Brown Brothers Harriman & Co.

01/23/2022 | News release | Distributed by Public on 01/23/2022 20:33

EM Preview for the Week of January 23, 2022

EM FX was able to post mixed performances last week despite the resurgent dollar and increasing risk-off impulses. CLP, ZAR, and BRL were the best performers while RUB, HUF, and MXN were the worst. With the Fed expected to deliver a hawkish hold this week that sets up March liftoff and perhaps sooner than expected balance sheet runoff, we believe EM is likely to remain under pressure. USD/JPY and EUR/CHF are starting off the week near recent lows, suggesting risk-off impulses remain intact and likely to weigh on EM.

AMERICAS

Mexico reports mid-January CPI data Monday. Headline inflation is expected at 7.12% y/y vs. 7.45% in mid-December. If so, it would be the first deceleration since mid-August but would still remain well above the 2-4% target range. Banco de Mexico delivered a hawkish surprise at its last meeting December 16, hiking 50 bp to 5.5% vs. 25 bp expected. Next policy meeting is February 10. If inflation data are still showing signs of slowing, then we think the bank moves back to a 25 bp hike. Swaps market sees the policy rate peaking around 7.5% by year-end and remaining there through 2023. December trade data will be reported Thursday.

Brazil reports mid-January IPCA inflation and December current account data Wednesday. Headline inflation is expected at 10.06% y/y vs. 10.42% in mid-December. If so, it would be the second straight deceleration but would still remain well above the 2-5% target range. COPOM delivered the expected 150 bp hike to 9.25% at its last meeting December 8 and flagged a similar hike at the next meeting February 2. Swaps market sees the policy rate peaking around 12.5% by mid- year and then falling to 12.0% by year-end. Central government budget data for December will be reported Friday.

Chile central bank meets Wednesday and is expected to hike rates 125 bp to 5.25%. However, the market is split as nearly half the analysts polled by Bloomberg see a larger 150 bp hike. The bank delivered the expected 125 bp hike to 4.0% at its last meeting December 14. It warned then that the policy rate will be raised above neutral in the short-term. CPI rose 7.2% y/y in December, the highest since November 2008 and further above the 2-4% target range. As such, we do see risks of a hawkish surprise this week. Swaps market sees the policy rate peaking between 6.75-7.0% by mid-year-end and then falling to between 5.75-6.0% by year-end. Governor Marcel has been tapped to be Finance Minister but we expect his replacement at the bank to be equally market-friendly in order to maintain investor confidence.

Colombia central bank meets Friday and is expected to hike rates 75 bp to 3.75%. However, a couple of analysts look for a larger 100 bp move. The bank delivered the expected 50 bp hike to 3.0% at its last meeting December 17. However, the vote was spilt 4-3, with the three dissents in favor of a larger 75 bp hike. CPI rose 5.62% y/y in December, the highest since December 2016 and further above the 2-4% target range. As such, we do see risks of a hawkish surprise this week followed by more hikes over the course of 2022. Swaps market sees the policy rate at 5.75% by mid-year.

EUROPE/MIDDLE EAST/AFRICA

Poland reports December real retail sales Monday. Sales are expected at 17.2% m/m vs. -1.0% in November. With the economy strong and price pressures rising, the central bank moving further behind the curve. Governor Glapinksk finally seems to get this and last Friday said that "In light of the latest data, I believe that central bank interest rates should rise more than the market predicts. I'll seek to persuade members of the Monetary Policy Council to extend the rate-hike cycle this year." The bank delivered the expected 50 bp hike to 2.25% at its last meeting January 4. Next policy meeting is February 8 and another 50 bp hike to 2.75% seems likely. Swaps market sees the policy rate peaking between 3.25-3.50% by mid-year and remaining there through both 2022 and 2023.

National Bank of Hungary meets Tuesday and is expected to hike the base rate 30 bp to 2.70%. The bank is also expected to hike its 1-week deposit rate 30 bp to 4.30% at its week tender Thursday. CPI rose a higher than expected 7.4% y/y in both November and December, the highest since December 2007 and just below the top of the 3-6% target range. The bank delivered a 30 bp hike in the base rate to 2.40% at its last meeting December 14, less than the 40 bp expected. Swaps market sees the base rate peaking around 3.35% by mid-year, which we think understates the central bank's need to tighten more aggressively.

Reserve Bank of South Africa meets Thursday and is expected to hike rates 25 bp to 4.0%. CPI rose a higher than expected 5.9% y/y in December, the highest since March 2017 and just below the top of the 3-6% target range. We had thought back-to-back hikes was unlikely but the higher than expected December inflation reading of 5.9% y/y may force the bank's hand. Its model suggests quarterly 25 bp hike in 2022, 2023, and 2024, which strikes us as too aggressive given how weak the economy remains. December budget data will be reported Friday. Strong revenues and limited expenditures have seen the 12-month deficit narrow over the course of 2021. Finance Minister Godongwana will deliver his first budget speech February 23 and is likely to maintain the path of fiscal consolidation set forth in the medium-term budget outlook from November.

ASIA

Singapore reports December CPI Monday. Headline inflation is expected at 3.7% y/y vs. 3.8% in November, while core inflation is expected at 1.8% y/y vs. 1.6% in November. While the MAS does not have an explicit inflation target, rising price pressures led it to tighten policy at its October policy meeting with a modest steepening of its targeted S$NEER trading band. With the regional growth outlook a bit more uncertain in light of the slowdown in mainland China, we suspect the MAS will remain on hold at its next policy meeting in April. IP will be reported Wednesday and is expected at 11.5% y/y vs. 14.6% in November..

Taiwan reports December IP Monday. It is expected at 8.85% y/y vs. 12.19% in November. Export orders slowed to 12.1% y/y in December, the lowest since October 2020 and warns of slowing activity as we move through H1. Q4 GDP data will be reported Thursday and growth is expected at 3.8% y/y vs. 3.7% in Q3. Meanwhile, tensions with the mainland remain high after China sent 39 aircraft into Taiwan's air defense zone over the weekend, the largest incursion since last October. Taiwan lawmakers this month passed an extra spending bill of TWD237 bln ($8.6 bln) for defense over the next five years to go on top of a record TWD471.1 bln ($17 bln) annual military budget.

Korea reports Q4 GDP data Tuesday. Growth is expected at 1.1% q/q vs. 0.3% in Q3. In y/y terms, growth is expected to slow a tick to 3.9%. However, the government just submitted an extra budget worth KRW14 trln should provide fiscal stimulus that will help offset the monetary tightening that is under way. BOK has hiked rates 75 bp since August and the swaps market sees another 75 bp of tightening this year that would take the policy rate to 2.0% by year-end. December IP will be reported Friday and is expected at 0.3% m/m vs. 5.1% in November.

Philippines reports December trade and Q4 GDP data Thursday. Exports are expected at 6.5% y/y vs. 6.6% in November, while imports are expected at 29.0% y/y vs. 36.8% in November. GDP growth is expected at 3.5% q/q vs. 3.8% in Q3. In y/y terms, growth is expected to slow to 6.4% from 7.1% in Q3. Despite solid growth, inflation decelerated four straight months to 3.6% y/y in December, the lowest since December 2020 and back in the 2-4% target range. This will allow the central bank to maintain accommodative policy for now in the hopes of offsetting regional slowdown impulses coming from China.

China reports January official and Caixin PMI readings Sunday local time. Official manufacturing PMI is expected at 49.7 vs. 50.3 in December, while non-manufacturing is expected at 49.8 vs. 52.7 in December. If so, the composite would drop sharply from 52.2 in December. Elsewhere, Caixin manufacturing PMI stood at 50.9 in December. With China forced to follow strict movement restriction due to the ineffectiveness of the Sinovac vaccine, we see downside risks to the economic numbers as we move into 2022. On the positive side, policymakers will remain in stimulus mode as a result.