EM Preview for the Week of February 19, 2023

February 19, 2023

EM FX was mostly softer last week as the dollar gained broad-based traction on strong U.S. data and hawkish Fed comments. MXN, CLP, and HUF outperformed while KRW, THB, and MYR underperformed. We continue to believe that EM remains vulnerable given the fundamental backdrop of tighter global liquidity and rising risks to global growth.


Mexico reports mid-February CPI Thursday. Headline is expected at 7.83% y/y vs. 7.94% in mid-January, while core is expected at 8.42% y/y vs. 8.45% in mid-January. Banco de Mexico minutes will also be released Thursday. At that February 9 meeting, the bank delivered a hawkish surprise with a 50 bp hike to 11.0% vs. 25 bp expected and “deemed that, given the dynamics of core inflation, on this occasion it is necessary to continue with the magnitude of the reference rate adjustment. Given the monetary policy stance already attained and depending on the evolution of incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude.” Next meeting is March 30 and a 25 bp hike seems likely given that forward guidance. The swaps market is now pricing in a peak policy rate near 11.75% over the next 6 months, followed by the start of an easing cycle over the subsequent 6 months. December GDP proxy and Q4 current account data will be reported Friday. GDP is expected at 2.80% y/y vs. 3.28% in November.

Brazil reports mid-February IPCA inflation and January current account data Friday. Inflation is expected at 5.60% y/y vs. 5.87% in mid-January. If so, it would be the lowest since early 2021 but still above the 1.75-4.75% target range. Central bank President Campos Neto gave a masterful performance Friday, expressing a desire to work with Lula’s economic team but also refusing to give in on cutting rates or raising the inflation target. Unfortunately, we expect tensions with Lula to continue over the near-term. Next COPOM meeting is March 22 and rates are expected to remain steady at 13.75% for the next 3 months. However, the swaps market is pricing in the start of an easing cycle over the subsequent 3 months, which seems very unlikely.


Poland reports January industrial output and PPI Monday. IP is expected at 4.6% y/y vs. 1.0% in December, while PPI is expected at 18.4% y/y vs. 20.4% in December. Real retail sales will be reported Tuesday and are expected at 1.0% y/y vs. 0.2% in December. The economy is clearly slowing and explains why the central bank is reluctant to hike rates further. Next policy meeting is March 8 and rates are likely to remain steady at 6.75%. Yet inflationary pressures remain high and we cannot say how long markets will continue to give policymakers the benefit of the doubt.

Bank of Israel meet Monday and is expected to hike rates 25 bp to 4.0%. However, markets are split as nearly a third of the analysts polled by Bloomberg look for a larger 50 bp move. At the last policy meeting January 2, the bank hiked rates 50 bp to 3.75% and its models showed the policy rate at 4% in 12 months. While this suggests that the tightening cycle is nearing an end, Governor Yaron stressed then that rates “will have to remain at a high level.” Since then, January CPI came in higher than expected at 5.4% y/y and was a new high for this cycle. As such, we see some risks of a hawkish surprise this week. December manufacturing production will be reported Tuesday. January trade data will be reported Wednesday,

Russia reports Q4 GDP and January IP and PPI Wednesday. GDP is expected at -4.6% y/y vs. -3.7% in Q3, while IP is expected at -2.8% y/y vs. -4.3% in December. The 1-year anniversary of the Ukraine invasion is this Friday. No end is in sight but it’s clear that Russia is paying a heavy price as the economic outlook remains poor.

Turkey central bank meets Thursday and is expected to cut rates 100 bp to 8.0%. Expectations are all over the place, however. Of the 17 analysts polled by Bloomberg, 4 see no change, 10 see a 100 bp cut, 2 see a 150 cut, and 1 sees a 200 bp cut. Rates have been kept steady since the last 150 bp cut in November. However, the recent earthquakes have likely forced policymakers back into easing mode. In addition, President Erdogan will be keen to add stimulus ahead of the planned May elections. It remains to be seen whether the earthquake response will cost Erdogan at the polls.


Malaysia reports January trade data Monday. Exports are expected at 7.8% y/y y/y vs. 6.0% in December, while imports are expected at 9.6% y/y vs. 12.0% in December. January CPI will be reported Friday and headline is expected to fall a tick to 3.7% y/y. If so, it would be the lowest since June and continue the deceleration process from the 4.7% peak in August. While Bank Negara does not have an explicit inflation target, falling price pressures allowed it to deliver a dovish surprise and keep rates steady at 2.75% at the last policy meeting January 19. The bank noted then that “Any changes to the OPR depend on how strong the economy and prices grow,” adding that the pause will allow the bank to assess the impact of past tightening “given the lag effects of monetary policy on the economy.” The bank said headline inflation peaked in Q3 and is expected to ease further this year and so we may have seen the end of the tightening cycle.

Taiwan reports January export orders and Q4 current account data Monday. Orders are expected at -24.0% y/y vs. -23.2% in December. IP will be reported Thursday and is expected at -9.55% y/y vs. -7.93% in December. So far, there have been no signs of a positive impact on regional trade and activity from China reopening.

Korea reports trade data for the first 20 days of February Tuesday. Bank of Korea meets Thursday and is expected to keep rates steady at 3.5%. At the last meeting January 13, the bank hiked rates 25 bp to 3.5%, as expected. Governor Rhee said that two board members wanted to keep rates steady and noted that the bank will consider further hikes if needed. He said “I don’t think it’s right to interpret from this decision that the rate will be frozen.” Rhee added that three board members saw 3.5% as the terminal rate while three others saw the terminal rate at 3.75%. Since then, inflation accelerated again in January and so we see some risks of a hawkish surprise this week. The swaps market is pricing in a peak policy rate near 4.0% over the next 6 months.

Singapore reports January CPI Thursday. Headline is expected at 6.9% y/y vs. 6.5% in December, while core is expected at 6.0% y/y vs. 5.1% in December. If so, it would be the highest headline reading since September while core would be at a new cycle high. Rising price pressures support our view that the global fight against inflation remain unfinished, and raised the odds that the MAS will tightening policy again at its April meeting. January IP will be reported Friday and is expected at -0.6% y/y vs. -3.1% in December. The FY2023/24 budget struck a balance, increasing handouts to the needy whilst increasing taxes on high end properties and luxury cars. Finance Minister Won warned that while there are positive signs for the economy, there are also many negative risks that include inflation, new Covid variants, China-US tensions, and rising global trade tensions.

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