EM Preview for the week of October 10, 2021

October 10, 2021

EM FX came under pressure last week as broad-based dollar strength continued. RUB, PEN, COP, and IDR were the top performers last week, while BRL, CLP, TRY, and MXN were the worst. We believe the jobs report Friday will still allow the Fed to announce tapering at the November 2-3 FOMC meeting. In the past, such tapering has led to further dollar gains and we believe that dynamic will continue to play out in the coming weeks. Please see our recent piece “Tapering and the Dollar.”

AMERICAS

Mexico reports August IP Tuesday. It is expected to fall -0.6% m/m vs. a 1.1% gain in July. Banco de Mexico releases its minutes Thursday. At the September 30 meeting, the bank hiked rates 25 bp to 4.75% and was the third straight move in this tightening cycle. The vote was 4-1 with the dissent in favor of steady rates and this was a hawkish tilt from the previous 3-2 vote. The bank left the door open to further tightening and so the minutes could be very helpful in determining the future rate path. Next policy meeting is November 11 and another 25 bp hike to 5.0% seems likely after inflation accelerated to 6.0% y/y in September. This was the highest since and further above the 2-4% target range.

Chile central bank meets Wednesday and is expected to hike rates 75 bp to 2.25%. Some see a 100 bp hike and one analyst even sees a 150 bp hike. After starting the tightening cycle with a 25 bp hike to 0.75% back in July, the bank delivered a larger than expected 75 bp hike to 1.50% in August. Headline inflation came in at a higher than expected 5.3% y/y in September, the highest since November 2014 and further above the 2-4% target range. As such, we think the bank will maintain the faster pace of tightening for now. Bloomberg consensus sees the policy rate at 3.75% in Q1, rising to 4.5% in H2.

Colombia reports August manufacturing production and retail sales Friday. The economy continues to recover even as price pressures pick up. CPI rose 4.51% y/y in September, the highest since April 2017 and well above the 2-4% target range. No wonder the bank just started the tightening cycle with a 25 bp hike to 2.0% September 30. However, the vote was 4-3, with the 3 dissents in favor of a 50 bp hike. Next policy meeting is October 29 and another 25 bp hike to 2.25% is expected then, with risks of a larger 50 bp move.

EUROPE/MIDDLE EAST/AFRICA

Czech Republic reports September CPI Monday. Headline inflation is expected to accelerate to 4.6% y/y vs. 4.1% in August. If so, it would be the highest since October 2008 and further above the 1-3% target range. After starting the tightening cycle with a 25 bp hike to 0.50% back in June, the bank followed up with another 25 bp hike to 0.75% in August before delivering a larger than expected 75 bp hike to 1.50% in September. Minutes to that meeting show that Governor Rusnok sees rates returning to pre-pandemic levels “relatively quickly.” Next policy meeting is November 4 and another 75 bp hike to 2.25% seems likely then. That is where the rates stood in February 2020 and so the big question is whether the bank keep tightening after that. Minutes suggest the pace of tightening will depend on the November macro forecasts.

Turkey reports August current account data Monday. A deficit of -$100 mln is expected vs. -$680 mln in July. While the external accounts have improved sharply, monetary policy and inflation are likely to remain the primary drivers for the lira in the coming months. There were reports last week (later denied) that President Erdogan was “cooling” on central bank Governor Kavcioglu. Next policy meeting is October 21 and another rate cut is expected then. IP will be reported Tuesday and is expected to rise 3.7% m/m vs. -4.2% in July.

South Africa reports August manufacturing production Tuesday. It is expected to rise 6.1% m/m vs. -8.0% in July. Retail sales will be reported Wednesday, which are expected to rise 9.5% m/m vs. -11.2% in July. The economy is recovering but remains vulnerable. Yet SARB has tilted more hawkish in recent weeks, raising the odds that it will start the tightening cycle at the next meeting November 18. At the last policy meeting, the bank’s model suggested a 25 bp hike in Q4 is needed, followed by quarterly 25 bp hikes in both 2022 and 2023 in order to keep inflation around its 4.5% target. This seems overly hawkish to us but the SARB gave itself an out by saying future policy remains "data-dependent."

Israel reports September trade data Wednesday. September CPI will be reported Friday, with headline inflation expected at 2.5% y/y vs. 2.2% in August. If so, it would be the highest since November 2011 and in the upper half of the 1-3% target range. Bank of Israel just left rates steady at 0.10% last week but announced an end to its QE program by November or December. However, the bank stressed that it will “continue to conduct an accommodative monetary policy for a prolonged time.” The bank raised its 2021 inflation forecast to 2.5% and its growth forecast to 7% but are then seen slowing in 2022 to 5.5% and 1.6%, respectively. Governor Yaron warned that “The main risk to the forecast is the possibility of additional waves of morbidity that will require severe limitations on activity.”


ASIA

China reports September money and loan data sometime this week. New loans are expected to pick up to CNY1.82 trln from CNY1.22 trln in August, while aggregate financing is expected to pick up to CNY3.10 trln from CNY2.96 trln in August. Trade data will be reported Wednesday, with exports expected to rise 21.6% y/y vs. 25.6% in August and imports expected to rise 20.7% y/y vs. 33.1% in August. CPI and PPI will be reported Thursday, with the former expected to pick up a tick to 0.9% y/y and the latter expected to pick up a full percentage point to 10.5% y/y. Yet policymakers remain focused on boosting growth and likely to cut RRR again soon.

Bank of Korea meets Tuesday and is expected to keep rates steady at 0.75%. September CPI came in slightly above expectations at 2.5% y/y, reinforcing the view that the bank will remain on a gradual tightening cycle after it started with a surprise 25 bp hike at the last meeting August 26. Note that one MPC member dissented in favor of a hold. The BOK should continue to pull ahead of most Asian central banks with another hike at its November 25 meeting, though rates will remain well below that of most other EM Asia central banks.

India reports September CPI and August IP Tuesday. Inflation is expected at 4.50% y/y vs. 5.30% in August, while IP is expected to rise 11.8% y/y vs. 11.5% in July. If so, inflation would be the lowest since April and nearing the center of the 2-6% target range. WPI will be reported Thursday, which is expected to rise 11.13% y/y vs. 11.39% in August. Yet the RBI just delivered a hawkish surprise last week, keeping rates steady whilst announcing an abrupt end to its bond buying Government Securities Acquisition Program (GSAP) and starting long-term reverse repo auctions to drain liquidity. Next policy meeting is December 7 and no change is expected then.

Singapore reports advance Q3 GDP data Thursday. Growth is expected at 1.1% q/q vs. -1.8% q/q in Q2. The MAS typically meets the same day. With virus numbers still near record high levels, the government recently tightened movement restrictions. As such, the economic outlook remains cloudy and so we expect the MAS to maintain its current accommodative stance at this semiannual policy meeting.

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