EM FX was mixed last week as markets were whip-sawed by large swings in Fed tightening expectations. MXN, THB, and CLP outperformed while ARS, PLN, and IDR underperformed. We continue to believe markets are putting too much weight on a potential Fed pivot and underestimating the Fed’s capacity to tighten in 2023. With the global liquidity and growth story still very much negative for risk assets, we remain defensive on EM.
Mexico reports December CPI Monday. Headline is expected at 7.84% y/y vs. 7.80% in November, while core is expected at 8.35% y/y vs. 8.51% in November. If so, headline would accelerate for the first time since August while core would decelerate for the first time since November 2020. At the last policy meeting December 15, Banco de Mexico hiked rates 50 bp to 10.50% and said “The Board considers it will still be necessary to raise the reference rate in its next monetary policy meeting” February 9. It added that “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.” While the market is pricing in 25 bp, we expect another 50 bp hike to 11.0% next month. The swaps market is pricing in a peak policy rate near 11.0% but much will depend on how inflation develops and also on Fed policy. November IP will be reported Wednesday.
Brazil reports December IPCA inflation Tuesday. Headline is expected at 5.58% y/y vs. 5.90% in November. If so, it would be the lowest since February 2021 and moving closer to the new target of 1.75-4.75%. At the last policy meeting December 7, COPOM left rates steady at 13.75%. However, the tone was hawkish as it reiterated that rates will be kept steady for “a sufficiently long period” and that it will not hesitate to resume hiking rates if inflation doesn’t slow as planned. The swaps market is pricing in 25 bp of tightening over the next six months to a peak near 14.0% but much will depend on Lula’s fiscal policy going forward. November retail sales will be reported Wednesday. November GDP proxy will be reported Friday.
Peru central bank meets Thursday and is expected to hike rates 25 bp to 7.75%. CPI rose 8.46% y/y in December. While inflation has fallen from the 8.81% peak in June, the process has been uneven and inflation remains well above the 1-3% target range. Since September, the bank has been hiking at a 25 bp clip every month. At the last meeting December 7, the bank hiked rates 25 bp even as the nation was reeling from Castillo’s attempted coup attempt. Bloomberg consensus sees the policy rate peaking at 7.75% but we think much will depend on how the data evolve.
Hungary reports November IP and trade data Monday. December CPI will be reported Friday. Headline is expected at 25.8% y/y vs. 22.5% in November. If so, it would be the highest since February 1996 and further above the 2-4% target range. Yet at the last policy meeting December 20, the central bank kept the bank rate steady at 13.0%. However, it downplayed any notions of easing as Deputy Governor Virag counseled “patience,” and added that the central bank first had to see a “trend improvement” in inflation risks before cutting rates. Despite the hawkish tone, the swaps market is still pricing in an easing cycle in Q1 but we think that remains highly unlikely.
Turkey reports November IP Tuesday. It is expected at -2.0% y/y vs. 2.5% in October. November current account data will be reported Wednesday and a deficit of -$4.05 bln is expected vs. -$360 mln in October. If so, the 12-month total would rise to -$45.4 bln vs. -$43.5 bln October and would be the highest since August 2018. With the budget deficit also widening out, we believe Turkey is heading towards an economic crisis as interest rates remain too low to adequately finance these deficits.
Czech Republic reports December CPI Wednesday. Headline is expected to fall a tick to 16.1% y/y. If so, it would resume the deceleration from the 18.0% peak in September but would remain well above the 1-3% target range. The central bank has left rates steady at 7.0% since August on the assumption that policy is tight enough to bring inflation down. At the last policy meeting December 21, the bank said there was no discussion of cutting rates and that it cannot rule out further tightening if risks materialize. The swaps market is pricing in a possible 25 bp hike in Q1 followed by easing in Q2 but a rate cut so soon seems very unlikely. November retail sales will be reported Thursday.
Russia reports December CPI Friday. Headline is expected at 12.10% y/y vs. 11.98% in November. If so, it would be the first acceleration since April, when it peaked at 17.83% y/y. At the last policy meeting December 16, the central bank left rates steady at 7.5%, the second straight hold after six straight cuts took the policy rate from 20.0% to 7.5%. Governor Nabiullina said then that the bank was sending a “neutral signal” and that future decisions remain “data-dependent” but warned that “Due to a growing shortage of personnel, companies’ labor costs are increasing.” The bank noted that ““Current consumer prices are growing at a moderate rate, and consumer demand is subdued. At the same time, pro-inflation risks are up and prevail over disinflationary risks” and that “the capacity to expand production in the Russian economy is largely limited by the labor market conditions.”
China reports December money and loan data sometime this week. New loans are expected at CNY1.09 trln vs. CNY1.21 trln in November, while aggregate financing is expected at CNY1.58 trln vs. CNY1.99 trln in November. December CPI and PPI data will be reported Thursday. CPI is expected at 1.8% y/y vs. 1.6% in November, while PPI is expected at -0.1% y/y vs. -1.3% in November. December trade data will be reported Friday. Exports are expected at -12.0% y/y vs. -8.9% in November, while imports are expected at -10.0% y/y vs. -10.6% in November. The economy is clearly suffering from both domestic and global headwinds and so further stimulus is expected in Q1.
Korea reports November current account data Tuesday. Bank of Korea meets Friday and is expected to hike rates 25 bp to 3.5%. At the last policy meeting November 24, the bank hiked rates 25 bp to 3.25%. Three policymakers favored a terminal rate of 3.5%, while two were open to going above 3.5% and one believed no more hikes are needed. Governor Rhee stressed it was premature to discuss rate cuts and that the bank will need strong evidence of inflation moving to its target before easing can be discussed. The swaps market is pricing in a peak policy rate near 3.25% but we think this is too low.
India reports December CPI and November IP Thursday. Headline is expected at 5.80% y/y vs. 5.88% in November. If so, it would be the third straight month of deceleration. It would be the lowest since December 2021 and further within the 2-6% target range. At the last policy meeting December 7, the Reserve Bank of India hiked the repo rate 35 bp to 6.25% by a 5-1 vote. Governor Das said “Growth in India remains resilient and inflation is expected to moderate. But the battle against inflation is not over.” While the size of the hike was reduced from 50 bp in September, the tone was decidedly on the hawkish side and so the tightening cycle will continue. The swaps market is pricing in a peak policy rate between 6.75-7.0%. December trade data will be reported Friday.