EM FX was mixed last week, as was the dollar against the majors. Within EM, BRL, CLP, and MYR outperformed while ARS, INR, and ZAR underperformed. China returns from the week-long Lunar New Year holiday and reports January PMI readings.. While a significant rebound from December readings is likely, we believe China will struggle to grow consistently this year. Elsewhere, both the Fed and ECB are likely to deliver a hawkish messages this week along with expected rate hikes. As a result, we believe EM FX remains vulnerable.
AMERICAS
Brazil reports December consolidated budget data Monday. A consolidated deficit of -BRL12.4 bln is expected vs. -BRL20.1 bln in November. COPOM meets Wednesday and is expected to keep rates steady at 13.75%. Rates have been kept steady since the last 50 bp hike in August. At the last meeting December 7, the bank pledged to keep rates steady for “a sufficiently long period” and said it would not hesitate to resume hikes if inflation doesn’t slow as expected. The swaps market is pricing in some odds of one last 25 bp hike to 14.0% in H1 followed the start of an easing cycle in H2. January trade data will also be reported Wednesday. December IP will be reported Friday and is expected at -1.1% y/y vs. 0.9% in November.
Mexico reports Q4 GDP data Tuesday. GDP is expected at 0.3% q/q vs. 0.9% in Q3, while the y/y rate is expected at 3.4% vs. 4.3% in Q3. If so, it would be the first deceleration after three straight quarters of acceleration. However, inflation remains very high and so Banco de Mexico will continue to tighten policy. At the last policy meeting December 15, the bank hiked rates 50 bp to 10.5%. Next meeting is February 9 and another 50 bp hike to 11.0% seems likely. The swaps market is pricing in a peak policy rate near 11.0% in H1 followed by the start of an easing cycle in H2 but much will depend on how the inflation data come in.
Chile reports December manufacturing production and retail sales Tuesday. Production is expected at -7.3% y/y vs. -7.8% in November, while sales are expected at -14.0% y/y vs. -15.2% in November. Monthly GDP proxy will be reported Wednesday and is expected to pick up a tick to -2.4% y/y. The economy is clearly slowing and so it’s no surprise that the central bank halted its tightening cycle after the last 50 bp hike to 11.25% in October. However, after last week’s hold, Governor Costa warned “As long as we don’t have greater clarity regarding whether inflation’s convergence to target is effectively taking place, the key rate will be maintained steady. We have inflation that’s extraordinarily high and it’s important to have that prior diagnosis before changing the bias in policy.” The swaps market is pricing in the start of an easing cycle in Q1 but that is clearly too optimistic.
Colombia central bank minutes will be released Tuesday. Last Friday, the bank delivered a dovish surprise and hike rates 75 bp to 12.75% vs. 100 bp expected. The vote was 5-2 with the two dissents in favor of a smaller 25 bp move. Governor Villar signaled that the tightening cycle is nearing an end by noting “With today’s decision, monetary policy is nearing the stance required to cause inflation to slow to its 3% over the medium term.” The swaps market is pricing a peak policy rate between 13.5-13.75% in H1 followed by the start of an easing cycle in H2. January CPI will be reported Saturday. Headline is expected at 13.25% y/y vs. 13.12% in December. If so, it would be the highest since March 1999 and further above the 2-4% target range.
Peru reports January CPI Wednesday. Headline is expected at 8.97% y/y vs. 8.46% in December. If so, it would be the third straight month of acceleration to the highest since June 1997 and move further above the 1-3% target range. At the last policy meeting January 12, the central bank hiked rates 25 bp to 7.75% and noted that “The forecast is for annual inflation to start to slow from March, and to return to the target range in the fourth quarter of this year.” Bloomberg consensus sees steady rates in H1 followed by the start of an easing cycle in H2 but this seems unlikely.
EUROPE/MIDDLE EAST/AFRICA
South Africa reports December money and private sector credit, trade, and budget data Tuesday. Last week, SARB delivered a dovish surprise and hiked rates 25 bp to 7.25% vs. 50 bp expected. It cut its growth forecasts for 2023 to 0.3% vs. 1.1% previously and sees growth picking up modestly to 0.7% in 2024 and 1.0% in 2025. The bank’s models see the policy rate at 7.08% by end-2023 vs. 6.55% previously, at 6.91% by end-2024 vs. 6.71% previously, and at 6.89% by end-2025 vs. 6.83% previously. The rate path clearly suggests "higher for longer" and the growth forecasts reflect this. The swaps market is pricing in steady rates in 2023, followed by an easing cycle in 2024. Next policy meeting is March 30 and we see risks of another hike then before the cycle ends.
Turkey reports December trade data Tuesday. A deficit of -$10.4 bln is expected vs. -$8.76 bln in November. If so, the 12-month total would rise to -$110.2 bln, the highest on record and emblematic of the nation’s struggle with the twin deficits. January CPI will be reported Friday. Headline is expected at 53.80% y/y vs. 64.27% in December, while core is expected at 46.70% y/y vs. 51.93% in December. While inflation has clearly peaked, it is due in large to high base effects. Until monetary policy is tightened (unlikely ahead of May elections), price pressures are likely to remain high, while making it harder and harder to finance the twin deficits.
Czech Republic reports Q4 GDP data Tuesday. GDP is expected at -0.6% q/q vs. -0.2% in Q3, while the y/y rate is expected at 0.2% vs. 1.5% in Q3. January budget data will be reported Wednesday. Czech National Bank meets Thursday and is expected to keep rates steady at 7.0%. The bank has kept rates steady since the 125 bp hike in June. At the last meeting December 21, the bank said it preferred steady rates “for some time” but could not rule out further tightening if demand leads to higher price pressures. The swaps market is pricing in steady rates in Q1 followed by the start of an easing cycle in Q2. This seems too optimistic.
ASIA
Korea reports December IP Tuesday. It is expected at -6.1% y/y vs. -3.7% in November. January trade data will be reported Wednesday. Exports are expected at -11.5% y/y vs. -9.6% in December, while imports are expected at -3.6% y/y vs. -2.5% in December. January CPI will be reported Thursday. Headline is expected to pick up a tick to 5.1% y/y. If so, it would be the first acceleration since October and would move further above the 2% target. At the last policy meeting January 13, Bank of Korea hiked rates 25 bp to 3.5%. Governor Rhee said two board members wanted to keep rates steady and added that “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%. The swaps market is pricing in a peak policy rate near 3.5% but we think one more hike to 3.75% is likely at the next policy meeting February 23.
Taiwan reports December export orders Tuesday. Orders are expected at -25.6% y/y vs. -23.4% in November. If so, it would be the weakest since January 2009 and points to weak shipments in H1. IP will be reported Wednesday and is expected at -5.80% y/y vs. -4.93% in November. Taiwan and the rest of the regional exporters continue to suffer from the mainland slowdown but China reopening should offer some relief in the coming months.
China markets reopen after the week-long Lunar New Year holiday. China reports official January PMI readings Tuesday. Manufacturing is expected at 50.1 vs. 47.0 in December, while non-manufacturing is expected at 52.0 vs. 41.6 in December. Caixin reports its manufacturing PMI Wednesday and is expected at 49.8 vs. 49.0 in December. Its services and composite PMIs will be reported Friday, with services expected at 51.6 vs. 48.0 in December. The rebound from December is to be expected; the bigger question is whether the rebound can be sustained beyond just a month or two.
Indonesia reports January CPI Wednesday. Headline is expected at 5.40% y/y vs. 5.51% in December, while core is expected at 3.31% y/y vs. 3.36% in December. If so, it would be the third straight month of deceleration from the 5.95% peak in September but would remain well above the 2-4% target range. At the last policy meeting January 19, Bank Indonesia hiked rates 25 bp to 5.75% and Governor Warjiyo noted that “Global economic growth this year will be slower than expected, due to the recession risk in the US and Europe, and China’s challenging exit from Covid Zero.” We note that while headline inflation appears to have peaked, core continues to accelerate and so the tightening cycle is likely to continue at the next meeting February 15 with another 25 bp hike to 6.0%. That said, the bank’s focus on downside growth risks suggest the end of that cycle is drawing near and Bloomberg consensus currently sees a 6.0% peak.
