EM Preview for the Week of November 28, 2021

November 28, 2021

EM FX sold off sharply last week as risk off sentiment took hold on news of the new omicron variant. RON and BRL were able to eke out miniscule gains against the dollar, but most were down significantly, led by TRY (-8.5%), BRL (-5.0%), ZAR (-3.4%), and RUB (-2.8%). While we are hopeful that this variant will cause limited damage to the global economy, it’s clear that the burden will again fall hardest on the poorest nations. The dollar came under some pressure last Friday, losing ground mostly to the safe havens JPY and CHF. With the impact of omicron still unknown, we believe markets will remain risk averse this week and that suggest further EM weakness.


Brazil reports October central government budget data Monday. Consolidated budget data will be reported Tuesday. With interest rates rising and growth slowing, the fiscal numbers will surely worsen in the coming months. Next COPOM meeting is December 8 and the bank has signaled another 150 bp hike to 9.25% then. However, with IPCA inflation running near 11% y/y in mid-November, more clearly needs to be done. November trade data will be reported Wednesday. Q3 GDP data will be reported Thursday, with growth expected flat q/q vs. -0.1% in Q2. October IP will be reported Friday and is expected to rise 0.7% m/m vs. -0.4% in September.

Chile reports October unemployment, retail sales, and IP Tuesday. Unemployment is expected to drop a couple of ticks to 8.2%, retail sales are expected to accelerate a couple of ticks to 20.1%, and manufacturing production is expected to slow a couple of percentage points to 2.0% y/y. The economy should continue to recover but at this point, it’s all about politics. With a runoff election scheduled December 19, the latest polls show leftist candidate Gabriel Boric with 40.4% support vs. 24.5% for conservative candidate Jose Antonio Kast. 15.6% of the respondents said they don’t know who they will vote for. Last week, Kast sought to reassure markets by expanding his team of economic advisors, including one from his center-right rival.

Banco de Mexico releases its quarterly inflation report Wednesday. The bank just delivered its fourth 25 bp hike of the cycle November 11. With the policy rate now at 5.0% and headline inflation at 7.05% y/y in mid-November, there is clearly need for a more aggressive tightening cycle. However, the outlook has been made cloudier by AMLO’s decision to nominate Hacienda official Victoria Rodriguez as the next Banxico Governor after initially choosing former Finance Minister Arturo Herrera. Rodriguez has limited monetary policy experience and is little known to financial markets, which makes her a poor choice at a time when inflation is surging and the peso slumping.

Colombia reports November CPI Saturday. Headline is expected at 4.96% y/y vs 4.58% in October. If so, it would be the highest since February 2017 and further above the 2-4% target range. The central bank started the tightening cycle with a 25 bp hike to 2.0% in September and follow up with a 50 bp hike to 2.5% in October. However, the bank is in danger of falling behind the curve, as USD/COP traded at a new high for the year near 4015 last week and is on track to test the March 2020 high near 4237. This will add to the inflationary pressures in the economy. Next policy meeting is December 17 and another 50 bp hike to 3.0% is likely, with risks of a hawkish surprise.


Turkey reports October trade data Monday. A deficit of -$1.5 bln is expected vs. -$2.55 bln in September. Q3 GDP data will be reported Tuesday and is expected to grow 3.3% q/q vs. 0.9% in Q2. November CPI will be reported Friday, with headline expected at 20.70% y/y vs 19.89% in October and core expected at 17.50% y/y vs. 16.82% in October. If so, headline would accelerate for the sixth straight month to the highest since November 2018, while core would be the highest since this April. The central bank cut rates 100 bp to 15.0% this month but hinted that December 16 may see an end to the tightening cycle. While the inflation dynamics should preclude any easing then, we expect another 100 bp cut that would cement higher inflation and further lira weakness.

South Africa reports October money and credit, trade, budget, and Q3 unemployment data Tuesday. Here, the focus is now on the new omicron variant and its potential for harm. Only a third of adults are fully vaccinated. Health Minister Phaala said the government has not made any decisions yet on possible movement restrictions. If the nation is forced into another lockdown situation, the economy could tip back into recession and the SARB’s decision to start the tightening cycle this month with a 25 bp hike to 3.75% will look increasingly wrong-footed.

Poland reports November CPI Tuesday. Headline inflation is expected to accelerate to 7.3% y/y vs. 6.8% in October. If so, it would be the highest since January 2001 and further above the 1.5-3.5% target range. The central bank started the tightening cycle with a 40 bp hike to 0.5% in October and followed up with a 75 bp hike to 1.25% this month. However, the bank is in danger of falling behind the curve, as EUR/PLN traded at a new multi-year high near 4.75 last week and is on track to test the February 2009 high near 4.93. This will add to the inflationary pressures in the economy. Next policy meeting is December 8 and another 75 bp hike to 2.0% is likely, with risks of a hawkish surprise.

National Bank of Hungary releases its minutes Wednesday. The bank is expected to hike the one-week deposit rate 10 bp to 3.0% Thursday. Last Thursday, the bank delivered a hawkish surprise by hiking it 40 bp to 2.9% vs. 10 bp expected. With the benchmark rate at only 2.1%, the bank is in danger of falling behind the curve as EUR/HUF traded at a new all-time high near 372 last week. This will add to the inflationary pressures in the economy. Of note, CPI rose 6.5% y/y in October, the highest since September 2012 and further above the 2-4% target range. October retail sales will be reported Friday and are expected to rise 4.7% y/y vs. 5.8% in September.


Korea reports October IP Tuesday. IP is expected to fall -0.5% m/m vs. -0.8% in September. November export data will be reported Wednesday, with exports expected to rise 27.5% y/y vs. 24.1% in October and imports expected to rise 39.6% y/y vs. 37.7% in October. November CPI will be reported Thursday, with headline expected to fall a tick to 3.1% y/y and core expected at 2.2% y/y vs. 2.8% in October. If so, the falling inflation pressures would validate BOK’s modest pace of tightening. The bank just delivered the second 25 bp hike in the cycle this month after standing pat in October. Next policy meeting is January 14 and rates are expected to remain steady at 1.0%.

China reports official November PMI readings Tuesday. Manufacturing is expected at 49.7 vs. 49.2 in October, while non-manufacturing is expected at 51,4 vs. 52.4 in October. If so, the composite should fall from 50.8 in October. Caixin reports its November manufacturing PMI Wednesday and is expected to fall a tick to 50.5. Caixin reports its services and composite PMI readings Friday, with services expected at 51.0 vs. 53.8 in October. If so, its composite should fall from 51.5 in October. The yuan has remained remarkably firm even as the rest of EM FX continues to weaken. With policymakers allowing market forces to play a greater role in the exchange rate, we would expect the yuan to play catch up and weaken significantly in the coming days. Keep an eye on the daily fix.

Indonesia reports November CPI Wednesday. Headline is expected at 1.70% y/y vs. 1.66% in October, while core is expected at 1.41% y/y vs. 1.33% in October. If so, headline would be the highest since June 2020 but still below the 2-4% target range. The bank has signaled steady rates for the time being. While low inflation could justify further easing, the bank remains concerned about rupiah weakness. Next policy meeting is December 16 and rates are expected to remain steady at 3.5%. Foreigners have yet to return to the local bond market, with their share of total holdings falling to 21.2% in October, the lowest since February 2010.

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