EM Preview for the Week of January 26, 2025

January 26, 2025

EM FX was mostly firmer last week as the dollar came under broad-based selling pressure. COP, HUF, and PLN outperformed while TRY, ARS, and INR underperformed. The dollar was hurt last week by stories of delayed tariffs but that should reverse this week now that the tariff wars are upon us. President Trump over the weekend announced travel bans and immediate 25% tariffs on Colombian imports in retaliation for Colombia refusing to accept two U.S. military planes deporting 160 Colombians. Colombia President Petro announced 25% retaliatory tariffs on all U.S. goods. Of note, Mexico also announced over the weekend that it would not allow a U.S. military plane carrying deportees to land.

AMERICAS

Mexico reports December trade data Monday. Q4 GDP data will be reported Thursday. Growth is expected at -0.2% q/q vs. 1.1% in Q3, while the y/y rate is expected at 1.1% vs. 1.6% in Q3. If so, it would be the first q/q contraction since Q3 2021 and the weakest y/y rate since Q1 2021. No wonder the central bank is hoping to cut rates at a faster pace.

Chile central bank meets Tuesday and is expected to keep rates steady at 5.0%. At the last meeting December 17, the 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 not pricing in any further easing for this cycle.

Brazil COPOM meets Wednesday and is expected to hike rates 100 bp to 13.25%. At the last COPOM meeting December 11, the central bank unexpectedly hiked rates 100 bp to 12.25% and promised more jumbo cuts ahead. Most were looking for a 75 bp move. The bank stated that “In light of a more adverse scenario for inflation convergence, the Committee anticipates further adjustments of the same magnitude in the next two meetings, if the scenario evolves as expected.” The swaps market is pricing in 400 bp of total tightening over the next 12 months. Consolidated budget data for December will be reported Friday. A primary surplus of BRL12.9 bln is expected vs. a primary deficit of -BRL6.6 bln in November.

Colombia central bank meets Friday and is expected to cut rates 25 bp to 9.25%. However, a handful of analysts polled by Bloomberg look for steady rates. The final decision will likely be determined by the peso’s reaction to the trade war with the U.S. At the last meeting December 20, the bank delivered a hawkish surprise and cut rates 25 bp to 9.5% vs. 50 bp expected. The vote was 5-2, with one dissent in favor of a 50 bp move and another one in favor of a 75 bp move. Governor Villar said the weak peso and hawkish Fed guidance were behind the “prudent” cut. The swaps market is pricing in 125 bp of total easing over the next 12 months that would see the policy rate bottom near 8.25%.

Peru reports January CPI data Saturday. Headline is expected at 2.05% y/y vs. 1.97% in December. At the last meeting January 9, the central bank cut rates 25 bp to 4.75%, as expected. Since October, the bank has been cutting every other meeting as it maintains a cautious pace due to sticky core inflation. If it sticks to this pattern, it should remain on hold at the next meeting February 13.

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary meets Tuesday and is expected to keep rates steady at 6.5%. At the last meeting December 17, the bank delivered a hawkish hold. Only one MPC member recommended a rate cut, suggesting the bar for the bank to resume easing is high. Indeed, the bank emphasized that “geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant further pause in cutting interest rates.” The market is pricing in one 25 bp cut over the next 12 months. Q4 GDP data will be reported Thursday. Growth is expected at 0.4% q/q vs. -0.7% in Q3, while the y/y rate is expected at 0.1% vs. -0.8% in Q3.

South African Reserve Bank meets Thursday and is expected to cut rates 25 bp to 7.5%. At the last meeting November 21, the South African Reserve Bank cut rates 25 bp to 7.75% and Governor Kganyago said, “As a central bank in a small, open economy, caution is what’s going to be at play here.” Its model also adjusted the expected rate path high, with the end-2025 policy rate seen at 7.40% vs. 7.17% previously, end-2026 at 7.27% vs. 7.09% previously, and end-2027 at 7.28%. The swaps market sees the policy rate bottoming at 7.25% over the next three to six months.

ASIA

China reports official January PMIs Monday. Manufacturing is expected to remain steady at 50.1, while non-manufacturing is expected to remain steady at 52.2. if so, the composite should also remain steady at 52.2. Policymakers announced more measures to boost local equity markets, this time by promoting the development of index investment products. Last week, measures were announced to boost local equity investments by mutual funds and state-owned insurance companies. We repeat: While these measures may give local equity markets a temporary boost, they do not address the root causes of China’s malaise, namely a burst property bubble and a huge debt overhang. Until those are addressed, we remain negative on China.

Korea reports January trade data Saturday. Exports are expected at -11.3% y/y vs. 6.6% in December, while imports are expected at -10.4% y/y vs. 3.3% in December. The expected drop in exports is due to high base effects from last year, but the expected drop in imports is strange as base effects from last year are low. Risks to regional trade and activity remain skewed to the downside.

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