EM Preview for the Week of October 31, 2021

October 31, 2021

EM FX was mixed last week as the dollar staged a broad-based comeback to end the week on a strong note. ZAR, MXN, PLN, and RUB were the worst EM performers last week, while KRW, PHP, THB, and HUF were the best. If the dollar builds on its gains this week as we expect, then EM FX is likely to remain under pressure. With the Fed widely expected to start tapering and the U.S. data likely to remain strong, the combination of higher U.S. interest rates and a stronger dollar will weight on EM and other risk assets.

AMERICAS

Peru reports October CPI Monday. Headline inflation is expected at 5.30% y/y vs. 5.23% in September. If so, it would be the highest since February 2009 and further above the 1-3% target range. The bank started the tightening cycle with a 25 bp hike to 0.5% in August and then followed up with 50 bp hikes in September and October. Next policy meeting is November 11 and another 50 bp hike to 2.0% is expected. Political risk and uncertainty are likely to remain high after President Castillo last week asked congress to nationalize the Camisea gas field and to start the process for constitutional reforms.

Brazil reports October trade data Monday. Central bank minutes will be released Wednesday. Last week, COPOM delivered a 150 bp hike and pledged a similar hike at the December 8 meeting. Markets were disappointed that hike wasn’t bigger and the CDI market is currently pricing in a 200 bp move next. September IP will be reported Thursday and is expected flat m/m vs. -0.7% in August. While tightening so far has been viewed as inadequate by the rates markets, the hikes have clearly taken a toll on the equity market as the Bovespa just entered bear market territory, down more than 20% from the June peak.

Colombia central bank minutes will be released Wednesday. Last Friday, the bank delivered a 50 bp hike to 2.5%. it started the tightening cycle with a 25 bp hike to 2.0% September 30, but inflation risks have risen and necessitated a faster pace of hikes. October CPI will be reported Friday, with headline inflation expected at 4.80% y/y vs. 4.51% in September. If so, it would be the highest since February 2017 and further above the 2-4% target. Next policy meeting is December 17 and another 50 bp hike to 3.0% is expected then.

EUROPE/MIDDLE EAST/AFRICA

Hungary reports September PPI Tuesday. Central bank minutes will be released Wednesday. The bank just delivered a 15 bp hike in October and has promised to continue hiking at that pace for the time being. Inflation continues to run hot at 5.5% y/y in September, the highest since December 2012 and further above the 2-4% target range. Next policy meeting is November 16 and another 15 bp hike to 1.95% is expected. Retail sales and IP will be reported Friday. Sales are expected to rise 3.3% y/y vs. 4.1% in August, while IP is expected at -0.2% y/y WDA vs. +0.6% in August.

Turkey reports October CPI Wednesday. Headline inflation is expected at 20.40% y/y vs. 19.58% in September. If so, it would be the highest since November 2018 and further above the 3-7% target range. Not that it matters since the central bank has cut rates twice in a row with inflation remaining well above target. Next policy meeting is November 18 and another 100-200 bp cut is expected then from the current policy rate of 16%.

National Bank of Poland meets Wednesday and is expected to hike rates 25 bp to 0.75%. However, nearly half of the analysts polled by Bloomberg look for a larger 50 bp hike to 1.0%. October CPI inflation came in last week at 6.8% y/y, the highest since May 2001 and further above the 1.5-3.5% target range. As such, we see risks of a hawkish surprise this week. The bank is already behind the curve and an aggressive move is needed this week to ease market concerns.

Russia reports October CPI Wednesday. Headline inflation is expected at 8.0% y/y vs. 7.4% in September. If so, it would be the highest since February 2016 and further above the 4% target. The central bank hiked rates a larger than expected 75 bp to 7.5% last month and flagged further hikes as Governor Nabiullina said “The chances of the key rate rising and staying elevated for longer are higher than we had assumed in our last forecast.” Next policy meeting is December 17 and a hike of 50-75 bp is expected.

Czech National Bank meets Thursday and is expected to hike rates aggressively. However, the market is split as half the analysts polled by Bloomberg see a 50 bp hike to 2.0% and the other half see a 75 bp hike to 2.25%. The bank started the tightening cycle with a 25 bp hike to 0.75% in August, then followed up with a larger than expected 75 bp hike to 1.5% in September by a 5-2 vote. Governor Rusnok said then that the rate hike debate is now about pace and magnitude, suggesting there is quite a bit of tightening ahead. CPI rose 4.9% y/y in September, the highest since October 2008 and further above the 1-3% target range. As such, we see risks of a hawkish surprise this week. September retail sales will be reported Friday.

ASIA

Korea reports October trade data Monday. Exports are expected to rise 28.5% y/y vs. 16.7% in September, while imports are expected to rise 43.0% y/y vs. 31.0% in September. CPI will be reported Tuesday, with headline inflation expected at 3.3% y/y vs. 2.5% in September. If so, it would be the highest since January 2012 and further above the 2% target. Core inflation is expected at 2.6% y/y vs. 1.9% in September and would be the highest since January 2015. The bank started the tightening cycle with a 25 bp hike to 0.75% in August but then left rates steady at the next meeting in October. The next meeting is November 25 and a 25 bp hike to 1.0% is expected then as price pressures rise. September current account data will be reported Friday.

Caixin reports October manufacturing PMI Monday. It is expected to remain steady at 50.0. Caixin services and composite PMI readings will be reported Wednesday, with services expected to fall two ticks to 53.2. Over this past weekend, official PMI readings were reported. Manufacturing fell to 49.2 vs. 49.7 expected and 49.6 in September, while non-manufacturing fell to 52.4 vs. 53.0 expected and 53.2 in September. This dragged the composite PMI down to 50.8 from 51.7 in September. As the economy continues to slow, we continue to expect another RRR cut in the coming weeks.

Indonesia reports October CPI Monday. Headline inflation is expected at 1.65% y/y vs. 1.60% in September. If so, it would be the highest since December 2020 but still well below the 2-4% target range. Q3 GDP data will be reported Friday, with growth expected at 1.8% q/q vs. 3.3% in Q2. Next policy meeting is November 18 and rates are expected to remain steady at 3.5%. Bloomberg consensus sees steady rates to mid-2022, with the first hike seen in Q3 22 and the second one seen in Q1 23..

Bank Negara Malaysia meets Wednesday and is expected to keep rates steady at 1.75%. CPI rose 2.2% y/y in September, well below the 4.7% peak from April. While the bank does not have an explicit inflation target, falling price pressures should allow it to maintain current rate through much of next year. Bloomberg consensus sees steady rates to mid-2022, with the first hike seen by end-2022. The focus is on growth, as the government just announced a record budget plan for 2022. Spending is set to increase 3%, but some tax hikes and stronger growth led the government to forecast the budget deficit to narrow to -6% of GDP from -6.5% this year.

Philippines reports October CPI and September trade data Friday. Headline inflation is expected at 4.9% y/y vs. 4.8% in September. If so, it would match the cycle high from August that was the highest since December 2018 and further above the 2-4% target range. Next policy meeting is November 18 and rates are expected to remain steady at 2.0%. Bloomberg consensus sees steady rates to mid-2022, with the first hike seen in Q4 22. Exports are expected to rise 5.8% y/y vs. 17.6% in September, while imports are expected to rise 18.7% y/y vs. 30.8% in September.

Thailand reports October CPI Friday. Headline inflation is expected at 1.85% y/y vs. 1.68% in September. If so, it would be the highest since May but still well within the 1-3% target range. Next policy meeting is November 10 and rates are expected to remain steady at 0.5%. While the economy is set to reopen as the pandemic eases, the bank is expected to maintain rates at their current accommodative level through all of 2022.

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