EM Preview for the Week of December 5, 2021

December 05, 2021

EM held up relatively well given the unknown risks of omicron as well as the growing likelihood of faster Fed tapering. Both are negative for EM and risk assets and so until the impact of the new variant becomes known, we would play EM from a defensive standpoint. The dollar put in a mixed performance last week but we expect broad-based gains to resume as the Fed tilts more and more hawkish.

AMERICAS

Chile reports November CPI and trade data Tuesday. Headline inflation is expected at 6.6% y/y vs. 6.0% in October. If so, it would be the highest since December 2008 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike in July and then followed up with a 75 bp hike in August and a 125 bp hike to 2.75% at the last meeting October 13. Minutes showed that hikes of 75 or 150 bp were viewed as “inadequate.” Next policy meeting is December 14 and another large hike of 100-125 bp is expected. Swaps market sees the policy rate at 4.5% in Q1 and peaking at 5.5% by end-2022. The lower house rejected the bill allowing a fourth round of pension withdrawals, effectively killing it. Elsewhere, polls show left-wing candidate Boric’s lead narrowing over right wing Kast, but 25% remain undecided ahead of the December 19 runoff vote.

 Brazil COPOM meets Wednesday and is expected to hike rates 150 bp to 9.25%. October retail sales will also be reported Wednesday and are expected at 0.7% m/m vs. -1.3% in September. November IPCA inflation will be reported Friday, with headline inflation expected at 10.86% y/y vs. 10.67% in October. If so, it would be the highest since November 2003 and further above the 2.25-5.25% target range. Of note, that range falls to 2-5% in 2022. Swaps market sees the policy rate peaking at 12.75% by mid-2022 but then falling to 11.50-11.75% by end-2022. The Senate approved a bill that eases fiscal rules for the government, which should allow President Bolsonaro to turn on the fiscal taps ahead of his reelection campaign.

Peru central bank meets Wednesday and is expected to hike rates 50 bp to 2.5%. The central bank started the tightening cycle with a 25 bp hike in August and then followed up with a 50 bp hikes each in September, October, and November. CPI rose 5.7% y/y in November, down only a tick from the cycle high in October and well above the 1-3% target range. At the November meeting, the bank saw inflation converging to target in H2 22, still saw the need for expansive monetary policy, and said withdrawal of accommodation would be “gradual.” Bloomberg consensus sees the policy rate at 3.5% in Q1 2023. Despite the bank’s dovish messaging, we think this rate path understates the likely tightening ahead.

Mexico reports November CPI Thursday. Headline inflation is expected at 7.24% y/y vs. 6.24% in October. If so, it would be the highest since January 2001 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike in June and then followed up with 25 bp hikes each in August, September, and November. Next policy meeting is December 16 and another 25 bp hike to 5.25% is expected. In its quarterly inflation report last week, the bank forecast inflation of 6.8% by end-2021, 3.3% by end-2022, and 3.0% by end-2023, suggesting tightening will continue in early 2022. Swaps market sees the policy rate peaking at 7.25% by end-2022. October IP will be reported Friday and is expected at 0.9% m/m vs. -1.4% in September.

EUROPE/MIDDLE EAST/AFRICA

Czech reports October retail sales Monday. Headline sales are expected at -1.1% y/y vs. 0.6% in September, while sales ex-autos are expected at 4.7% y/y vs. 3.6% in September. Trade and industrial output will be reported Tuesday. November CPI will be reported Friday, with headline inflation is expected at 6.0% y/y vs. 5.8% in October. If so, it would be the highest since October 2008 and further above the 1-3% target range. The central bank started the tightening cycle with a 25 bp hike in June and then followed up with a 25 bp hike in August, 75 bp in September, and a 125 bp hike to 2.75% at the last meeting November 4. The bank said then that it saw “sharp” hikes in late 2021 and early 2022, suggesting further tightening ahead. Next policy meeting is December 22 and another large hike is expected.

South Africa reports Q3 GDP data Tuesday. It is expected to have contracted -0.8% q/q vs. 1.2% growth in Q2. October retail sales will be reported Wednesday and are expected at 0.8% m/m vs. 5.1% in September. Q3 current account and October manufacturing production will be reported Thursday. The surplus is expected at 3.8% of GDP vs. 5.6% in Q2, while production is expected at 0.5% m/m vs. 3.8% in September. This is of course all old news as the detection of the new omicron variant has made the economic outlook cloudier. With another couple of weeks likely needed to determine its impact, policymakers are in a holding pattern. SARB started the tightening cycle last month with a 25 bp hike to 3.75%, which in hindsight looks premature.

Hungary reports October IP Tuesday. It is expected at -2.0% y/y WDA vs. -1.7% in September. November CPI will be reported Wednesday, with headline inflation is expected at 7.3% y/y vs. 6.5% in October. If so, it would be the highest since December 2007 and further above the 2-4% target range. October trade data will be reported Thursday. The central bank has hiked the benchmark rate by a total of 150 bp through the last policy meeting November 16 to 2.1%. Since that meeting, it has hiked the one-week deposit another 130 bp in total to 3.10% currently and is expected to hike another 10 bp to 3.2% Thursday.

Russia reports November CPI Wednesday. Headline inflation is expected at 8.35% y/y vs. 8.13% in October, while core is expected at 8.40% y/y vs. 8.03% in October. If so, headline would be the highest since January 2016 and further above the 4% target. October trade data will be reported Friday. The central bank started the tightening cycle with a 25 bp hike in March and then followed up with 50 bp hikes in April and June, 100 bp in July, 25 bp in September, and a 75 bp hike to 7.5% at the last meeting October 22. Next policy meeting is December 17 and a 50 bp hike to 8.0% is expected. Elsewhere, tensions with the U.S. remain elevated as the two nations continue to spar over Ukraine.

National Bank of Poland meets Wednesday and is expected to hike rates 50 bp to 1.75%. However, the market is split. Of the 26 analysts polled by Bloomberg, 1 sees a 25 bp hike, 16 see 50 bp, and 9 see 75 bp. The central bank started the tightening cycle with a 40 bp hike in October then followed up with a 75 bp hike to 1.25% at the last meeting November 3. Minutes to that meeting will be released Friday. With CPI rising 7.7% y/y in November, the bank is clearly behind the curve and in need of a more aggressive tightening cycle. Finance Minister Koscinski warned that recent government measures to soften the impact of higher prices and help the poor may be inflationary. Planned tax cuts would help lower inflation, but increased social transfers will mean more cash in the economy, which will boost inflation.

ASIA

Philippines reports November CPI Tuesday. Headline inflation is expected at 4.0% y/y vs. 4.6% in October. If so, it would be the lowest since July and back to the 2-4% target range. October trade data will be reported Friday, with exports expected at 5.9% y/y vs. 6.3% in September and imports expected at 26.7% y/y vs. 24.8% in October. The central bank has kept rates unchanged at 2.0% all year on the view that inflation would eventually ease back toward its target. Next policy meeting is December 16 and no change is expected then. Bloomberg consensus sees steady rates through H1, with odds of a hike starting in Q3 followed by another in Q1 23.

China reports November trade data Tuesday. Exports are expected at 20.3% y/y vs. 27.1% in October, while imports are expected at 21.5% y/y vs. 20.6% in October. November CPI and PPI will be reported Thursday. CPI is expected at 2.5% y/y vs. 1.5% in October, while PPI is expected at 12.1% y/y vs. 13.5% in October. Money and loan data could emerge either this week or next. Consensus sees a CNY2.7 trln rise in aggregate financing and a CNY1.6 trln rise in new yuan loans, both nearly double the October readings. Last week, Premier Li said that PBOC will likely cut RRR to help smaller firms. PBOC is still in easing mode and we remain surprised that the yuan remains so firm given 1) broad EM weakness and 2) growing monetary policy divergence. We like USD/CNY higher.

Reserve Bank of India meets Wednesday and is expected to keep rates steady at 4.0%. At the last policy meeting October 8, the bank abruptly ended its bond purchase program and announced long-term reverse repo auctions to drain liquidity. While this signaled a hawkish tilt, the bank is unlikely to hike rates anytime soon. Bloomberg consensus sees the first hike possibly in Q2, followed by another one by end-2022. CPI rose 4.5% y/y in October, near the bottom of the bank’s 2-6% target range, and so signaling little need for an aggressive tightening cycle. October IP will be reported Friday and is expected to rise 4.5% y/y vs. 3.1% in September.

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