EM FX was mixed last week as early dollar weakness was followed by a sharp rebound in the second half. BRL, CLP, and KRW outperformed while RUB, ARS, and INR underperformed. This week’s U.S. data will be a key part of the Fed rate puzzle but we have not yet seen the full impact of past tightening on the economic data yet. Some analysts are trying to pick a bottom for EM but we do not think that is possible until we have seen peak global interest rates as well as peak global recession risks. We think that is a 2023 story and so we remain defensive of EM.

AMERICAS

Brazil reports September IPCA inflation Tuesday. Headline is expected at 7.12% y/y vs. 8.73% in August. If so, it would be the lowest since April 2021 but still above the 2-5% target range. At the last meeting September 21, COPOM kept rates steady at 13.75%, as expected. The vote then was 7-2 with the dissents in favor of a 25 bp hike. It said “The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected.” The bank stressed that it would keep rates steady for a “sufficiently long period” to help bring inflation back to target. With inflation falling rapidly, it appears that the tightening cycle is at an end. However, the swaps market is pricing in the start of an easing cycle in Q1, which seems too soon.

Mexico reports August IP Wednesday. IP is expected at 2.9% y/y vs. 2.6% in July. Banco de Mexico releases its minutes Thursday. At the September 29 meeting, the bank hiked rates 75 bp to 9.25%, as expected. It 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.” The bank revised its inflation forecasts upwards, with headline inflation seen remaining at 8.6% through end-2022 and falling to 3.1% only by Q3 2024.CPI rose 8.70% y/y in September, the highest since December 2000 and further above the 2-4% target range. The swaps market is pricing in 150 bp of tightening over the next 6 months that would see the policy rate peak near 10.75%.

Chile central bank meets Wednesday and is expected to hike rates 50 bp to 11.25%. At the last meeting September 6, the bank delivered a hawkish surprise with a 100 bp hike to 10.75% vs. 75 bp expected. There was one dissent in favor of an even larger 125 bp move. The bank noted that “The next move in rates will depend on the macroeconomic scenario. The board will pay special attention to the risk of higher inflation.” Since then, September CPI came in at 14.1% y/y, the highest since September 1992 and further above the 2-4% target range. The swaps market is pricing in 75 bp of tightening over the next 3 months that would see the policy rate peak near 11.5%.

Colombia reports August retail sales and manufacturing production Friday. Sales are expected at 7.0% y/y vs. 7.7% in July while production is expected at 5.6% y/y vs. 5.2% in July. The economy is slowing, which helps explain the dovish surprise form the central bank at the last meeting September 29. It hiked rates 100 bp to 10.0% vs. 150 bp expected and 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 was 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. World inflation has continued to increase, and acquired a greater persistence.” The swaps market is now pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 12.0%, down from 13.0% at the start of this month.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports August trade data Monday. September CPI will be reported Tuesday. Headline is expected at 19.8% y/y vs. 15.6% in August. If so, it would be the highest since December 1996 and further above the 2-4% target range. Central bank minutes will be released Wednesday. At the September 27 meeting, the bank delivered a hawkish surprise by hiking rates 125 bp to 13% vs. 100 bp expected. However, it also announced then that it was ending the tightening cycle. The bank said it would maintain tight monetary conditions and will use “other tools” to rein in inflation as it focuses on tightening liquidity. So Hungary has joined Poland and Czech in trying to end the tightening cycle. It will be hard to maintain rates when inflation is flirting with 20% and if the forint weakens, look for the bank to hike its 1-week deposit rate at its weekly tender Thursday. The swaps market is pricing in one last 25 bp hike but we see upside risks here.

Czech Republic reports September CPI Tuesday. Headline is expected to remain steady at 17.2% y/y. If so, it would remain well above the 1-3% target range. On September 29, the Czech National Bank kept rates steady at 7.0% for the second straight meeting. The vote was 5-2, with the dissents in favor of a 75 bp hike. Governor Michl said “The bank board will wait for and analyze further data. At the next meeting the board will decide whether to keep rates unchanged or raise them.” The next meeting is November 3 and barring a collapse in the koruna, the bank is likely to keep rates steady. The swaps market sees steady rates over the next 6 months, followed by the start of an easing cycle over the subsequent 6 months. A 7% nominal policy when inflation is 17.2% doesn't seem to be restrictive enough and so we believe an easing cycle is unlikely to come so soon.

Turkey reports August current account data Tuesday. A deficit of -$3.1 bln is expected vs. -$4.0 bln in July. If so, the 12-month total would rise to -$40. 8bln, the highest since September 2018. The external accounts are widening sharply and at the same time are getting harder to finance given the central bank’s ill-advised easing cycle. If these trends continue, we believe Turkey will face a balance of payments crisis that will eventually morph into a full-blown economic crisis. August IP and retail trade will be reported Wednesday. IP is expected at 2.7% y/y vs. 2.4% in July.

Israel reports September CPI Friday. Headline is expected to fall a tick to 4.5% y/y. If so, it would be the second straight deceleration from the 5.2% peak in July but still above the 1-3% target range. Last week, the Bank of Israel hiked rates 75 bp to 2.75%, as expected. Governor Yaron stressed that the bank is front-loading its rate hikes because it’s “determined to return the inflation rate to within the target range.” The bank updated its macro forecasts and now sees the policy rate at 3.5% a year from now vs. 2.75% seen a year ahead at the July 4 meeting. The swaps market is now pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 3.75%. Of note, the bank sees inflation at 4.6% this year and falling to 2.5% next year, within the 1-3% target range. Yaron noted that medium- and long-term inflation expectations are already within the target range.

ASIA

China reports September new loan and money data this week. Consensus sees CNY1.8 trln in new loans vs. CNY1.25 trln in August and CNY2.75 trln in aggregate financing vs. CNY2.43 trln in August. PBOC will also set its 1-year MLF rate this week and is expected to keep it steady at 2.75%. September CPI, PPI, and trade data will be reported Friday. CPI is expected at 2.9% y/y vs. 2.5% in August and PPI is expected at 1.0% y/y vs. 2.3% in August. If so, CPI would be the highest since April 2020 and nearing the 3% target for this year. That said, we believe policymakers are focused on boosting growth and supporting the property sector, and so we see continued easing in the coming months. Elsewhere, exports are expected at 4.0% y/y vs. 7.1% in August and imports are expected at 0.2% y/y vs. 0.3% in August. Over the weekend, Caixin services and composite PMI readings fell sharply to 49.3 and 48.5, respectively. The composite reading was the lowest since May and is lower than the official reading of 50.9.

Monetary Authority of Singapore meets this week and is expected to tighten policy again. August CPI came in higher than expected at 7.5% y/y, the highest since June 2008. While the MAS does not have an explicit inflation target, ongoing price pressures should lead to another round of tightening at this meeting. It has already tightened four times this past year, twice at the regularly scheduled semiannual meetings and twice intra-meeting in January and July. Advance Q3 GDP data will be reported the same day and is expected at 0.7% q/q vs. -0.2% in Q2, while the y/y rate is expected at 3.5% vs. 4.4% in Q2..

India reports September CPI and August IP Wednesday. CPI is expected at 7.3% y/y vs. 7.0% in August. If so, it would be the highest since April and further above the 3-6% target range. WPI will be reported Friday and is expected at 11.20% y/y vs. 12.41% in August. The Reserve Bank of India just hiked rates 50 bp to 5.90%, as expected. Governor Das noted that “If high inflation is allowed to linger, it invariably triggers second order effects.” He did not provide any forward guidance but pledged to “remain alert and nimble” in its policy. This is clearly less hawkish than he was at the August 5 meeting, when Das said “It’s now basically a whatever-it-takes approach going into third year in succession.” Perhaps he is less hawkish after CPI came in at 7.00% y/y in August, down from the 7.79% peak in April. The swaps market is pricing in 135 bp of tightening over the next 6 months that would see the policy rate peak near 7.25%.

Bank of Korea meets Wednesday and is expected to hike rates 50 bp to 3.0%. At the last meeting August 25, the bank hiked rates 25 bp to 2.5%, as expected. Governor Rhee said 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. Since August 25, the won has weakened another 6% and the external accounts have worsened, but inflation has eased to 5.6% y/y from the 6.3% peak in July. Rhee has noted that interest rate differentials with the U.S. have widened and that this could be a factor at this week’s meeting. 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%.