EM FX was mostly firmer last week as the dollar remains under broad-based pressure. CLP, BRL, and THB outperformed while RUB, ZAR, and ARS underperformed. Sentiment on EM is likely to remain constructive on reports of looser Covid restrictions in Shanghai as well as ongoing notions of a Fed pivot. We believe overall market sentiment is swinging too far into positive territory and will eventually swing the other way.
AMERICAS
Colombia reports November CPI Monday. Headline is expected at 12.39% y/y vs. 12.22% in October. If so, it would be the highest since March 1999 and further above the 2-4% target range. At the last policy meeting October 28, the central bank hiked rates 100 bp to 11.0% and Governor Villar noted that “During the last month, the adverse financial conditions facing the economy got more acute, caused by global factors and idiosyncratic factors. Inflation expectations continued to rise over the last month, getting further away from the target.” Next policy meeting is December 16 and another 100 bp hike seems likely. The swaps market is pricing in a peak policy rate near 12.0%.
Chile central bank meets Tuesday and is expected to keep rates steady at 11.25%. At the last policy meeting October 12, the central bank hiked rates 50 bp to 11.25% but signaled an end to rate hikes. Chile reports November CPI and trade data Wednesday. Headline is expected at 12.9% y/y vs. 12.8% in October. If so, it would be the first acceleration since August and argues for caution against cutting rates too soon after ending the tightening cycle at the October meeting. The swaps market is pricing in the start of an easing cycle within the next 3 months, which seems too soon.
Brazil COPOM meets Wednesday and is expected to keep rates steady at 13.75%. At the last policy meeting October 26, it kept rates steady at 13.75%. However, the uncertain fiscal outlook has led markets to price in further tightening ahead. The swaps market is pricing in a peak policy rate near 14.5% over the next 6 months. October retail sales will be reported Thursday. November IPCA inflation will be reported Friday. Headline is expected at 6.05% y/y vs. 6.47% in October. If so, it would be the lowest since February 2021 and moves closer to the 2-5% target range. Of note, this range falls to 1.5-4.5% in 2023. The swaps market is pricing in a peak policy rate between 14.25-14.5%.
Peru central bank meets Wednesday and is expected to hike rates 25 bp to 7.5%. At the last policy meeting November 10, the bank hiked rates 25 bp to 7.25%. CPI rose 8.45% y/y in November vs. 8.28% in October, interrupting the decelerating trend from the 8.81% peak in June and further above the 1-3% target range.
Mexico reports November CPI Thursday. Headline is expected at 7.95% y/y vs. 8.41% in October, while core is expected at 8.53% y/y vs. 8.42% in October. While the deceleration in headline would be the second straight month to the slowest since May, the central bank has become increasingly concerned with the continued rise in core. At the last policy meeting November 10, Banco de Mexico hiked rates 75 bp to 10.0%. Next policy meeting is December 15 and we expect the bank to match the Fed with a 50 bp hike to 10.5%. The swaps market is pricing in a peak policy rate between 10.75-11.0%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports November CPI Monday. Headline is expected at 84.90% y/y vs. 85.51% in October, while core is expected at 69.75% y/y vs. 70.45% in October. If so, it would be the first deceleration in headline since May 2021 but still well above the 3-7% target range. At the last policy meeting November 24, the central bank rates 150 bp to 9.0% and said that “the current policy rate is adequate and decided to end the rate-cut cycle that started in August.” It promised additional measures “supporting the effective transmission” of monetary policy, suggesting more macroprudential policies will be seen. Even with the easing cycle ending, the damage has been done. Until interest rates are allowed to move higher, the twin deficits will become increasingly harder to finance. We continue to look for a balance of payments crisis in 2023 that eventually morphs into a full-blown economic crisis.
Hungary reports October retail sales Monday. Sales are expected at 2.2% y/y vs. 3.0% in September. IP will be reported Wednesday. Central bank minutes will also be released Wednesday. November CPI and October trade data will be reported Thursday. Headline is expected at 22.1% y/y vs. 21.1% y/y in October. If so, it would be the highest since September 1996 and further above the 2-4% target range. At the last policy meeting November 22, the central bank kept the base rate steady at 13.0%. Next policy meeting is December 20 and no change is expected then. While the bank has signaled an end to the tightening cycle, it is likely to use its 1-day and 1-week deposit rates to support the forint as needed. The swaps market is pricing in the start of an easing cycle within the next 3 months, which seems too soon.
Bank of Israel publishes its minutes Monday. At that November 21 meeting, the bank delivered a dovish surprise and hiked rates 50 bp to 3.25%vs. 75 bp expected. Deputy Governor Abir saw a “fair probability” that the policy rate at will be above 3.5% in the coming month 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%. October CPI came in at 5.10% y/y vs. 4.59% in September, the highest since October 2008 and further above the 1-3% target range. As such, we believe market pricing will eventually move closer to the bank’s forward guidance.
South Africa reports Q3 GDP data Tuesday. Growth is expected at 0.4% q/q vs. -0.7% in Q2, while the y/y rate is expected at 2.8% vs. 0.2% in Q2. Q3 current account and October manufacturing production will be reported Thursday. The Q3 deficit is expected at -0.8% of GDP vs. -1.3% in Q2. At this point, the data are secondary as all eyes are on politics. President Ramaphosa is under fire for a corruption scandal that endangers his bid for a second term but he has decided to fight rather than resign. This comes as the ruling ANC is about to choose its leader and Ramaphosa was considered a shoo-in. With no heir apparent, his possible impeachment would leave a hole in the nation’s leadership. Stay tune.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 6.75%. Minutes to the November 9 meeting will be released Friday. At that meeting, it delivered a dovish surprise and kept rates steady vs. an expected 25 bp hike. Governor Glapinski said then that the tightening cycle was still on pause and had not ended. The swaps market is pricing in the start of an easing cycle within the next 3 months, which seems too soon.
ASIA
Caixin reports November services and composite PMI readings Monday. Services is expected at 48.0 vs. 48.4 in October. China reports November trade and foreign reserves data Wednesday. Exports are expected at -4.4% y/y vs. -0.3% in October, while imports are expected at -7.1% y/y vs. -0.7% in October. November CPI and PPI data will be reported Friday. CPI is expected at 1.6% y/y vs. 2.1% in October, while PPI is expected at -1.5% y/y vs. -1.3% in October. With price pressures under control, policymakers will continue focusing on boosting growth. The PBOC cut reserve requirements by 25 bp November 25 and further easing seems likely in the coming months.
Philippines reports November CPI Tuesday. Inflation is expected at 7.8% y/y vs. 7.7% y/y in October. If so, it would be the highest since December 2008 and further above the 2-4% target range. The central bank 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% at the last policy meeting November 17, when it hiked rates 75 bp to 5.0%. 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,” Next policy meeting is December 15 and a smaller 50 bp hike then seems likely. The swaps market is pricing in a peak policy rate between 5.75-6.0%.
Taiwan reports November CPI Tuesday. Headline is expected at 2.53% y/y vs. 2.72% in October, while core is expected at 2.60% y/y vs. 2.96% in October. While the central bank does not have an explicit inflation target, easing price pressures should allow it to continue tightening modestly. At the last policy meeting September 22, the bank rates 12.5 bp to 1.625%. Next policy meeting is December 15 and another 12.5 bp hike to 1.75% seems likely, even though the swaps market is pricing in no more hikes. November trade data will be reported Wednesday. Exports are expected at -6.8% y/y vs. -0.5% in October, while imports are expected at -1.0% y/y vs. 8.2% in October.
Thailand reports November CPI Tuesday. Headline is expected at 5.85% y/y vs. 5.98% in October, while core is expected at 3.20% y/y vs. 3.17% in October. If so, this would be the third straight month of deceleration from the 7.86% peak in August but still well above the 1-3% target range. Last week, the Bank of Thailand hiked rates 25 bp to 1.25% and said that “Economic recovery will be on track, albeit with risks to inflation. Given the heightened uncertainties surrounding the global economy, the Committee is ready to adjust the size and timing of policy normalization should the growth and inflation outlook shift from the current assessment.” The bank revised its inflation forecast for 2023 to 3% vs. 2.6% previously and pushed out the expected return to target to Q3 23 vs. Q2 23 previously. The swaps market is pricing in a policy rate between 1.75-2.0% over the next 12 months, rising gradually to between 2.25-2.5% over the subsequent 24 months.
Reserve Bank of India meets Wednesday and is expected to hike the repo rate 35 bp to 6.25%. However, a couple of analysts polled by Bloomberg look for a smaller 25 bp move. At the last policy meeting September 30, the bank hiked the repo rate 50 bp to 5.90%. Governor Das declined to provide any forward guidance but pledged to “remain alert and nimble” and data-dependent, which is a bit softer tone than his “whatever it takes” stance at the August meeting. The bank cut its growth forecast for FY22 to 7.0% vs. 7.2% previously but maintained its 6.7% forecast for inflation. Since then, CPI inflation peaked at 7.41% y/y and fell to 6.77% in October. The swaps market is pricing in a peak policy rate near 6.50%.
