EM Preview for the Week of January 9, 2022

January 09, 2022

EM FX was mixed last week despite broad-based dollar gains vs. the majors. CLP, HUF, and ZAR were the best performers, while TRY, RUB, and KRW were the worst. We believe the dollar will recover from Friday’s modest selloff, as the Fed moves quickly to normalize policy in the face of rising inflation and a tightening labor market. A fourth hike this year is getting priced in, as is a terminal Fed Funds rate closer to 2%. U.S. yields should continue to march higher and this is likely to put downward pressure on risk assets such as EM.

AMERICAS

Mexico reports November IP Tuesday. It is expected to rise 0.5% m/m vs. 0.6% in October. Banxico MPC members Heath and Esquivel had a very public debate about inflation over Twitter, something that is very unusual for the typically old-fashioned central. The former is concerned about rising core inflation, while the latter feels that inflation peaked in November and will continue to slow in the coming months. Of note, the decision to hike 50 bp in December was 4-1, with Esquivel dissenting in favor of a 25 bp move. New Governor Rodriguez takes over at a difficult time for the economy. Her first meeting will be February 10 and it’s not clear yet whether the bank will deliver another 50 bp move or not. Swaps market sees the policy rate peaking at 7.75% by year-end.

Brazil reports December IPCA inflation Tuesday. Headline inflation is expected at 9.97% y/y vs. 10.74% in November. If so, it would be the first deceleration since May 2020 but still far above the 2-5% target range for this year. Next COPOM meeting is February 2 and another 150 bp hike to 10.75% is expected. Swaps market sees the policy rate peaking at 12.75% by mid-year followed by a modest easing cycle starting in H2. November retail sales will be reported Friday and expected at -0.4% m/m vs. -0.1% in October. Economic data have been weakening recently as the economy buckles under the weight of aggressive tightening by the central bank.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports November trade data Monday. December CPI will be reported Friday, with headline inflation expected at 7.2% y/y vs. 7.4% in November. If so, it would be the first deceleration since July but still well above the 2-4% target range. Last week, the central bank left the one-week deposit rate steady for the first time in eight weeks and is expected to do the same this Thursday. We do not think the inflation battle is over yet as the central bank remains behind the curve. Next policy meeting is January 25 and another 30 bp hike in the benchmark rate to 2.7% is likely.

Turkey reports November current account data Tuesday. A deficit of -$2.5 bln is expected. If so, the 12-month total would narrow to -$14.4 bln, the lowest since June 2020. IP will be reported Thursday and is expected at 0.5% m/m vs. 0.6% in October. Of note, the budget deficit was already rising before crisis and is likely to expand further as outlays will likely balloon due to rising civil service pay as well as the government’s plan to assume of currency risk for lira depositors. Borrowing costs will have to rise in order to finance this borrowing, something policymakers are trying to avoid as the central bank revived its bond-guying plan last week. Until a monetary policy anchor is established, we believe the government’s efforts to avoid a crisis are doomed to failure.

Czech Republic reports December CPI Wednesday. Headline inflation is expected at 6.6% y/y vs. 6.0% in November. If so, it would be the highest since September 2008 and further above the 1-3% target range. The bank delivered a hawkish surprise last month with a 100 bp hike to 3.75% and said it will continue hiking rates. Next policy meeting is February 3 and another large hike is expected. Swaps market sees the policy rate peaking at 4.75% in H1, followed by modest easing in H2. November retail sales will be reported Thursday and are expected to rise 6.4% y/y vs. 0.3% in October.

Poland reports November trade and current account data Thursday. National Bank of Poland releases minutes Friday. At the January 4 meeting, the bank hiked rates 50 bp to 2.25%, as expected. Governor Glapinski said the bank still has room to hike rates and will likely stick to 50 bp moves. However, he showed his dovish colors when he said it was “safe” for rates to rise to 3%, later adding that even 4% could be safe if growth remains strong. Next policy meeting is February 8 and another 50 bp hike to 2.75% is likely. Swaps market is pricing in 175 bp of further tightening over the course of 2022 that would take the policy rate to 4.0%

Israel reports December trade data Thursday. December CPI will be reported Friday, with headline inflation expected at 2.5% y/y vs. 2.4% in November. If so, it would match the cycle high from September but remain within the 1-3% target range. Next policy meeting is February 21 and rates are likely to remain at 0.10%. At the policy meeting last week, the bank delivered a dovish hold. It said accommodative policy would be maintained for a “prolonged” time, adding that there is no concern about an “inflationary outbreak” as it has stabilized around the midpoint of its target range. Meanwhile, the bank bought $34.8 bln of foreign currency last year vs. $30 bln planned and said it would “continue to act in the foreign exchange market at its discretion and taking economic activity into account.”

ASIA

China reports December new loan and money data sometime this week. Aggregate financing is expected at CNY2.4 trln vs. CNY2.6 trln in November, while new loans are expected at CNY1.25 trln vs. CNY1.27 trln in November. CPI and PPI will be reported Wednesday. CPI is expected at 1.7% y/y vs. 2.3% in November, while PPI is expected at 11.3% y/y vs. 12.9% in November. Price pressures appear to be easing and so policymakers are likely to continue boosting the economy with further monetary and fiscal stimulus this year. Trade data will be reported Friday, with exports expected at 20.0% y/y vs. 22.0% in November and imports expected at 27.8% y/y vs. 31.7% in November.

Korea reports November current account data Tuesday. Bank of Korea meets Friday and is expected to hike rates 25 bp to 1.25%. A handful of analysts see no hike. At the last meeting in November, the bank hiked 25 bp and Governor Lee flagged more hikes ahead, noting “With this hike, the policy rate is still below the neutral level, the real rate is still negative, and there’s plenty of liquidity. It’s natural that we normalize the rate, which has been excessively low, as the economy recovers.” CPI rose 3.7% y/y in December, down a tick from the November peak but nearly double the 2% target. Swaps market is pricing in 100 bp of tightening in 2022.

India reports December CPI and November IP Wednesday. CPI is expected at 5.80% y/y vs. 4.91% in November, while IP is expected at 2.8% y/y vs. 3.2% in October. If so, inflation would be the highest since June and nearing the top of the 3-6% target range. WPI will be reported Friday and is expected to rise 13.50% y/y vs. 14.23% in November. If so, it would be the first deceleration since July. Still, price pressures remain high and the RBI is expected to start a tightening cycle this year. Next policy meeting is February 8 and swaps market is pricing in liftoff then with a 50 bp hike to 4.5%. A total of 150 bp in tightening is seen over the course of 2022, followed by another 75-100 bp in 2023.

More from Mind on the Markets

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved..

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction