EM FX was mixed last week despite broad dollar strength against the majors. PHP, THB, and HUF outperformed while ZAR, BRL, and KRW underperformed. U.S. rates are likely to march higher as markets continue to digest the Fed’s hawkish pivot. As such, EM FX and other risk assets are likely to remain under pressure in early 2025.
AMERICAS
Brazil reports consolidated budget data for November Monday. A primary deficit of -BRL7.0 bln is expected vs. a BRL36.9 bln primary surplus in October. Until the fiscal outlook improves, Brazil assets are likely to remain under pressure. The central bank continues to intervene regularly to support BRL but is burning through its foreign reserves at an unsustainable pace. Foreign reserves have fallen over $30 bln this month through the 26th. The swaps market is pricing in a peak policy rate north of 17% but even that is not helping BRL.
Chile reports November real sector data Tuesday. Retail sales are expected at 4.8% y/y vs. 4.5% in October, IP is expected at 1.3% y/y vs. 3.2% in October, and manufacturing production is expected at 0.7% y/y vs. 3.0% in October. Monthly GDP proxy will be reported Thursday and is expected at 1.7% y/y vs. 2.3% in October. The economic recovery remains modest even as price pressures remain elevated. At the last meeting December 17, the central bank cut rates 25 bp to 5.0% and signaled a new phase as Governor Costa noted that inflation will be around 5% in early 2025, a level that she called “uncomfortable” even as she stressed that “From here on, it shouldn’t be surprising that we enter a stage in which there are pauses.” The swaps market is pricing in 25 bp of further easing in this cycle.
Peru reports December CPI data Wednesday. Headline is expected at 2.22% y/y vs. 2.27% in November. If so, it would remain just above the center of the 1-3% target range. At the last meeting December 12, the central bank kept rates steady at 5.0% and noted that “The board is especially attentive to new information about inflation and its determinants, including core inflation, inflation expectations and economic activity to consider, if necessary, additional modifications in the monetary policy stance.” We expect the cautious easing cycle to continue in 2025.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports December CPI data Friday. Headline is expected at 45.20% y/y vs. 47.09% in November, while core is expected at 45.80% y/y vs. 47.13% in November. If so, headline would be the lowest since June 2023 and core the lowest since April 2023. Last week, the central bank started the easing cycle with a 250 bp cut to 47.50% vs. 175 bp expected. It also narrowed its rates corridor to 300 bp vs. 600 bp previously. The bank said that future decisions would be made on a “meeting-by-meeting basis with a focus on the inflation outlook.” Of note, the bank reduced the number of policy meetings each year to eight vs. 12 previously. The swaps market is pricing in 500 bp of easing over the next three months.
Poland reports December CPI data Friday. Headline is expected at 4.9% y/y vs. 4.7% in November. If so, headline would nearly reverse the November drop and move further above the 1.5-3.5% target range. At the last policy meeting December 4, the central bank kept rates steady at 5.75% and Governor Glapinski reversed his earlier guidance and pushed out the expected timing of the next cut into 2026 vs. mid-2025 previously. This exposed a rift on the MPC, as several members said they still expect to start discussing easing in March. The swaps market is pricing in steady rates over the next three months followed by 25 bp of easing over the subsequent three months.
ASIA
Korea reports December CPI data Tuesday. Headline is expected to pick up two ticks to 1.7% y/y and core is expected to remain steady at 1.9% y/y. If so, inflation would remain at or below the 2% target for the fifth straight month. Bank of Korea has cut rates 25 bp for two straight meetings. Next meeting is January 16 and another 25 bp cut seems likely. The swaps market is now pricing in 100 bp of easing over the next 12 months that would see the policy rate bottom near 2.0%. December trade data will be reported Wednesday. Exports are expected at 3.1% y/y vs. 1.4% in November and imports are expected at 2.7% y/y vs. -2.4% in November. Politics continue to weigh on Korean assets after parliament impeached Acting President Han after he refused to immediately appoint three judges to fill vacancies at the Constitutional Court. Finance Minister Choi became the new Acting President.
China reports official December PMIs Tuesday. Manufacturing PMI is expected to remain steady at 50.3 while non-manufacturing PMI is expected to rise two ticks to 50.2. If so, the composite PMI is likely to rise slightly from 50.8 in November. Caixin reports its manufacturing PMI Thursday and is expected to rise two ticks to 51.7. Despite the small bump up in the data, we remain skeptical that stimulus measures seen so far will have much lasting impact.
Singapore reports Q4 GDP data Thursday. Growth is expected at 3.8% y/y vs. 5.4% in Q3. On a q/q basis, however, GDP is expected at -0.7% vs. 3.2% in Q3. November retail sales will be reported Friday and are expected at 1.7% y/y vs. 2.2% in October. Last week, November CPI data came in lower than expected, with core inflation of 1.9% y/y the lowest since November 2021. While the MAS does not have an explicit inflation target, low price pressures should allow it to ease policy in 2025 if the economy slows too much. The January meeting may be too soon, as MAS chief Chia said just last week that its current policy setting is still appropriate for now.
Indonesia reports December CPI data late this week. Headline is expected at 1.44% y/y vs. 1.55% in November. If so, it would be the lowest since June 2021 and further below the 2-4% target range. Despite low inflation, Bank Indonesia has kept rates steady at 6.0% for the past three meetings due to ongoing rupiah weakness. Next meeting is January 15. If the currency remains under pressure, another hold then is likely.
