EM FX was mostly firmer last week, taking advantage of broad-based dollar weakness against the majors. CLP, PLN, and COP outperformed while BRL, ARS, and CNY underperformed. With the Fed expected to deliver another 75 bp hike and maintain its hawkish stance, we believe the dollar could start to stage a recovery this week. We will also get key data this week that should show continued resilience in the U.S. economy that underscores the need for the fed to go higher for longer.
AMERICAS
Brazil reports September consolidated budget data Monday. A primary surplus of BRL11 bln is expected. Central bank minutes, September IP, and October trade data will be reported Tuesday. IP is expected at 0.7% y/y vs. 2.8% in August. At that October 26 meeting, COPOM left rates steady at 13.75%, as expected, but the tone was decidedly hawkish. It said it won’t hesitate to resume rate hikes if needed, adding that it will evaluate holding rates for a sufficiently long period. The bank tweaked its inflation forecasts higher and noted that various measures of core inflation are above target. The swaps market has pushed out the start of an easing cycle from Q1 into Q2. As of this writing, the polls have closed and vote counting has begun. Reports suggest the early returns are likely to skew towards President Bolsonaro and right now, he is leading 51-49% over Lula with 25% of the votes counted. While a Bolsonaro victory is likely to lead to knee-jerk gains in Brazil assets, we believe a Lula victory will also be accepted by the markets without much fuss.
Colombia central bank minutes will be released Tuesday. At last week’s meeting, the bank hiked rates 100 bp to 11.0%, as expected. The decision was unanimous as the bank warned that inflation expectations are moving away from the target. Finance Minister Ocampo said the hike should help calm markets, adding that the bank decided against FX intervention after finding liquidity in the futures market to be normal. October CPI will be reported Saturday. Headline is expected at 12.14% y/y vs. 11.44% in September. If so, it would be the highest since March 1999 and further above the 2-4% target range. The swaps market is pricing in 250 bp of further tightening over the next 6 months that would see the policy rate peak near 13.5%.
Peru reports October CPI Wednesday. Headline is expected at 8.41% y/y vs. 8.53% in September. If so, it would resume the deceleration from the 8.81% peak in June. At the last policy meeting October 6, the central bank hiked rates 25 bp to 7.0%, as expected. Next policy meeting is November 10 and another 25 bp seems likely.
EUROPE/MIDDLE EAST/AFRICA
Poland reports October CPI Monday. Headline is expected at 17.8% y/y vs. 17.2% in September. If so, it would be the highest since August 1996 and further above the 1.5-3.5% target range. Yet at the last policy meeting October 5, the central bank delivered a dovish surprise and kept rates steady at 6.75% vs. an expected 25 bp hike. Governor Glapinski said then that there was no formal end of the tightening cycle and that the bank was in “wait and see” mode. While he hinted that this is just a pause, Glapinski also said that a rate cut may take place at the end of next year. Next policy meeting is November 9 and no change is expected then. However, if inflation continues to accelerate into year-end, the bank may have to hike again in early 2023. That is what the swaps market sees at it is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 7.75%.
Turkey reports October CPI Thursday. Headline is expected at 85.60% y/y vs. 83.45% in September, while core is expected at 72.00% y/y vs. 68.09% in September. If so, headline would be the highest since June 1998 and further above the 3-7% target range. At the last policy meeting October 20, the central bank delivered its third dovish surprise in a row by cutting rates 150 bp to 10.5% vs. 100 bp expected. It said that it would consider a similar cut at the next meeting November 24 and may also consider an end to the easing cycle then. If one last 150 bp cut is seen, rates would bottom at 9.0% while CPI inflation is near 85% and still rising. As we’ve said many times before, the country is lurching towards a crisis with its unorthodox policy mix that favors growth over inflation.
Czech National Bank meets Thursday and is expected to keep rates steady at 7.0%. Of note, rates have been kept steady since the last 125 bp hike back in June. Minutes from the last meeting September 29 showed that most policymakers believed inflation was probably near its peak. There were two dissents in favor of a hike but the board is dominated by doves after the July appointments brought three new doves to the board to go along with new Governor Michl. Yet inflation is still running well below target and so it remains to be seen whether the tightening cycle is truly over. The swaps market is pricing in steady rates over the next 12 months. However, the bank may eventually be forced to hike again if price pressures remain high.
ASIA
Korea reports September IP Monday. Growth is expected to remain steady at 1.0% y/y. October trade data will be reported Tuesday. Exports are expected at -2.1% y/y vs. 2.7% in September, while imports are expected at 6.6% y/y vs. 18.6% in September. October CPI will be reported Wednesday, with headline expected at 5.8% y/y vs. 5.6% in September and core expected to remain steady at 4.5% y/y. If so, it would be the first acceleration in headline since July and would move further above the 2% target. At the last policy meeting October 12, the Bank of Korea hiked rates 50 bp to 3.0%, as expected. There were two dissents in favor of a smaller 25 bp move. The bank noted that “The Board sees continued rate hikes as warranted, as inflation is expected to remain high, substantially above the target level, although domestic economic activity has slowed.” Governor Rhee added that the bank expects rates to be around 3.5% at the end of this tightening cycle. Next policy meeting is November 24 and another 50 bp hike seems likely. The swaps market is pricing in 50 bp of tightening over the next 6 months that would see the policy rate peak near 3.5%.
China reports official October PMI readings Monday. Manufacturing is expected at 49.8 vs. 50.1 in September, while non-manufacturing is expected at 50.1 vs. 50.6 in September. Caixin reports its manufacturing PMI Tuesday and is expected at 48.5 vs. 48.1 in September. Caixin reports its services and composite PMI readings Thursday. Services is expected at 49.0 vs. 49.3 in September. The recovery will remain uneven as China continues its Covid Zero policy. Fresh lockdowns were imposed late last week in Wuhan, Guangzhou, Beijing, and Shanghai, underscoring President Xi’s unwavering commitment to this controversial policy.
Indonesia reports October CPI Tuesday. Headline is expected at 5.98% y/y vs. 5.95% in September, while core is expected at 3.40% y/y vs. 3.21% in September. If so, headline would be the highest since October 2015 and further above the 2-4% target range. At the last policy meeting October 20, Bank Indonesia hiked rates 50 bp to 4.75%, as expected. However, it also loosened some macroprudential measures in order to boost lending, suggesting the bank is aware of the building headwinds to the economy. Of note, Governor Warjiyo paid particular attention to the exchange rate as he pledged to “control” the rupiah’s movements. Next policy meeting is November 17 and another 50 bp hike seems likely.
Bank Negara Malaysia meets Thursday and is expected to hike rates 25 bp to 2.75%. At the last policy meeting September 8, the bank hiked rates 25 bp to 2.50%. The bank noted that “The economy is stronger. It doesn’t need large support like it did during the pandemic.” It said policy is “not on any pre-set course” and added that “Any adjustments to the monetary policy settings going forward would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative.” Since then, September CPI came in at 4.5% y/y, down from the cycle peak of 4.7% in August. While the bank does not have an explicit inflation target, still-high price pressures should keep the tightening cycle going for now. The swaps market is pricing in 100 bp of tightening over the next 12 months that would see the policy rate peak near 3.5%.
Philippines reports October CPI Friday. Headline is expected at 7.2% y/y vs. 6.9% in September. If so, it would be the highest since February 2009 and further above the 2-4% target range. At the last policy meeting September 22, the central bank hiked rates 50 bp to 4.25%, as expected. It noted that “The BSP reiterates its commitment to take all necessary actions to steer inflation towards a target-consistent path over the medium term.” It also tweaked its inflation forecasts for 2022 to 5.6% vs. 5.4% previously and for 2023 to 4.1% vs.4.0% previously. 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. Next policy meeting is November 17 and another 50 bp hike seems likely. The swaps market is pricing in another 100 bp of tightening over the next 3 months that would see the policy rate peak near 5.25%,
Thailand reports October CPI Friday. Headline is expected at 6.00% y/y vs. 6.41% in September, while core is expected at 3.20% y/y vs. 3.12% in September. If so, it would be the second straight deceleration from the 7.86% y/y peak in August but still well above the 1-3% target range. At the last policy meeting September 28, the Bank of Thailand hiked rates 25 bp to 1.0%, as expected. 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.” 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 even as headline inflation rose 7.9% y/y in August. Next policy meeting is November 30 and another 25 bp hike is expected. The swaps market is pricing in 175 bp of tightening over the next 12 months that would see the policy rate peak near 2.75%.
