EM Preview for the week of October 24, 2021

EM FX was mixed last week. Some EM currencies were able to take advantage of broad-based dollar weakness against the majors, but many EM currencies were the victims of their own mistakes. TRY and BRL were the worst EM performers last week, both down 3-4% against the dollar due to monetary and fiscal policy missteps. RUB was the best performer, helped by a hawkish surprise from the central bank and higher oil prices. With the Fed about to taper and market expectations for Fed lift-off intensifying, we believe the upward trend in U.S. rates and the dollar will continue.

AMERICAS

Brazil reports mid-October IPCA inflation Tuesday. Inflation is expected at 10.11% y/y vs. 10.05% in mid-September. If so, it would be a slight drop from 10.25% y/y posted in September and still well above the 2.25-5.25% target range. COPOM meets Wednesday and is expected to hike rates 125 bp to 7.5%. However, the market is split as nearly a third of the analysts polled by Bloomberg see a 100 bp hike and nearly another third see a 150 bp hike. After Bolsonaro announced further fiscal loosening, we see risks of a hawkish surprise. The swaps market is pricing in nearly 575 bp of tightening over the next twelve months, which we think is probably too much given COPOM's already aggressive tightening. Central budget data for September will be reported Thursday, followed by consolidated budget data Friday.

Mexico reports September trade data Tuesday. A deficit of -$2.54 bln is expected vs. -$3.9 bln in August. Q3 GDP data will be reported Friday, with growth expected at 0.1% q/q vs. 1.5% in Q2. The central bank started the tightening cycle June 24 with a 25 bp hike to 4.25% and followed up with a 25 bp hike August 12 and a 25 bp hike September 30 to put the policy rate at 4.75%. Next policy meeting is November 11 and another 25 bp hike then seems likely. The swaps market is pricing in nearly 250 bp of tightening over the next twelve months, which we think is probably too much given the central bank's dovish leanings.

Chile reports September unemployment, retail sales, and IP Friday. The economic recovery remains strong even as price pressures pick up. CPI rose 5.3% y/y in September, the highest since November 2014 and way above the 2-4% target range. The central bank started the tightening cycle July 14 with a 25 bp hike to 0.75% and followed up with a 75 bp hike August 31 and a 125 bp hike October 13 to put the policy rate at 2.75%. Next policy meeting is December 14 and another large hike then seems likely. The swaps market is pricing in nearly 300 bp of tightening over the next twelve months, which we think is probably too much given the central bank's already aggressive tightening.

Colombia central bank meets Friday and is expected to hike rates 25 bp to 2.25%. However, a handful of analysts polled Bloomberg look for a 50 bp hike. The bank just started the tightening cycle September 30 with a 25 bp hike to 2.0%. The vote then was split 4-3, with the dissents in favor of a 50 bp hike. September CPI came in at 4.51% y/y vs. 4.44% in August. This was the highest since April 2017 and further above the 2-4% target range. As such, we cannot rule out a 50 bp hike this week.

EUROPE/MIDDLE EAST/AFRICA

Turkey reports September trade data Wednesday. A deficit of -$2.60 bln is expected vs. -$4.26 bln in August. While the external accounts are improving, inflation and monetary policy are the primary drivers for the lira for the foreseeable future. After two surprise cuts of 100 bp and 200 bp, the central bank is clearly signaling that growth takes precedence over inflation. Next policy meeting is November 18 and another rate cut is likely then even though inflation is set to accelerate from the plunging lira and rising energy prices. On top of deteriorating fundamentals, tensions with the West are likely to continue rising after President Erdogan said that ambassadors from ten nations (including the U.S., Germany, and France) were no longer welcome in Turkey.

South Africa reports September PPI Thursday. It is expected to pick up a tick to 7.3% y/y. Money, credit, trade, and budget data will be reported Friday. Next policy meeting is November 3 and the bank may start the tightening cycle then with a 25 bp hike to 3.75%. Last week, CPI inflation came in as expected at 5.0% y/y, the highest since May and nearing the top of the 3-6% target range. SARB has been tilting more hawkish but we do not believe the tightening cycle will be an aggressive one given all of its economic woes.

Poland reports October CPI Friday. Headline inflation is expected at 6.4% y/y vs. 5.9% in September. If so, it would be the highest since May 2001 and further above the 1.5-3.5% target. No wonder the central bank just started the tightening cycle October 6 with a surprise 40 bp hike to 0.5%. The bank gave no forward guidance but we expect rate hikes to continue. Next policy meeting is November 3 and another hike is expected. The swaps market is pricing in nearly 200 bp of tightening over the next twelve months, which we think is far too aggressive given the central bank's dovish DNA.

ASIA

Singapore reports September CPI Monday. Headline inflation is expected to remain steady at 2.4% y/y, while core is expected to remain steady at 1.1% y/y. Even though the MAS does not have an explicit inflation target, it recently tightened policy by steepening the slope of its targeted S$NEER trading band. IP will be reported Tuesday and is expected to fall -0.4% m/m vs. 11.2% in August.

Taiwan reports September IP Monday. It is expected to rise 11.65% y/y vs. 13.69% in August. Q3 GDP will be reported Friday, with growth expected at 4.25% y/y vs. 7.43% in Q2. Last week, September export orders came in at 25.7% y/y vs. 17.6%. This was stronger than expected and the highest since June. Along with strong Korean export growth, strong orders suggest that regional trade and activity are not slowing as much as feared.

Korea reports Q3 GDP Tuesday. Growth is expected at 0.6% q/q vs. 0.8% in Q2. October consumer confidence will be reported Wednesday. IP will be reported Thursday and is expected to fall -0.3% m/m vs. -0.7% in August. The central bank started its tightening cycle August 26 with a 25 bp hike to 0.75%. However, it stood pat in October, which supports our view that the tightening cycle will be fairly mild. Next policy meeting is November 25 and a 25 bp hike to 1.0% seems likely.

China reports official October PMI readings Sunday local time. Manufacturing PMI is expected to rise to 49.9 from 49.6 in September, while non-manufacturing PMI is expected at 53.5 vs. 53.2 in September. This should push the composite reading up from 51.7 in September. Reports suggest policymakers have urged local governments to speed up bond issuance in order to help support infrastructure spending and growth. There is a cap for the year at CNY3.65 trln but borrowers have only issued around CNY2.51 trln, leaving an unused quota of around CNY1.14 trln. This suggests that growth is slowing more than desired and that policymakers are back to relying on debt-fueled spending to support the economy. We also expect the PBOC to cut RRR again before year-end.

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