While the global economic backdrop remains favorable for EM, rising geopolitical risks will be a growing headwind. The EM VIX surged above 18% Friday as Iran tensions escalated, the highest since early December. With these tensions likely to persist, EM may remain under some pressure for the time being. High oil prices are positive for the exporters in Latin America and the Middle East but negative for the importers in Asia and Eastern Europe.
Chile reports December trade data Tuesday. December CPI will be reported Wednesday and is expected to rise 3.1% y/y vs. 2.7% in November. If so, inflation would be the highest since September 2018 and above the 3% target though within the 2-4% target range. Next policy meeting is January 29. It’s a tough call but we think the central bank will err on the side of caution and keep rates steady at 1.75%.
Brazil reports November IP Thursday, which is expected to contract -0.6% y/y vs. +1.0% in October. December IPCA inflation will be reported Friday. Inflation is expected to rise to 4.24% y/y from 3.27% in November. If so, it would be the highest since May and near the 4.25% target but still well within the 2.75-5.75% target range. Note that the target drops to 4% +/- 1.5 percentage points in 2020. Next COPOM meeting is February 5 and no change is expected then as we believe rates have bottomed at the current 4.5%.
Mexico reports December CPI Thursday. Inflation is expected to ease to 2.76% y/y from 2.97% in November. If so, it would be the lowest since August 2016 and moves further below the 3% target. Next policy meeting is February 13 and a 25 bp cut to 7.0% is expected then. November IP will be reported Friday, which is expected to contract -1.6% y/y vs. -3.0% in October.
Peru central bank meets Thursday and is expected to keep rates steady at 2.25%. CPI rose 1.90% y/y in December, remaining in the bottom half of the 1-3% target range. The bank just cut rates 25 bp at the November meeting and so another cut this month seems too soon. The economy remains sluggish and so we believe the bank will leave the door open to further easing this year if needed.
Hungary reports November retail sales Tuesday, which are expected to rise 5.9% y/y vs. 6.2% in October. IP and trade will be reported Wednesday. IP is expected to rise 8.0% y/y vs. 6.4% in October, while the trade surplus is expected to widen to EUR663 mln from EUR479 mln in October. Central bank minutes will also be released Wednesday. Next policy meeting is January 28 and no change is expected then.
Poland reports December CPI Tuesday, which is expected to rise 2.8% y/y vs. 2.6% in November. If so, inflation would be the highest since August and nearing the top of the 1.5-3.5% target range. The National Bank of Poland then meets Wednesday and is expected to keep rates steady at 1.5%. Even though price pressures have been creeping up, officials are more concerned about growth than inflation and so we take them at their word of steady rates through 2021.
South Africa reports November manufacturing production Thursday, which is expected to contract -1.9% y/y vs. -0.8% in October. The economy remains weak even as inflation has fallen towards the bottom of the 3-6% target range. Next SARB meeting is January 16 and we think a 25 bp cut to 6.25% is possible then.
Bank of Israel meets Thursday and is expected to keep rates steady at 0.25%. CPI rose only 0.3% y/y in November, well below the 1-3% target range. The economy has taken a back seat to politics ahead of the March 2 election, as Prime Minister Netanyahu just asked the Knesset for immunity from prosecution. Essentially, he is banking on winning a majority that will grant his request.
Caixin reports December China services and composite PMI readings Monday. Foreign reserves will be reported Tuesday. December CPI and PPI will be reported Thursday, which are expected at -0.4% y/y and +4.7% y/y, respectively. Last week, the PBOC cut reserve requirements 50 bp and an official said it has room to cut further. Monetary policy will clearly remain accommodative this year.
Philippines reports December CPI. Inflation is expected to pick up to 2.0% y/y from 1.3% in November. If so, inflation would be right at the bottom of the 2-4% target range. Next central bank meeting is February 6. If price pressures remain low, a 25 bp cut to 3.75% is likely then. Officials are keeping an eye on oil, though Governor Diokno said prices would have to rise to and persist near $90 per barrel to impact the bank’s inflation forecasts.
Taiwan reports December CPI and trade data Tuesday. Inflation is expected to pick up to 0.8% y/y from 0.59% in November, while exports are expected to rise 3.1% y/y and imports by 6.0% y/y. While the central bank does not have an explicit inflation target, low price pressures should allow it to keep rates steady in 2020 since the economy remains weak.