EM FX was mixed last week as the risk off impulses that started the week off faded as the week wore on. Price action in the FX markets was a bit strange and may have been impacted by month- and quarter-end rebalancing flows. This week should give a cleaner read of the markets and we expect the dollar to resume its broad-based climb. Simply put, the U.S. economy is proving to be more resilient and inflation more persistent than previously anticipated, which should keep the Fed in tightening mode.
AMERICAS
As of this writing, early election results show current President Bolsonaro leading former President Lula. However, the vote count is most advanced in the states that lean towards Bolsonaro and so Lula is likely to gain ground as more states report. Recent polls showed Lula at close to 50% support. If neither gets a simple majority, it will go to a run-off October 30. September trade data will be reported Monday. August IP will be reported Wednesday and is expected at 2.2% y/y vs. -0.5% in July. August retail sales will be reported Friday and is expected at 0.3% y/y vs. -5.2% in July. The economy appears to be picking up even as the central bank has likely ended its tightening cycle. Markets are pricing in an easing cycle starting in Q1 but this may be too aggressive.
Chile reports August GDP proxy Monday. September CPI and trade data will be reported Friday. Headline is expected at 13.8% y/y vs. 14.1% in August. If so, it would be the first deceleration since February 2021 but still well above the 2-4% target range. At the last meeting September 6, the central bank delivered a hawkish surprise and hiked rates 100 bp to 10.75% vs. 75 bp expected. It noted then that the policy rate now stands at “the maximum level considered in the central scenario of the September Monetary Policy Report. Future movements of the policy rate will depend on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target.” The swaps market is still pricing in 100 bp of tightening over the next 3 months that would see the policy rate peak near 11.75%.
Peru reports September CPI Monday. Headline is expected at 8.49% y/y vs. 8.40% in August. If so, it would the first acceleration since June and inflation would move further above the 1-3% target range. The central bank meets Thursday and is expected to hike rates 25 bp to 7.0%. At the last meeting September 8, the bank delivered a dovish surprise and hiked rates 25 bp to 6.75% vs. 50 bp expected. It noted then that “The board of directors reaffirms its commitment to adopt the necessary actions to ensure the return of inflation to the target range in the horizon of projections.” The bank saw inflation returning to the target range in H2 2023 and said it is continuing its policy normalization.
Colombia central bank minutes will be released Tuesday. At last week’s meeting, the bank delivered a dovish surprise and hiked rates 100 bp to 10.0% ca. 150 bp expected. The vote was 6-1 with the dissent in favor of a 50 bp move. The bank raised its 2022 growth forecast to 7.8% vs. 6.9% previously but cut its 2023 forecast to 0.7% vs. 1.1% previously. It noted that “Over the next months, there are signs of deceleration in productive activity. The fears of a global recession have increased, causing reductions in commodities prices.” This is a very different tone than the last policy meeting July 29, when the bank hiked 150 bp and Governor Villar said then that “The excess of demand continues, with economic activity that remains strong.” The swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 12.0%. Colombia reports September CPI Wednesday. Headline is expected at 11.29% y/y vs. 10.84% in August. If so, it would be the highest since March 1999 and further above the 2-4% target range.
Mexico reports September CPI Friday. Headline is expected at 8.76% y/y vs. 8.70% in August, while core is expected at 8.34% y/y vs. 8.05% in August. If so, it would be the first deceleration since May but inflation would remain well above the 2-4% target range. Banco de Mexico last week hiked rates 75 bp to 9.25% and said “The Board will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions.” Governor Rodriguez stressed that “As we said in our statement, the governing board considered that this cycle of increases has not ended” but added that it’s hard to anticipate how high rates will need to go. Next policy meeting is November 10 and while another hike is expected, the size will depend on whether inflation slows further in October. The swaps market is pricing in 150 bp of tightening over he next 6 months that would see the policy rate peak near 10.75%.
EUROPE/MIDDLE EAST/AFRICA
Turkey reports September CPI Monday. Headline is expected at 83.50% y/y vs. 80.21% in August, while core is expected at 68.60% y/y vs. 66.08% in August. Despite still-rising inflation, the central bank has cut rates by 100 bp for two straight meetings. Next policy meeting is October 20 and while the data do not support another cut, it’s clear that there is significant risk of a dovish surprise at every meeting. The lira should continue to weaken but the pace has been controlled as policymakers keep a tight grip on the exchange rate. Of note, S&P downgraded Turkey on Friday by a notch to B with a stable outlook. The agency noted that “In our view, highly accommodative fiscal and monetary settings risk further undermining confidence in the lira as a store of value, against a backdrop of tightening global financing conditions.” We concur.
Bank of Israel meets Monday and is expected to hike rates 75 bp to 2.75%. At the last meeting August 22, it delivered a hawkish surprise and hiked rates 75 bp vs. 50 bp expected. The bank noted that “The Israeli economy is recording strong growth, accompanied by a tight labor market and an increase in the inflation environment. The increase in inflation is broad-based, with contributions from most CPI components.” The hawkish message was received as the swaps market is now pricing in a terminal rate near 3.0%. At the previous meeting in July, bank researchers saw the policy rate at 2.75% in Q2 2023 but that rate path has likely steepened now. Updated macro forecasts will be released at this week’s meeting.
National Bank of Poland meets Wednesday and is expected to hike rates 25 bp to 7.0%. However, a few analysts polled by Bloomberg see no change. At the last policy meeting September 7, the bank hiked rates 25 bp to 6.75%. Before that meeting, Governor Glapinski said that he saw only one or two more 25 bp hikes in this cycle. Since then, September CPI came in much higher than expected at 17.2%, the highest since September 1996 and further above the 1.5-3.5% target range. The swaps market is pricing in 50 bp of tightening over the next 12 months that would see the policy rate peak near 7.25%. Here too, we see upside risks to the policy rate. Minutes from the September 7 meeting will be released Friday.
Hungary reports August retail sales and IP Thursday. Sales are expected to slow a tick to 4.2% y/y while IP is expected to pick up to 7.7% y/y vs. 6.6% in July. The central bank also holds its weekly 1-week deposit tender Thursday and it may hike the 1-week deposit rate from the current 13.0% if the forint remains under pressure. Last week, EUR/HUF traded at an all-time high near 424 and ongoing weakness is likely to spoil the central bank’s plans to end the tightening cycle. Next policy meeting is October 25 and much will depend on how the forint is trading. The swaps market is pricing in 25 bp of tightening over the next 3 months that would see the base rate peak near 13.25%.
Russia reports September CPI Friday. Headline is expected at 13.50% y/y vs. 14.30% in August, while core is expected at 17.10% y/y vs. 17.71% in August. If so, headline would be the lowest since February but still well above the 4% target. At its last meeting September 16, the bank cut rates 50 bp to 7.5% and signaled that the easing cycle was nearing an end. Governor Nabiullina said then that “we are close to the conclusion of the easing cycle” and described its policy stance as “overall neutral.” She added that “The next step, besides holding the rate, may be an increase, but we do not exclude a decrease.” Next policy meeting is October 28 and rates are likely to be kept steady at 7.5%.
ASIA
Indonesia reports September CPI Monday. Headline is expected at 5.90% y/y vs. 4.69% in August, while core is expected at 3.51% y/y vs. 3.04% in August. At the last meeting September 22, Bank Indonesia hiked rates 50 bp to 4.25% vs. 25 bp expected and was the second straight hawkish surprise. Governor Warjiyo said “The decision to increase interest rates is a front loaded, pre-emptive, and forward looking step to lower inflation expectations and ensure core inflation returns to the target of 2%-4% in the second half of 2023, as well as to strengthen the rupiah stabilization policy.” He noted that the larger move would help the bank bring core inflation back below 4% by Q3 23 after an expected peak of 4.6% by end-2022. Warjiyo added that headline inflation is expected to peak above 6% by end-2022, reflecting the impact of the recent fuel price hike.
Korea reports September CPI Wednesday. Headline is expected to remain steady at 5.7% in August, while core is expected at XX% y/y vs. 4.4% in August. August current account data will be reported Friday. Next Bank of Korea meeting is October 14 and a 25 bp hike to 2.75% is expected. At the last meeting August 25, the bank hiked rates 25 bp to 2.5%. Governor Rhee reiterated his view that large hikes were no longer required and that the bank would continue with 25 bp hikes going forward, adding that the policy rate has already reached the middle of what it considers to be its neutral range. Rhee said that after reaching the upper part of that range, the bank will then consider if it needs to go higher. Regarding the weak won, Rhee said “I expect the 25 bp hike will help rein in the currency rate. We don’t target a certain currency level, but we do consider its impact on inflation.” The swaps market is pricing in 125 bp of tightening over the next 12 months that would see the policy rate peak near 3.75%.
Philippines reports September CPI Wednesday. Headline is expected at 6.8% y/y vs. 6.3% in August. If so, it would be the highest since October 2018 and further above the 2-4% target range. Next central bank meeting is November 7 and another 50 bp hike to 4.75% is expected. At the last meeting September 22, the bank hiked rates 50 bp to 4.25% on September 22 and noted that “The BSP reiterates its commitment to take all necessary actions to steer inflation towards a target-consistent path over the medium term.” Deputy Governor Dakila said the bank will respond to FX fluctuations to the extent that it impacts inflation, adding that it does not target any particular level for the peso. The swaps market is pricing in another 100 bp of tightening over the next 6 months that would see the policy rate peak near 5.25%.
Thailand reports September CPI Wednesday. Headline is expected at 6.50% y/y vs. 7.86% in August, while core is expected at 3.20% y/y vs. 3.15% in August. If so, it would be the first deceleration since April but inflation would remain well above the 1-3% target range. Last week, the Bank of Thailand hiked rates 25 bp to 1.0%, as expected and noted that “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.” The bank forecasts 3.3% growth this year and 3.8% next year and sees 6.3% inflation this year and 2.6% next year. The inflation outlook seems too optimistic given the BOT’s rather gradual approach to tightening. The swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.
China will be on holiday all week for its Golden Week. Caixin reports September services and composite PMI readings Saturday local time. Services PMI is expected at 54.5 vs. 55.0 in August. Last week, official PMI readings came in soft. Non-manufacturing PMI came in at 50.6 vs. 52.6 in August and dragged the composite PMI down to 50.9 vs. 51.7 in August. We expect stimulus to continue in the coming months.
