meetings, with the dissents in favor of a hike, and so the tightening cycle is likely over. Governor Kganyago warned “Serious upside risks to the inflation outlook remain. In light of these risks, the Committee remains vigilant and stands ready to act should risks begin to materialize.” Next meeting is January 25, and no change is expected. The swaps market is pricing in 25 bp of easing over the next three months followed by another 25 bp over the subsequent three months.

ASIA

China reports November money and new loan data sometime this week. New loans are expected at CNY1.3 trln vs. CNY738 bln in October, while aggregate financing is expected at CNY2.6 trln vs. CNY1.85 trln in October. PBOC will set its key 1-year MLF rate Friday and is expected to remain steady at 2.5%. China also reports November IP, retail sales, FAI, property investment, and residential property sales Friday. IP is expected at 5.7% y/y vs. 4.6% in October, while sales are expected at 12.5% y/y vs. 7.6% in October. FAI is expected to rise a tick to 3.0% YTD, while property investment is expected to fall a tick to -9.4% YTD. Over the weekend, November CPI came in at -0.5% y/y and highlights growing deflation risks. More stimulus is likely but will do little to address the underlying problem of the huge debt overhang.

India reports November CPI and October IP Tuesday. CPI is expected at 5.70% y/y vs. 4.87% in October, while IP is expected at 10.0% y/y vs. 5.8% in September. If so, headline would accelerate for the first time since July and move closer to the top of the 2-6% target range. WPI will be reported Thursday and is expected at 0.00% y/y vs. -0.52% in October. The RBI just delivered a hawkish hold last week as Governor Das stressed that “It would be wrong to think or assume that a change of approach or any loosening is round the corner. It’s not on the table.” The bank raised its growth forecast for FY23 ending in March to 7.0% vs. 6.5% previously, which Deputy Governor Patra called “conservative.” The swaps market is pricing in low odds of a rate cut over the next three months, while 25 bp of easing is nearly priced in over the subsequent three months. This seems unlikely given the bank’s hawkish tone.

Philippine central bank meets Thursday and is expected to keep rates steady at 6.5%. At the last scheduled meeting November 16, the bank kept rates steady at 6.5% after hiking 25 bp intra-meeting October 26. It 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.” We see steady rates for the time being. However, the swaps market is pricing in 75 bp of easing over the next three months, which seems very unlikely given the bank’s hawkish tone.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.875%. At the last policy meeting September 21, the bank kept rates steady. Governor Yang said some board member express concerns about inflation and that the policy rate will be kept in a higher range for longer. He added that rates would be kept high even if inflation falls below 2%. The central bank does not have an explicit inflation target, but we believe the tightening cycle has ended. The market is pricing in steady rates over the next three years.

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