EM FX was mixed last week as the dollar mounted a bit of a comeback against the majors. CLP, CNY, and ZAR outperformed while HUF, MXN, and INR underperformed. The backdrop for EM remains rocky, with many major central banks continuing the aggressive tightening process this week. All eyes are on the Fed, but the ECB, BOE, and SNB also expected to hike rates 50 bp. With global growth slowing, we remain negative on EM and risk despite the China reopening theme.
AMERICAS
Mexico reports October IP Monday. It is expected at 3.4% y/y vs. 3.9% in September. Banco de Mexico meets Thursday and is expected to hike rates 50 bp to 10.5%. At the last policy meeting November 10, the bank hiked rates 75 bp to 10.0%. The vote was 4-1, with Deputy Governor Esquivel voting for a smaller 50 bp move. The bank said that the magnitude of future hikes will be decided the circumstances, suggesting greater data-dependence. Since then, headline inflation came in lower at 7.80% y/y in November, but core continues to accelerate to new highs. The swaps market is pricing in a policy rate peak near 10.75%.
Brazil central bank releases its minutes Tuesday. At last week’s meeting, the bank left rates steady at 13.75%, as expected. However, the tone was hawkish as it reiterated that rates will be kept steady for “a sufficiently long period” and that it will not hesitate to resume hiking rates if inflation doesn’t slow as planned. The swaps market is pricing in 50 bp of tightening over the next six months but much will depend on Lula’s fiscal policy once he takes office January 1. His appointment of leftist Haddad has certainly raised concerns, and suggests Lula 2.0 may turn out to be quite different from Lula 1.0. Stay tuned. October GDP proxy will be reported Wednesday.
Colombia reports October retail sales and IP Thursday. The central bank meets Friday and is expected to hike rates 100 bp to 12.0%. At the last policy meeting October 28, the bank hiked rates 100 bp to 11.0%. Since then, headline inflation has continue to accelerate to 12.53% y/y in November, the highest since March 1999 and further above the 2-4% target range. The swaps market is pricing in a peak policy rate near 12.5% but we see upside risks.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports October current account data Monday. A deficit of -$1.62 bln is expected vs. -$2.97 bln in September. If so, the 12-month total would rise to -$44.9 bln vs. -$39.2 bln in September and would be the highest since August 2018. October IP and retail trade will be reported Tuesday. IP is expected at -0.2% y/y vs. 0.4% in September. Central government budget will be reported Thursday. We continue to believe that the twin deficits will get worse and that financing them will be difficult until interest rates are allowed to rise.
Czech Republic reports November CPI Monday. Headline is expected at 15.7% y/y vs. 15.1% in October. If so, it would partially reverse last month’s drop from the 18.0% peak in September and move it further above the 1-3% target range. The swaps market is pricing in the start of an easing cycle within the next six months, which seems very unlikely if price pressures remain relatively high. Next central bank policy meeting is December 21 and no change is expected then.
Israel reports November trade data Tuesday. Q3 current account data will be reported Wednesday. November CPI will be reported Thursday, with headline expected at 5.3% y/y vs. 5.1% in October. If so, it would be the highest since October 2008 and further above the 1-3% target range. At the last policy meeting November 21, the central bank delivered a dovish surprise and hike rates 50 bp to 3.25% vs. 75 bp expected. Deputy Governor Abir said then that “We think that further monetary tightening is needed in order to make sure that we get inflation down. It’s not the end of the process.” He saw a “fair probability” that the policy rate will be above 3.5% in the coming months and stay there well into next year. At the previous meeting October 3, the research department saw the policy rate at 3.5% in one year. Of note, the swaps market is pricing in a peak policy rate near 3.5%.
South Africa reports November CPI and October retail sales Wednesday. Headline is expected to fall a tick to 7.5% y/y, while core is expected to rise a tick to 5.1% y/y. Sales are expected at -0.8% y/y vs. -0.6% in September. PPI will be reported Thursday and is expected at 15.2% y/y vs. 16.0% in October. Next SARB meeting is January 26 and a 50 bp hike to 7.5% seems likely. At the last meeting November 24, the bank hike rates 75 bp to 7.0%, as expected. The vote was 3-2, with the dissents in favor of a smaller 50 bp move and supporting our call for a smaller hike next month. Of note, the bank’s model suggests the repo rate will be 6.55% at the end of 2023, 6.71% at end of 2024, and 6.83% at end of 2025, Elsewhere, the swaps market is pricing in a peak policy rate between 7.75-8.0%.
Russia central bank meets Friday and is expected to keep rates steady at 7.5%. The bank did the same at the last policy meeting October 28, the first hold after six straight cuts. Governor Nabiullina said then that the bank was sending a “neutral signal” and added that “Further trajectory will be data-dependent.” Since then, inflation eased to 12.63% y/y in October and is expected to fall further to 12.1% y/y in November. Meanwhile, the economy is getting hit hard by sanctions and so we see some risks of a dovish surprise this week.
ASIA
China reports November money and loan data sometime this week. New loans are expected at CNY1.4 trln vs. CNY615 bln in October, while aggregate financing is expected at CNY2.1 trln vs. CNY908 bln in October. PBOC sets its key 1-year MLF rate Thursday and is expected to remain steady at 2.75%. China also reports November IP and retail sales Thursday. IP is expected at 3.7% y/y vs. 5.0% in October, while sales are expected at -3.9% y/y vs. -0.5% in October. Although easing of Covid Zero restrictions are welcome, markets remain concerned that a likely spike in infections will reverse those moves.
India reports November CPI and October IP Monday. Headline is expected at 6.36% y/y vs. 6.77% in October. If so, it would be the lowest since February and close to the 2-6% target range. Reserve Bank of India just hiked the repo rate last week 35 bp to 6.25%, as expected. The vote was 5-1. Governor Das said “Growth in India remains resilient and inflation is expected to moderate. But the battle against inflation is not over.” The bank maintained its 6.7% forecast for FY22 inflation but lowered its growth forecast to 6.8% vs. 7% seen previously. It also expects inflation to move back into the 2-6% target range in Q1. While the size of the hike was reduced from 50 bp in September, the tone was decidedly on the hawkish side and so the tightening cycle will continue. The swaps market is pricing in a peak policy rate near 6.75%.
Philippine central bank meets Thursday and is expected to hike rates 50 bp to 5.5%. At the last meeting November 17, the bank hiked rates 75 bp and raised its 2022 inflation forecast two ticks to 5.8%, its 2023 forecast by two ticks to 4.3%, and its 2024 forecast by one tick to 3.1%. Governor Medalla said then that the jumbo Fed hikes are likely over and “therefore we are slowly going back to a more normal global interest rate environment. Therefore, we will probably do less.” The swaps market is pricing in a peak policy rate near 5.5% but this may move higher if inflation continues to rise. CPI rose 8.0% y/y in November, the highest since November 2008 and well above the 2-4% target range.
Taiwan central bank meets Thursday and is expected to hike rates 12.5 bp to 1.75%. At the last policy meeting September 22, the bank hiked rates 12.5 bp to 1.625% and also raised reserve requirements by 25 bp. The vote was 13-2 with the two dissents in favor of a larger 25 bp move. At the same time, the bank cut its growth forecast for 2022 to 3.51% and for 2023 to 2.9% and added that domestic demand is likely to be the main driver of growth. The swaps market is pricing in no more hikes.
