EM FX was largely firmer last week, taking advantage of some dollar softness and profit-taking. MXN, COP, and THB were the biggest outperformers, while TRY, INR, and PLN were the biggest underperformers. With the Fed widely expected to announce faster tapering this week, markets are positioned for Fed liftoff coming sooner rather than later. EM may be able to hold up in the short-term, but we think market pricing for a 1.5% terminal Fed Funds rate is faulty and see risks that it ends up higher. If markets start to reprice a more hawkish tightening cycle, we think it will become an even tougher backdrop for EM.
AMERICAS
Brazil central bank minutes will be released Tuesday. Last week, it hiked rates 150 bp to 9.25%, as expected, and signaled another hike of the same magnitude at the next meeting February 2 and said “It is appropriate to advance the process of monetary tightening significantly into the restrictive territory” The bank releases its quarterly inflation report Thursday. IPCA inflation came in at 10.74% y/y in November vs. 10.67% in October, the highest since November 2003 and further above the 2.25-5.25% target range. That range falls to 2-5% in 2022. Swaps market is pricing in a peak policy rate of 12.25% by mid-2022, falling to 11.75% by end-2022 and then 9.50% by end-2023.
Chile central bank meets Tuesday and is expected to hike rates 125 bp to 4.0%. November CPI rose 6.7% y/y, the highest since December 2008 and further above the 2-4% target range. Swaps market is pricing in a peak policy rate around 5.50% by mid-2022 and remaining there at end-2022 before falling slightly in 2023. The nation goes to the polls next weekend. Latest polls show left-wing candidate Boric slightly ahead of right-wing candidate Kast. Boric has tried to ease market concerns about his policies by pledging fiscal responsibility. Kast to has tried to appeal more to the center by softening his position on the environment and women’s rights.
Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 5.25%. However, a few analysts look for a 50 bp move. November CPI rose 7.37% y/y, the highest since January 2001 and further above the 2-4% target range. Swaps market is pricing in a peak policy rate of 7.25% by end-2022 and remaining there through 2023. The bank will have a new Governor on January 1 as Victoria Rodriguez was confirmed last week by the Senate 78-21, with 10 abstentions. Rodriguez takes the helm at a difficult time for policymaking and she will under the microscope. While we are withholding judgment now, her choice by AMLO was controversial given her lack of monetary policymaking experience.
Colombia reports October manufacturing and retail sales Wednesday. Production is expected at 13.0% y/y vs. 15.5% in September, while sales are expected at 14.2% y/y vs. 15.3% in September. The central bank meets Friday and is expected to hike rates 50 bp to 3.0%. After starting the tightening cycle with a 25 bp hike to 2.0%, the bank delivered a hawkish surprise October 29 with a 50 bp hike vs. 25 expected. November CPI rose 5.26% y/y, the highest since January 2017 and further above the 2-4% target range. As such, we see some risks of a hawkish surprise this week.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports October IP and current account data Monday. IP is expected at -0.1% m/m vs. -1.5% in September, while the current account is expected at $2.5 bln vs. $1.65 bln in September. The central bank meets Thursday and is expected to cut rates 100 bp to 14.0%. However, the market is split. Of the 19 analysts polled by Bloomberg, 1 sees a 25 bp cut, 3 see 50 bp, 1 sees 75 bp, 13 see 100 bp, and 1 sees 200 bp. November CPI rose 21.31% y/y, the highest since November 2018 and further above the 3-7% target range. Inflation has accelerated for six straight months, but that hasn’t prevent the bank from cutting rates three straight months for a total of 400 bp since the easing cycle started unexpectedly in September.
Israel reports November trade data Monday. Q3 current account data will be reported Tuesday. November CPI will be reported Wednesday, with headline expected to rise 2.5% y/y vs. 2.3% in October. If so, this would match the cycle high from September and move closer to the top of the 1-3% target range. After announcing an end to QE at the October 7 meeting, the central bank left policy unchanged November 22 and said it would intervene as needed to prevent shekel strength. Next policy meeting is January 3 and no change is expected then. Q3 GDP data will be reported Thursday.
National Bank of Hungary meets Tuesday and is expected to hike rates 40 bp to 2.5%. However, the market is split. Of the 16 analysts polled by Bloomberg, 1 sees a 20 bp hike, 6 see 30 bp, 3 see 40 bp, 2 see 50 bp, 2 see 60 bp, and 2 see 90 bp. The bank then holds its weekly 1-week repo tender Thursday and is expected to hike that rate 20 bp to 3.5%. November CPI rose 7.4% y/y, the highest since December 2007 and further above the 2-4% target range. As such, we see risks of hawkish surprises this week. Indeed, Deputy Governor Virag said last week that “We’re going to front-load as much of the interest-rate hikes as necessary.”
South Africa reports November CPI and PPI Wednesday. Headline CPI is expected at 5.5% y/y vs. 5.0% in October, core CPI is expected at 3.3% y/y vs. 3.2% in October, and PPI is expected at 8.7% y/y vs. 8.1% in October. With the inflation trajectory worsening, the SARB started the tightening cycle with a 25 bp hike to 3.75% November 18 and signaled quarterly 25 bp hikes over the course of both 2022 and 2023. All eyes are on the nation as scientists try to gauge the impact of omicron. For now, it still appears to be spreading at a much quicker pace than previous variants but with milder symptoms.
Central Bank of Russia meets Friday and is expected to hike rates 100 bp to 8.5%. However, the market is split. Of the 14 analysts polled by Bloomberg, 2 see a 50 bp hike, 2 see 75 bp, and 10 see 100 bp. November CPI rose 8.40% y/y, the highest since January 2016 and more than double the 4% target. The bank delivered a hawkish surprise October 22 with a 75 bp hike vs. 25 expected. Ahead of the decision, Russia reports Q3 GDP Wednesday, with growth expected to pick up a tick to 4.4% y/y. Of note, G-7 Foreign Ministers warned Russia to de-escalate its activities around Ukraine or face “massive consequences.” A joint statement said that they stood “united in our condemnation of Russia’s military build-up and aggressive rhetoric towards Ukraine. We call on Russia to de-escalate, pursue diplomatic channels, and abide by its international commitments on transparency of military activities.”
ASIA
India reports November CPI Monday. Headline inflation is expected at 5.10% y/y vs. 4.48% in October. If so, it would be the highest since August and nearing the top of the 2-6% target range. WPI will be reported Tuesday and is expected at 11.94% y/y vs. 12.54% in October. The RBI just left rates unchanged last week but announced another series of reverse repos to drain liquidity from the system. Clearly, the bank is being cautious about upward price pressures. November trade data will be reported Wednesday.
China reports November retail sales and IP Wednesday. Sales are expected at 4.8% y/y vs. 4.9% in October, while IP is expected at 3.8% y/y vs. 3.5% in October. Markets should be prepared for some downside surprises in the coming data, as the economy is clearly slowing enough for the PBOC to finally deliver on its RRR cut last week. This is typical of China’s policymakers: push painful structural reforms until growth slows too much, at which time the focus pivots back to supporting the economy. The RRR cut is meant to boost bank lending and so it’s back to the same old playbook of credit-fueled growth.
Bank Indonesia meets Thursday and is expected to keep rates steady at 3.5%. November CPI rose 1.75% y/y, the highest since June 2020 but still below the 2-4% target range. Rates are unlikely to go lower due to the likely negative impact on the rupiah, but a rate hike is completely unnecessary right now. Bloomberg consensus sees steady rates through H1 22, with some odds of a hike seen in Q3 22 and another one in Q1 23. We concur. Ahead of the decision, Indonesia reports November trade data Wednesday.
Philippine central bank meets Thursday and is expected to keep rates steady at 2.0%. November CPI rose 4.2% y/y, the lowest since July and moving closer to the 2-4% target range. Rates are also in a sweet spot right now, with falling inflation allowing the bank to maintain its current policy stance. Here, Bloomberg consensus sees steady rates through H1 22, with some odds of a hike seen in Q3 22 and another one in Q1 23. We concur.
Taiwan central bank meets Thursday and is expected to keep rates steady at 1.125%. November CPI rose 2.84% y/y, the highest since February 203. However, the central bank does not have an explicit inflation target and so the central bank can maintain its accommodative policy for the time being. Bloomberg consensus sees steady rates through H1 22, with some odds of a 12.5 bp hike seen in Q4 22.
