EM Preview for the Week of September 25, 2022

EM came under severe pressure last week as the major central banks continued to tighten policy aggressively. CLP and the CEE currencies were hit the hardest while MSCI EM tumbled -4% in its worst week since mid-June. With global growth also slowing significantly, the backdrop for EM and other risk assets remains challenging. We expect the dollar to continue strengthening as Fed tightening expectations remain elevated.

AMERICAS

Mexico reports July GDP proxy Monday. Growth is expected at 1.60% y/y vs,.1.56% in June. August trade data will be reported Tuesday. Banco de Mexico meets Thursday and is expected to hike rates 75 bp to 9.25%. At the last meeting August 11, it hiked 75 bp and said it "will assess the magnitude of the upward adjustments in the reference rate for its next policy decisions based on the prevailing conditions." While some felt this would allow the bank to slow its pace of hiking, the data have not warranted it. CPI rose 8.70% y/y in September, the highest since December 2000 and further above the 2-4% target range. The swaps market is pricing in 200 bp of tightening over the next 6 months that would see the policy rate peak near 10.5%.

Brazil reports July current account and FDI data Monday. COPOM minutes will be released and mid-September IPCA inflation will be reported Tuesday. At last week's meeting, rates were left unchanged at 13.75%, as expected. This was the first hold after 12 straight hikes but the vote was split 7-2 with the dissents in favor of a 25 bp hike. Minutes may offer some clues to future policy, though most expect the tightening cycle has ended. Inflation is expected at 8.15% y/y vs. 9.60% in mid-August. If so, it would be the lowest since mid-June 2021 but still above the 2-5% target range. August central government budget data will be reported Thursday and a -BRL51.2 bln primary deficit is expected. Consolidated budget data will be reported Friday and a -BRL27.3 bln primary deficit is expected.

Chile reports August unemployment Thursday and is expected to rise a tick to 8.0%. IP and retail sales will be reported Friday, with IP expected at -2.8% y/y vs. -5.1% in July and sales expected at -11.9% y/y vs. -10.9% in July. The economy is clearly slowing under the weight of monetary tightening and lower copper prices. The central bank delivered a hawkish surprise September 6 with a 100 bp hike to 10.75% vs. 75 bp expected. However, the vote was split as one member favored a 75 bp move and one favored a 125 bp move. The bank set up the possible end of the tightening cycle, noting that the policy rate now stands at "the maximum level considered in the central scenario of the September Monetary Policy Report. Future movements of the policy rate will depend on the evolution of the macroeconomic scenario and its implications for the convergence of inflation to the target." Next meeting is October 12 and much will depend on whether September CPI accelerates from the 14.1% y/y posted in August. The swaps market is pricing in 100 bp of tightening over the next 6 months that would see the policy rate peak near 11.75%.

Colombia central bank meets Friday and is expected to hike rates 150 bp to 10.5%. At the last policy meeting July 29, the bank hiked 150 bp to 9.0%. Governor Villar said then that "The excess of demand continues, with economic activity that remains strong. World inflation has continued to increased, and acquired a greater persistence." Since then, CPI picked up to 10.84% y/y in August, the highest since April 1999 and further above the 2-4% target range. The swaps market is pricing in 300 bp of tightening over the next 6 months that would see the policy rate peak near 12.0%.

EUROPE/MIDDLE EAST/AFRICA

National Bank of Hungary meets Tuesday and is expected to hike the base rate 100 bp to 12.75%. However, a third of the analysts polled by Bloomberg see a smaller 75 bp move. At the last policy meeting August 30, the bank hiked rates 100 bp to 11.75% and said it needs to continue hiking due to inflation risks. It also raised required reserves ratios for commercial banks at that meeting. CPI rose 15.6% y/y in August, the highest since May 1998 and further above the 2-4% target range. Of note, the bank should also raise its 1-week deposit rate at its weekly tender Thursday to match the hike in the base rate.

Czech National Bank meets Thursday and is expected to keep rates steady at 7.0%. At the last meeting August 4, the bank delivered a dovish surprise and kept rates steady at 7.0% vs. an expected 25 bp hike. The vote was 5-2, with the two dissents in favor of a 100 bp hike. New Governor Michl said that curbing inflation is the bank's top priority, but shifted its policy framework to get inflation back to target within 18-24 months vs. 12-18 months previously. The swaps market sees steady rates over the next 12 months, followed by the start of an easing cycle over the subsequent 12 months. A 7% nominal policy when inflation is 17.2% doesn't seem to be restrictive enough and so we see upside risks to the policy rate.

Poland reports September CPI Friday. Headline is expected at 16.4% y/y vs. 16.1% in August. If so, it would be the highest since October 1996 and further above the 1.5-3.5% target range. At the last policy meeting September 7, the bank hiked rates 25 bp to 6.75%. Before that meeting, Governor Glapinski said that he saw only one or two more 25 bp hikes in this cycle. The next policy meeting is October 5 and another 25 bp hike to 7.0% is expected. The swaps market is pricing in 50 bp of tightening over the next 12 months that would see the policy rate peak near 7.25%. Here too, we see upside risks to the policy rate.

ASIA

Singapore reports August IP Monday. IP is expected at -0.6% y/y vs. 0.6% in July. Even though the economy is slowing, August CPI came in higher than expected last week at 7.5% y/y, the highest since June 2008. While the MAS does not have an explicit inflation target, ongoing price pressures should lead to another round of tightening at its next policy meeting in October. It has already tightened four times this past year, twice at the regularly scheduled semiannual meetings and twice intra-meeting in January and July.

Bank of Thailand meets Wednesday and is expected to hike rates 25 bp to 1.0%. At the last meeting August 10, it started the tightening cycle with a 25 bp hike and the vote was 6-1. The pace of tightening is likely to be cautious as the bank noted "The committee views that the policy rate should be normalized to the level that is consistent with sustainable growth in the long term. Monetary policy normalization should be done in a gradual and measured manner consistent with the growth and inflation outlook in the period ahead." Assistant Governor Piti added "Too big an increase may raise bad debts and put pressure on banks. There is no need to rush." The swaps market is pricing in 225 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.

China reports official September PMI readings Friday. Manufacturing is expected at 49.6 vs. 49.4 in August, while non-manufacturing is expected at 52.3 vs. 52.6 in August. If so, the composite should fall slightly from 51.7 in August. Caixin reports its manufacturing PMI that same day and is expected to fall a tick to 49.4. With the economic outlook still weak, the PBOC is likely to continue easing. Interest rate differentials have moved dramatically in the dollar's favor. This has not only halted foreign inflows, but encouraged domestic outflows as well. Bloomberg reports that domestic holdings of foreign debt through the Bond Connect trading link between the mainland and Hong Kong totaled CNY301 bln ($42.6 bln) at the end of August, more than triple what is was three months earlier. These outflows should continue and put further downward pressure on the yuan.

Reserve Bank of India meets Friday and is expected to hike the repo rate 50 bp to 5.90%. At the last policy meeting August 5, the bank hiked the repo rate 50 bp to 5.40% vs. 35 bp expected. Governor Das said then that "Inflationary pressures are broad based and core inflation remains elevated," noting that inflation will remain above the 2-6% target band for the current FY ending in March. He stressed that "It's now basically a whatever-it-takes approach going into third year in succession." CPI rose 7.00% y/y in August, down from the 7.79% peak in April but still above the 3-6% target range. The swaps market is pricing in 135 bp of tightening over the next 6 months that would see the policy rate peak near 6.75%.