EM Preview for the Week of January 22, 2023

January 22, 2023

EM FX was mixed last week despite the dollar’s broad-based weakness against the majors. COP, HUF, and MYR outperformed while BRL, ZAR, and CNY underperformed. While the less hawkish Fed narrative is supportive of EM, weak U.S. data raised concerns about global recession. In our view, stronger growth in China and Europe are unlikely to fully offset any U.S. slowdown and so EM is likely to run into some headwinds as the year progresses.


Brazil reports mid-January IPCA inflation Tuesday. Headline is expected at 5.84% y/y vs. 5.90% in mid-December. If so, it would continue to disinflation process but would remain above the 1.75-4.75% target range. The swaps market is pricing in the possibility of one final 25 bp hike to 14.0% but much will depend on President Lula’s fiscal policy stance. His recent comments criticizing high interest rates are not helpful. Next COPOM meeting is February 1 and rates are expected to remain steady at 13.75%. December current account and FDI data will be reported Thursday. December central government budget data will be reported Friday, where a primary surplus of BRL1.5 bln is expected vs. a deficit of -BRL14.7 bln in November.

Mexico reports mid-January CPI data Tuesday. Headline is expected at 7.83% y/y vs. 7.77% in mid-December and core is expected at 8.32% y/y vs. 8.34% in mid-December. At the last policy meeting December 15, Banco de Mexico hiked rates 50 bp to 10.5% and signaled another hike at the next meeting February 9 by noting “The Board considers it will still be necessary to raise the reference rate in its next monetary policy meeting. Subsequently, it will assess if the reference rate needs to be further adjusted as well as the pace of adjustments based on the prevailing conditions.” The swaps market is pricing in a peak policy rate between 10.75-11.0%. November GDP proxy will be reported Wednesday. December trade data will be reported Friday.

Chile central bank meets Thursday and is expected to keep rates steady at 11.25%. It has kept rates steady since the last 50 bp hike at the October 12 meeting. The economy is clearly slowing while inflation was 12.8% y/y in December, down from the 14.1% peak in August but still well above the 2-4% target range. At the last meeting December 6, the bank said “The Board will maintain the monetary policy rate at 11.25% until the state of the macroeconomy indicates that this process has been consolidated.” We think inflation needs to fall much further before the bank starts cutting. That is why we think market expectations for the start of an easing cycle in the next three months are too aggressive.

Colombia central bank meets Friday and is expected to hike rates 100 bp to 13.0%. However, nearly a third of the analysts polled by Bloomberg look for smaller hikes of 50 or 75 bp. At the last meeting December 16, the bank hiked rates 100 bp to 12.0% in a split 4-1-1 vote. The two dissents favored hikes of 25 and 125 bp. Governor Villar warned then that it was nearing the end of its tightening cycle. Of note, the swaps market is pricing in a peak policy rate near 13.25% but much will depend on how inflation evolves in 2023.


Poland reports December IP, PPI, construction output, and real retail sales Monday. IP is expected at 1.7% y/y vs. 4.6% in November, PPI is expected at 19.4% y/y vs. 20.8% in November, construction is expected at 2.6% y/y vs. 4.0% in November, and sales are expected at 1.4% y/y vs. 1.6% in November. The economy is clearly slowing, which is why the central bank paused its tightening cycle. However, with inflation still running above target at 16.6% y/y in December, there is no room for an easing cycle anytime soon. Indeed, the swaps market is pricing in steady rates over the six months, followed by the start of an easing cycle in the subsequent six months.

National Bank of Hungary meets Tuesday and is expected to keep the base rate steady at 13.0%. The bank has kept this rate steady since it last hiked September 27, though it introduced the 1-day deposit rate in October at 18.0% to help support the forint. Inflation continues to accelerate, however, and so the markets may test the bank’s resolve to end the tightening cycle. As it is, the market is pricing in the start of an easing cycle in the next three months, which is highly unlikely given inflation close to 25%.

South African Reserve Bank meets Thursday and is expected to hike rates 50 bp to 7.5%. At the last meeting November 24, the bank hiked rates 75 bp for the third straight time to 7.0%. The vote was 3-2, with the dissents in favor of a smaller 50 bp move. Its model saw the policy rate at 6.55% at end-2023 vs. 6.36% previously, at 6.71% at end-2024 vs. 6.76% previously, and 6.83% by end-2025 in a new forecast. Of note, the swaps market sees the policy rate peaking at 7.5% but much will depend on whether inflation continues to fall in 2023. Ahead of the decision, December PPI will be reported and is expected at 14.2% y/y vs. 15.0% in November.


Singapore reports December CPI data Wednesday. Headline is expected to fall a tick to 6.6% y/y, while core is expected to fall a tick to 5.0% y/y. While the MAS doesn’t have an explicit inflation target, falling price pressures should allow it to keep policy steady at the next meeting in April. December IP will be reported Thursday and is expected at -5.5% y/y vs. -3.2% in November. The slowing economy is another reason for the MAS to remain on hold after tightening five times beginning in October 2021.

Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 1.5%. At the last policy meeting November 30, the bank 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 its expected return to target to Q3 23 vs. Q2 23 previously. Of note, headline inflation accelerated in December after two straight months of deceleration from the 7.86% peak in August, moving further above the 1-3% target range. The swaps market is pricing in a policy rate near 1.75% over the next 12 months, rising gradually to between 2.25-2.5% over the subsequent 24 months.

Korea reports Q4 GDP data Thursday. It is expected at -0.4% q/q vs. 0.3% in Q3, which would drag the y/y rate down to 1.4% vs. 3.1% in Q3. If so, this would be the first q/q contraction since Q2 2020 and the weakest y/y growth since Q4 2020. While the regional exporters should benefit from China reopening, we continue to believe that the mainland recovery will be very uneven and unpredictable. That is why the Bank of Korea is nearing the end of its tightening cycle. At the last meeting January 13, the bank hiked rates 25 bp to 3.5% and said a “continued tightening stance” was warranted. There were two dissents in favor of steady rates. Of note, the swaps market is pricing in low odds of one last 25 bp hike to 3.75%.

Philippines reports December trade and Q4 GDP data Thursday. GDP growth is expected at 1.3% q/q vs. 2.9% in Q3, which would bring the y/y down to 6.8% vs. 7.6% in Q3. If so, it would be the slowest y/y gain since Q1 2021. Central bank Governor Medalla said last week that he sees rates peaking this quarter after one or two more hikes that would take the policy rate to around 6.0%. Next policy meetings are February 16 and March 23 and Medalla’s comments suggest 25 bp hikes at both, but much will depend on whether headline inflation continues to accelerate. As things stand, the swaps market is pricing in a peak policy rate near 6.25%.

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