EM should continue to benefit from the generalized improvement in the global backdrop. Trade tensions have eased whilst the risks of a hard Brexit have fallen, at least for now. Yet recent developments in some major EM countries underscores how important it is for investors to differentiate between the strong credits and the weak ones. For instance, South Africa, Hong Kong, Argentina, and Chile all come with idiosyncratic risks.
Chile reports September GDP proxy Monday, which is expected to rise 3.5% y/y vs. 3.7% in August. Retail sales will be reported Tuesday and are expected to rise 2.0% y/y vs. 2.3% in August. October trade will be reported Thursday. CPI will be reported Friday and is expected to rise 2.2% y/y vs. 2.1% in September. Meanwhile, protests continue and press reports suggest President Pinera is backing down from plans to cut corporate taxes.
Brazil COPOM releases minutes Tuesday. At that meeting, it cut rates 50 bp to 5.0% and signaled another 50 bp cut to 4.5% at the December 11 meeting. CDI market is pricing in a last 25 bp cut at the February 5 meeting. October IPCA inflation will be reported Thursday and is expected to rise 2.53% y/y vs. 2.89% in September. If so, it would be the lowest since August 2017 and moves further below the 2.75-5.75% target range.
Colombia reports October CPI Tuesday and is expected to rise 3.85% y/y vs. 3.82% in September. The central bank just kept rates steady at 4.25% last week and ended its foreign reserve accumulation program. Governor Echavarria sounded hawkish, warning that it doesn’t have much room to lower interest rates and that his base case is steady rates. That is our base case for now too.
Mexico reports October CPI Thursday and inflation is expected to remain steady at 3.0% y/y. If so, it would remain right at the central bank’s target. Next policy meeting is November 14 and another 25 bp cut to 7.5% is expected. GDP contracted -0.4% y/y in Q3 vs. -0.8% in Q2, and so policymakers will be doing their utmost to stimulate growth.
Peru central bank meets Thursday and is expected to keep rates steady at 2.5%. The central bank cut rates 25 bp back in August but has remained on hold since. CPI rose 1.9% y/y in October, just below the 2% target but well within the 1-3% target range.
Turkey reports October CPI Monday and is expected to rise 8.6% y/y vs. 9.3% in September. The central bank just released its quarterly inflation report and cut its 2019 inflation forecast modestly whilst keeping its 2020 forecast unchanged. This was uncharacteristically cautious, but the bank is still likely to deliver another big cut at the next meeting December 12. Meanwhile, Fitch just moved the outlook on its BB- rating from negative to stable. We disagree, as our own ratings model has Turkey at B/B2/B.
Czech Republic reports September industrial and construction output and trade Wednesday. Czech National Bank meets Thursday and is expected to keep rates steady at 2.0%. September retail sales will be reported earlier that day and are expected to rise 7.1% y/y vs. 1.4% in August. Inflation is easing even as the economy is showing signs of slowing and so we think the central bank will move to an easing bias in 2020.
Hungary reports September retail sales Wednesday, which are expected to rise 6.0% y/y vs. 5.8% in August. The central bank also releases its minutes that day. October CPI will be reported Friday and inflation is expected to remain steady at 2.8% y/y. If so, it would remain below the 3% target and supports the bank’s efforts to take back some of its recent tightening measures. September IP will also be reported Friday and is expected to rise 5.4% y/y WDA vs. 2.7% in August.
National Bank of Poland meets Wednesday and is expected to keep rates steady at 1.5%. CPI rose 2.5% y/y in October, right at the bank’s target. As such, we see no need to change rates for the foreseeable future. The bank has signaled steady rates well into 2021.
Russia reports October CPI Wednesday and is expected to rise 3.8% y/y vs. 4.0% in September. If so, inflation would move below the 4% target for the first time since last November. The bank just delivered a bigger than expected 50 bp cut to 6.5%. Next policy meeting is December 13 and another cut is expected then.
South Africa reports September manufacturing Thursday, which is expected to contract -0.9% y/y vs. -1.8% in August. On Friday, Moody’s cut the outlook on its Baa3 rating from stable to negative. We believe a downgrade to Ba1 (or lower) was warranted and so this simply delays the inevitable until early next year, perhaps after another disappointing budget statement in February.
Malaysia reports September trade Monday. Bank Negara then meets Tuesday and is expected to keep rates steady at 3.0%. About a third of the analysts polled by Bloomberg look for a 25 bp cut to 2.75%. CPI rose 1.1% y/y in September, the lowest since May. While the central bank does not have an explicit inflation target, low price pressures will allow it to cut rates if the economy slows significantly.
Philippines reports October CPI Tuesday and is expected to rise 0.8% y/y vs. 0.9% in September. If so, inflation would be the lowest since April 2016. Next policy meeting is November 14 and another 25 bp cut to 3.75% is expected. September trade will be reports Wednesday. Q3 GDP will be reported Thursday and growth is expected at 6.0% y/y vs. 5.5% in Q2.
Bank of Thailand meets Wednesday and is expected to cut rates 25 bp to 1.25%. October CPI rose a lower than expected 0.11% y/y, the lowest since June 2017 and moves further below the 1-4% target range. Officials are worried about the strong baht and rate cuts should help offset that impact.
China reports October trade Friday. Exports are expected to contract -4.5% y/y and imports by -8.0% y/y. October CPI and PPI will be reported Saturday local time, with the former expected to rise 3.3% y/y and the latter to fall -1.5% y/y. The rise in CPI inflation is due in large part to surging pork prices. PBOC is much more concerned about supporting growth than fighting inflation right now.