EM FX was mostly firmer last week as the dollar remained under broad-based pressure. COP, CLP, and MYR outperformed while ARS, PEN, and CNY underperformed. Risk appetite has been stoked in recent weeks by a perceived Fed pivot as well as optimism on China reopening. We believe markets are putting too much weight on both these notions and that the pendulum of sentiment is likely near an extreme and will eventually swing the other direction. The situation in China bears watching but we remain defensive on EM and other risk assets.
AMERICAS
Mexico reports October trade data Monday. Banco de Mexico releases its quarterly inflation reports Wednesday and the forecasts will be key. While headline appears to have peaked, core is still rising. At the last policy meeting November 10, the bank hiked rates 75 bp to 10.0% and said “In its next meetings, the Board will assess the magnitude of the upward adjustments to the reference rate based on the prevailing conditions.” This suggests a potential downshift to 50 bp at the next meeting December 15. Indeed, there was one dissent in favor of a smaller 50 bp move and others may follow if inflation pressures ease. November CPI will be reported December 8.
Brazil reports October central government budget data Tuesday. A primary surplus of BRL28.3 bln is expected vs. BRL11.0 bln in September. Consolidated budget data will be reported Wednesday and a primary surplus of BRL23.8 bln is expected vs. BRL10.7 bln in September. When President-elect Lula takes over January 1, fiscal concerns will be at the forefront given his mixed signals regarding fiscal responsibility. He inherits a surprisingly solid fiscal situation despite current President Bolsonaro’s pre-election spending spree. Q3 GDP and November trade data will be reported Thursday. Growth is expected at 3.7% y/y vs. 3.2% in Q2. October IP will be reported Friday and is expected at 1.2% y/y vs. 0.4% in September.
Chile reports October IP and retail sales Wednesday. Sales are expected at -15.7% y/y vs. -14.3% in September. October GDP proxy will be reported Thursday. The economy is clearly slowing under the weight of aggressive monetary tightening and lower copper prices. Inflation has finally started to ease and the central bank has ended its tightening cycle. However, we think market pricing for the start of an easing cycle in Q1 is too aggressive.
Peru reports November CPI Thursday. Headline is expected at 0.05% y/y vs. 8.28% in October. If so, it would continue the deceleration from the June peak of 8.81% but would remain well above the 1-3% target range. At the last policy meeting November 10, the central bank hiked rates 25 bp to 7.25% and said it expects inflation to return to target in H2 of next year. While headline inflation appears to have peaked, core is still accelerating and so we think it’s too early to end the tightening cycle. Next meeting is December 7 and another 25 bp hike to 7.5% seems likely.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports October trade data Tuesday. A deficit of -$8.0 bln is expected vs. -$9.6 bln in September. If so, the 12-month total would rise to -$103. 4 bln vs. -$96.9 bln in September and would be the largest since February 2012. With the budget deficit also rising, Turkey is facing a growing twin deficit problem that will become harder and harder to finance due to too-low interest rates. Q3 GDP data will be reported Wednesday. Growth is expected at 4.5% y/y vs. 7.6% in Q2. In q/q terms, GDP is expected at -0.5% vs. 2.1% in Q2 and would be the first contraction since Q2 2020. No wonder policymakers are trying to boost the economy with rate cuts despite rising inflation.
Poland reports November CPI Wednesday. Headline is expected at 18.0% y/y vs. 17.9% in October. If so, it would be the highest since August 1996 and further above the 1.5-3.5% target range. At the last policy meeting November 9, the central bank delivered a dovish surprise and kept rates steady at 6.75% vs. an expected 25 bp hike. Next policy meeting is December 7 and rates are likely to remain steady. For now, the market is not punishing Polish assets for the bank’s dovish pivot as bonds yields remain low and the zloty remains stable.
ASIA
Korea reports October IP Wednesday. It is expected at 0.1% y/y vs. 0.8% in September. November trade data will be reported Thursday. Exports are expected at -11.4% y/y vs. -5.7% in October, while imports are expected at 0.6% y/y vs. 9.9% in October. November CPI will be reported Friday. Headline is expected at 5.2% y/y vs. 5.7% in October. If so, it would continue the deceleration from the July peak of 6.3% to the lowest since April but still well above the 2% target. At the last policy meeting November 24, Bank of Korea hiked rates 25 bp to 3.25%. It appears that three policymakers favor a terminal rate of 3.5%, while two are open to going above 3.5% and one believes 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. Next policy meeting is January 13 and another 25 bp hike to 3.5% seems likely.
China reports official November PMI readings Wednesday. Manufacturing is expected at 49.0 vs. 49.2 in October, while non-manufacturing is expected at 48.0 vs. 48.7 in October. If so, the composite would drop from 49.0 in October. Caixin reports its November manufacturing PMI Thursday and is expected at 49.0 vs. 49.2 in October. The economy continues to suffer from Xi’s Covid Zero policy. Reports emerged over the weekend that protests against Covid restrictions were held in Beijing and Shanghai and are spreading across the country. Some believe this to be the strongest showing of popular discontent since the Tiananmen Square protests in 1989. Will Xi loosen up Covid Zero in response or will he crack down on dissent? Stay tuned.
Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 1.25%. At the last meeting September 28, it hiked rates 25 bp to 1.0%. The vote was unanimous as the bank noted “The Thai economy will continue to recover but with increased inflation risks. The policy rate should be normalized in a gradual and measured manner to the level that is consistent with sustainable growth in the long term.” Since then, inflation decelerated for two straight months to 5.98% y/y in October, the lowest since April but still above the 1-3% target range. The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 2.25%.
Indonesia reports November CPI Thursday. Headline is expected at 5.49% y/y vs. 5.71% in October, while core is expected at 3.38% y/y vs. 3.31% in October. If so, inflation would decelerate for the second straight month from the September peak of 5.95% but still above the 2-4% target range. At the last policy meeting November 17, Bank Indonesia hiked rates 50 bp to 5.25% and Governor Warjiyo said “This decision to raise rates is a front-loaded, preemptive and forward looking step to lower inflation expectations that are still high.” The bank pledged to stabilize the rupiah in line with the fundamentals and that it will continue to intervene. It also said it would maintain its policy mix to sustain growth and is committed to keeping banking liquidity loose. Next policy meeting is December 22 and if inflation continues to fall, a 25 bp hike then becomes more likely.
