EM FX was mixed last week despite the broad dollar rally against the majors. COP, CLP, and ZAR outperformed while TRY, HUF, and IDR underperformed. EM central banks are finally responding to currency weakness, with some (Indonesia, Philippines, Turkey) actively hiking, others slowing the pace of easing (Chile, Poland, Hungary), and others delating the start of easing (Colombia, Mexico). The data out of the U.S. should continue to support our call for further Fed tightening and so the dollar uptrend remains intact. Risk assets like EM should remain under pressure as well.
AMERICAS
Chile reports September IP and retail sales Tuesday. IP is expected at -1.3% y/y vs. 0.3% in August, while sales are expected at -6.4% y/y vs. -9.1% in August. GDP proxy will be reported Thursday and is expected at -0.7% y/y vs. -0.9% in August. The recovery may be slower after the central bank cut rates 50 bp last week vs. 75 bp expected. The bank had said that the weak peso would be a factor in its decision so they addressed this by slowing the pace a tad. The bank also halted its dollar purchase program, which it should have done months ago when CLP weakness really took hold.
Mexico reports Q3 GDP data Tuesday. GDP is expected at 0.8% q/q for the second straight quarter while the y/y rate is expected at 3.2% vs. 3.6% in Q2. If so, it would be the slowest y/y rate since Q1 2022 but still well above other countries in the region. Given how strong the economy remains, Banco de Mexico is in no hurry to cut rates. Next policy meeting is November 9 and rates are expected to be kept steady at 11.25%. The swaps market is pricing in steady rates over the next six months followed by the start of a modest easing cycle over the subsequent six months.
Colombia central bank meets Tuesday and is expected to keep rates steady at 13.25%. The bank releases its quarterly monetary policy report Thursday. Minutes will be released Friday. At the last policy meeting September 29, the bank kept rates steady by a 5-2 vote and noted that “The majority of the board considers that, with the available information, it isn’t prudent to start a process of cutting interest rates, the sustainability of which would face important risks.” The swaps market is pricing in 25 bp of easing over the next three months, which suggests the start of an easing cycle at the next meeting December 19.
Brazil reports September IP and October trade data Wednesday. IP is expected at 0.4% y/y vs. 0.5% in August. COPOM also meets Wednesday and is expected to cut rates 50 bp to 12.25%. At the last meeting September 20, the bank cut rates 50 bp for the second straight meeting and signaled that there is a high bar for changing that pace of easing. Another 50 bp cut is priced in for the December 15 meeting as well.
Peru reports October CPI Wednesday. Headline is expected at 4.90% y/y vs. 5.04% in September. If so, it would be the lowest since July 2021 but still well above the 1-3% target range. Next central bank policy meeting is November 9 and another 25 bp cut to 7.0% seems likely. At the last meeting October 5, the bank cut rates 25 bp for the second straight meeting but warned that “This decision doesn’t necessarily imply a cycle of successive reductions in the interest rate. The board reaffirms its commitment to taking the necessary action to ensure that inflation returns to its target range over the forecast horizon.”
EUROPE/MIDDLE EAST/AFRICA
Turkey reports September trade data Tuesday. A deficit of -$5.0 bln is expected vs. -$8.66 bln in August. October CPI data will be reported Friday. Headline is expected at 62.20% y/y vs. 61.53% in September, while core is expected at 71.05% y/y vs. 68.93% in September. If so, headline would be the highest since December and core would be the highest on record dating back to January 2004. The central bank hiked rates 500 bp to 35.0% last week and promised to tighten more as needed. The swaps market is now pricing in a peak policy rate near 41% vs. 40% before the decision. Given how high inflation is running, this won’t be enough to tame inflation and stabilize the lira.
Czech Republic reports Q3 GDP data Tuesday. GDP is expected to remain flat q/q for the second straight quarter while the y/y rate is expected at -0.3% vs. -0.6% in Q2. Czech National Bank meets Thursday and is expected to start the easing cycle with a 25 bp cut to 6.75%. However, the market is split as 6 of the 16 analysts polled by Bloomberg see no change. At the last policy meeting September 27, the bank kept rates steady and Governor Michl said inflation was still at “unacceptably” high levels. Since then, inflation fell more than expected to 6.9% y/y but the koruna has weakened by around 1% vs. the euro, which the bank sees as equivalent to 25 bp of easing.
Poland reports October CPI Tuesday. Headline is expected at 6.6% y/y vs. 8.2% in September. If so, it would be the lowest since September 2021 but still above the 1.5-3.5% target range. At the last policy meeting October 4, the bank slowed the pace of easing to 25 bp vs. 75 bp in September. Governor Glapinski said the bank favors cutting rates gradually but will act based on incoming data. Next meeting is November 8 and another 25 bp cut to 5.5% is expected. The swaps market is pricing in 25 bp of total easing over the next three months, followed by another 50 bp over the subsequent three months.
ASIA
Korea reports September IP Tuesday. It is expected at -1.2% y/y vs. -0.5% in August. October trade data will be reported Wednesday. Exports are expected at 5.8% y/y vs. -4.4% in September, while imports are expected at -2.2% y/y vs. -16.5% in September. October CPI will be reported Thursday, with headline expected to remain steady at 3.7% y/y and core expected to fall two ticks to 3.1% y/y. The Bank of Korea just left rates steady October 19 but Governor Rhee warned that it would seriously consider a hike if the Mideast conflict caused inflation expectations to rise more than it expects. Next policy meeting is November 30.
China reports official October PMIs Tuesday. Manufacturing is expected to remain steady at 50.2, while non-manufacturing is expected to rise a tick to 51.8. If so, the composite would likely be little changed from 52.0 in September. Caixin reports manufacturing PMI Wednesday and is expected to rise two ticks to 50.8. Its services and composite PMIs will be reported Friday. We remain skeptical that the modest stimulus measures taken so far will have much impact.
Indonesia reports October CPI Wednesday. Headline is expected at 2.58% y/y vs. 2.28% in September, while core is expected at 1.98% y/y vs. 2.00% in September. If so, headline would still be in the bottom half of the 2-4% target range. At the last policy meeting October 19, the bank delivered a hawkish surprise and hiked rates 25 bp to 6.0%. Governor Warjiyo said “This increase is to strengthen rupiah exchange rate stabilization policies amid the impact of high global uncertainty and is a preemptive and forward looking step to mitigate impact on imported inflation.” Next policy meeting is November 23 and much will depend on the rupiah.
Bank Negara meets Thursday and is expected to keep rates steady at 3.0%. At the last meeting September 7, it kept rates steady for the second straight meeting and said its policy stance would support growth. It added then that the moderating trend in inflation would continue in H2. While Bank Negara does not have an explicit inflation target, the swaps market is pricing in 25 of tightening over the next 6-12 months.
