EM FX was mostly softer against the dollar last week despite the greenback’s mixed performance against the majors. PLN, HUF, and RON outperformed while COP, MXN, and CLP underperformed. Markets are starting the week with a risk off vibe after the weekend attack on Israel (see below). Risks of a wider regional conflagration are likely to keep markets on edge this week.
AMERICAS
Brazil reports September IPCA inflation Wednesday. Headline is expected at 5.26% y/y vs. 4.61% in August. If so, it would be the third straight month of acceleration to the highest since February and above the 1.75-4.75% target range. However, much of this is due to low base effects and so the centra bank is looking through it and has cut rates 5p bp two meetings in a row and signaled a steady pace of cuts ahead. Next meetings are November 1 and December 13 and 50 bp cuts are expected at each one that would take the policy rate down to 11.75% at year-end.
Mexico reports August IP Thursday. IP is expected at 4.6% y/y vs. 4.8% in July. September CPI was reported Monday. Headline came in at 4.45% y/y vs. 4.48% expected and 4.64% in August, while core came in a tick higher than expected at 5.76% y/y vs. 6.08% in August. Headline was the lowest since February 2021 and nearing the 2-4% target range. Banco de Mexico also releases its minutes Thursday as well. At the September 28 meeting, it kept rates on hold at 11.25% and said “The inflationary outlook will be complicated and uncertain throughout the entire forecast horizon, with upward risks.” Next meeting is November 9 and no change is expected. The swaps market is pricing in steady rates at the December 14 too, with 50% odds of a 25 bp cut in Q1.
Colombia reports August IP and retail sales Friday. IP is expected at -1.2% y/y vs. -3.6% in July, while sales are expected at -7.8% y/y vs. -8.2% in July. At the lats meeting September 29, the central bank kept rates on hold at 13.25% and said “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.” Next meeting is October 31 and no change is expected. The swaps market is pricing in a 25 bp cut in Q4, which suggests a cut at the December 19 meeting.
EUROPE/MIDDLE EAST/AFRICA
There are no words to describe the shocking weekend attack by Hamas on Israel. Military operations are ongoing and 300,000 IDF reservists have been called up but there is no telling how long this situation will last. Hostages have been taken and there is simply no easy military solution. As of this writing, over 900 Israelis and nearly 700 Palestinians have been reported killed.
Concerns of regional instability are running high. There have been some reports of Iranian involvement in the attack, which Iran has denied. There have also been reports of incursions from Lebanon. The U.S. is sending a group of warships to the eastern Mediterranean Sea, not to engage in hostilities but to discourage any involvement by others in the region. Oil prices have spiked on fears of wider regional instability. Israeli assets are coming under pressure, to state the obvious. The Bank of Israel announced a $45 bln support plan for the shekel, consisting of $30 bln in direct FX intervention and $15 bln in FX swaps.
Hungary reported September CPI Tuesday. Headline is expected at 12.4% y/y vs. 16.4% in August. If so, it would be the lowest since June 2022 but still well above the 2-4% target range. Central bank minutes will be released Wednesday. At the September meeting, it cut the 1-day deposit rate to 13%, matching the base rate. Going forward, both are expected to be cut in unison and the swaps market is pricing in 150 bp of easing over the next three months followed by another 125 bp over the subsequent three months.
Czech Republic reports September CPI Tuesday. Headline is expected at 7.5% y/y vs. 8.5% in August. If so, it would be the lowest since December 2021 but still well above the 1-3% target range. At the last policy meeting September 27, the central bank kept rates steady at 7% and said that inflation was still at “unacceptably” high levels. Next meeting is November 2 and no change is expected then. The swaps market is pricing in no easing over the next three months followed by 50 bp of easing over the subsequent three months.
Turkey reports August IP Tuesday. It is expected at 5.0% y/y vs. 7.4% in July. August current account data will be reported Wednesday. A deficit of -$650 mln is expected vs. -$5.47 bln in July. If so, the 12-month total would fall to -$56.5 bln vs. -$58.5 bln in July. The external accounts have been improving even as the central bank has been allowed to normalize monetary policy somewhat. Next policy meeting is October 26 and another 500 bp hike to 35% seems likely after it delivered a 500 bp hike at the last meeting September 21. The swaps market is pricing in a peak policy rate near 40% over the next three months, which would not be high enough to lower inflation and stabilize the lira.
ASIA
China reports September money and new loan data sometime this week. New loans are expected at CNY2.5 trln vs. CNY1.36 trln in August, while aggregate financing is expected at CNY3.75 trln vs. CNY3.12 trln in August. If so, it would be a significant pickup in stimulus. September CPI, PPI and trade data will be reported Friday. CPI is expected to pick up a tick to 0.2% y/y, while PPI is expected at -2.4% y/y vs. -3.0% in August. Elsewhere, exports are expected at -7.5% y/y vs. -8.8% in August, while imports are expected at -6.0% y/y vs. -7.3% in August.
India reports September CPI and August IP Thursday. Headline inflation is expected at 5.43% y/y vs. 6.83% in August, while IP is expected at 9.5% y/y vs. 5.7% in July. If so, headline inflation would decelerate for the second straight month to the lowest since June and back within the 2-6% target range. IP is expected at 9.3% y/y vs. 5.7% in July. The central bank just delivered a hawkish hold last week as Governor Das warned of inflation risks from excess liquidity in the system. He said the RBI was considering selling bonds in order to soak up that extra cash, which suggests that the RBI may be moving away from rate hikes to limit inflation in favor of tightening overall system liquidity. Next meeting is December 8 and no change is expected then. The swaps market is pricing in steady rates over the next twelve months.
Monetary Authority of Singapore meets Friday and is expected to keep policy steady. Advance Q3 GDP data will be reported the same day, with growth expected at 0.5% q/q vs. 0.1% in Q2. In y/y terms, growth is expected at 0.3% vs. 0.5% in Q2. If regional activity remains sluggish and domestic price pressures continue to fall, we believe the MAS will look to ease policy at the April meeting.
