EM Preview for the week of October 17, 2021

October 17, 2021

EM FX took advantage of broad-based dollar weakness to post significant gains last week. PEN, ZAR, MXN, and THB were the best performers while TRY, INR, PHP, and ARS were the worst. When all is said and done, we believe the data last week show that the U.S. economy remains strong and that price pressures remain high. This will give the Fed confidence in tapering next month, and that will ultimately prove dollar-positive.


Mexico reports mid-October CPI Friday. Headline is expected at 6.10% y/y vs. 5.87% in mid-September. If so, it would be the highest since December 2017 and further above the 2-4% target range. Banco de Mexico delivered its third straight 25 bp hike September 30 by a 4-1 vote and left the door open for further tightening. Minutes show several MPC members expecting further hikes, but dissenter Esquivel argued that rate hikes were “ineffective” and “inefficient.” Next policy meeting is November 11 and another 25 bp hike to 5.0% seems likely if price pressures continue to rise.

Brazil reports September current account and FDI data Friday. High commodity prices and the weak real should help boost exports. However, the domestic economy is likely to slow significantly from the aggressive tightening cycle. COPOM next meets October 27 and is expected to deliver another 100 bp hike to 7.25. Most analysts (including us) see the policy rate topping out around 9.0-9.5%. The question then becomes when will the easing cycle begin? Bloomberg consensus sees the policy rate topping out at 8.5% and staying there through 2022 before easing begins in Q1 23.


Poland reports September core CPI Monday. Core inflation is expected at 4.1% y/y vs. 3.9% in August. PPI and industrial output will be reported Wednesday, with the former expected at 10.0% y/y vs. 9.5% in August and the latter at 8.1% y/y vs. 13.2% in August. Real retail sales and construction output will be reported Thursday, with sales expected to pick up a tick to 5.5% y/y. The economy remains strong even as price pressures continue to build. No wonder the central bank just delivered a hawkish surprise with a 40 bp hike to 0.5%. The statement gave no forward guidance, nor did it mention QE. However, the bank said FX interventions remain part of their toolkit. Wage and price pressures continue to rise and so we do not think it is “one and done.” Next policy meeting is November 3 and another hike then seems likely.

National Bank of Hungary meets Tuesday and is expected to hike rates 15 bp to 1.80%. The bank started the tightening cycle with a 30 bp hike to 0.9% in June and followed up with two more 30 bp hikes in July and August before slowing to 15 bp in September. The bank said that this slower pace would continue until December, when it will make a quarterly assessment of the impact. CPI rose 5.5% y/y in September, the highest since October 2012 and further above the 2-4% target range. This suggests the tightening cycle will continue for the foreseeable future.

South Africa reports September CPI Wednesday. Headline is expected at 5.0% y/y vs. 4.9% in mid-September. If so, it would be the highest since May and nearing the top of the 3-6% target range. SARB has tilted hawkish in recent weeks, raising the risk that it hikes rates 25 bp to 3.75% at the next meeting November 18. The bank said its models show quarterly rate hikes in both 2022 and 2023, which strikes us as too aggressive.

Russia reports September PPI Wednesday. PPI inflation is expected at 29.7% y/y vs. 28.6% in August. The central bank then meets Friday and is expected to hike rates 50 bp to 7.25%. However, the market is split as nearly half the analysts polled by Bloomberg see a 25 bp hike to 7.0%. CPI rose 7.4% y/y in September, the highest since June 2016 and nearly double the 4% target. As such, we lean towards a more hawkish 50 bp hike this week.

Turkey central bank meets Thursday and is expected to cut rates 100 bp to 17.0%. However, nearly half the analysts polled by Bloomberg see a smaller 50 bp cut to 17.50%. President Erdogan doubled down on his pressure for lower interest rates by firing three central bank officials last week, sending the lira to fresh record lows. These officials (two Deputy Governors and one MPC member) were against the decision to cut rates 100 bp to 18.0% at the last meeting September 23. After those sackings, a larger 100 bp rate cut this week seems most likely now.


Singapore reports September trade data Monday. NODX are expected to rise 8.7% y/y vs. 2.7% in August. Export growth has slowed markedly in recent months, reflecting the same supply chain issues that many others in the region are experiencing. Yet the MAS delivered a hawkish surprise last week, tightening policy by slightly increasing the slope its S$NEER target band. That means like other central banks, the MAS has shifted from supporting growth to limiting inflation even though it does not have an explicit inflation target.

China reports Q3 GDP as well as September retail sales and IP Monday. Growth is expected at 0.4% q/q vs. 1.3% in Q2. Sales are expected to rise 3.5% y/y vs. 2.5% in August, while IP is expected to rise 3.8% y/y vs. 5.3% in August. A pickup in domestic demand would be welcome. However, any signs of greater than desired weakness in the economy is likely to move forward any RRR cuts that were planned for Q4.

Bank Indonesia meets Tuesday and is expected to keep rates steady at 3.5%. CPI rose 1.6% y/y in September, the highest since May but still below the 2-4% target range. At the last policy meeting September 21, BI delivered a dovish hold. It noted that policy remains accommodative and pro-growth, and that the bank will keep trying to improve the transmission of its policy to banks. The rupiah has been firm recently and we do not think BI will add to the currency’s vulnerability by cutting rates anytime soon.

Taiwan reports September export orders Wednesday. Orders are expected to rise 17.0% y/y vs. 17.6% in August. If so, it would be the slowest since October 2020. While it’s too early to sound the alarm, most indicators suggest a cooling in global trade and activity. Much of it is supply chain issues rather than weak demand, but the trend is nevertheless troublesome. Meanwhile, tensions with mainland China remain high as Taiwan has reportedly asked the U.S. to bring forward delivery of 66 fighter aircraft that have been ordered.

Korea reports trade data for the first twenty days of September Thursday. Exports rose 16.7% y/y in September vs. 34.7% in August, and was the slowest since March. This likely also reflects supply chain issues but bears watching. Korea imports remained strong at 31% y/y in September and suggests demand remains strong.

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