EM FX was mostly firmer last week and reflected broad dollar losses against the majors. MYR, ZAR, and IDR outperformed while MXN, TRY, and CLP underperformed. EM is benefitting from broad risk on impulses after the Fed’s 50 bp cut, but we continue to believe the market is overestimating the bank’s capacity to ease. As such, further gains for risk assets may be choppier in the coming days and weeks.
AMERICAS
Chile central bank releases its minutes Monday. At the September 3 meeting, the bank cut rates 25 bp to 5.5%, as expected. However, it accentuated the negative by noting that spending is showing more weakness and that bank lending remains weak. Since then, August CPI came in as expected at 4.7% y/y vs. 4.6% in July and was the fifth straight month of acceleration to the highest since November. However, it’s clear that the bank is more concerned about the sluggish economy and so rates should continue. The market is pricing in another 150 bp of easing over the next 12 months that would see the policy rate bottom near 4.0%.
Brazil central bank releases its minutes Tuesday. At the meeting last week, it started the tightening cycle with a 25 bp hike to 10.75% and said that the risks to the inflation outlook are tilted to the upside and requires more restrictive monetary policy. It then releases its quarterly inflation report Thursday. In between, Brazil reports mid-September IPCA inflation Wednesday. Headline is expected at 4.28% y/y vs. 4.35% in mid-August. If so, it would be the second straight month of deceleration to the lowest since mid-June. Next COPOM meeting is November 6 and the market is pricing in a 50 bp hike to 11.25%. Looking ahead, the market is pricing in 200-225 bp of total tightening over the next 12 months that would see the policy rate peak between 12.75-13.0%.
Mexico reports mid-September CPI Tuesday. Headline is expected at 4.71% y/y vs. 4.83% previously, while core is expected at 3.96% y/y vs. 4.01% previously. Banco de Mexico meets Thursday and is expected to cut rates 25 bp to 10.5%. A couple of analysts polled Bloomberg look for a larger 50 bp cut but we think that’s unlikely given the split 3-2 vote to cut in August, with the dissents in favor of no cut. The market is pricing in 75 bp of easing over the next three months and 250 bp of total easing over next 12 months. August trade data will be reported Friday.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to cut rates 25 bp to 6.5%. At the last meeting August 27, the bank kept rates steady at 6.75% as expected but said that “There may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception.” Deputy Governor Virag added that he continues to see 1-2 more rate cuts this year. The market is pricing in 100 bp of total easing over the next 12 months.
Czech National Bank meets Wednesday and is expected to cut rates 25 bp to 4.25%. At the last meeting August 1, the bank voted unanimously to cut rates 25 bp to 4.50% after several 50 bp cuts. Governor Michl described it as a hawkish cut. While it is premature to expect CNB to pause the easing cycle since economic activity is weak, jumbo rate cuts are unlikely going forward as Michl warned that “the fight against inflation is not over.” The market is pricing in 100 bp of total easing over the next 12 months.
ASIA
Malaysia reports August CPI Monday. Headline is expected to remain steady at 2.0% y/y. If so, it would be the fourth straight month that inflation has been stuck there. Bank Negara just kept rates steady at 3.0% on September 5 and noted that "At the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects." The bank said both headline and core inflation are expected to remain below 3% but warned that the outlook remains "highly subject to the implementation of further domestic policy measures." While the bank does not have an explicit inflation target, the fact that inflation has remained steady at 2.0% despite the end of some fuel subsidies over the summer suggests it will lean more dovish in the coming months. The swaps market is pricing in 25 bp of easing over the next 12 months.
Singapore reports August CPI Monday. Headline is expected at 2.1% y/y vs. 2.4% in July, while core is expected to pick up a tick to 2.6% y/y. If so, headline would be the lowest since April 2021. While the MAS does not have an explicit inflation target, low price pressures should allow it to ease at the January policy meeting. We think a dovish surprise at the October meeting is unlikely as core inflation remains elevated and the real economy is holding up relatively well. August IP will be reported Thursday and is expected at 8.9% y/y vs. 1.8% in July.
People’s Bank of China sets its key 1-year MLF rate Wednesday. It is expected to be kept steady at 2.30% but has been delayed since mid-September as the PBOC engineers a transition in the policy rate from the 1-year MLF to the 1-week reverse repo rate. After China reported soft August money and new loan data as well as weak real sector data, we expect further stimulus in the coming weeks and months.
