EM starts the week off in the familiar position of coming under pressure. The strong US jobs report has all but cemented a Fed lift-off this month, helping the dollar to claw back some of its post-ECB losses. Meanwhile, commodities continue to sink under the prospects of increased supply. Brent oil in particular is making new cycle lows after last week’s OPEC meeting saw the quota system basically scrapped. These factors all continue to conspire against EM assets in a broad fashion.
Within EM, idiosyncratic risks remain in play. USD/ZAR made a new all-time high today near 14.55, with sentiment souring after S&P last week moved the outlook on its BBB- rating from stable to negative. We think the rating will be cut to sub-investment grade in 2016. Moody’s affirmed Turkey’s BBB- rating, but kept the negative outlook in place. Here too, we see a cut to sub-investment grade in 2016. Elsewhere, USD/COP made a new all-time high today near 3272. We expect this trend to widen out to other EM currencies in the coming weeks.
Taiwan reports November CPI Tuesday, and is expected to rise 0.36% y/y vs. 0.31% in October. The central bank does not have an explicit inflation target, but low price pressures should allow the easing cycle to continue at the December meeting. November trade data reported today was much weaker than expected (with exports -17% y/y), underscoring downside risks to growth ahead.
China reports November trade Tuesday. Exports are expected at -5% y/y, while imports are expected at -11.9% y/y. China then reports November CPI and PPI Wednesday, with the former expected to rise 1.4% y/y and the latter expected to contract -6.0% y/y. On Saturday, China reports November retail sales and IP. The former is expected to rise 11.1% y/y, while the latter is expected to rise 5.7% y/y. The economy appears to be stabilizing, but downside risks remain and so we expect further PBOC easing in 2016.
Hungary reports October IP and November CPI Tuesday. The former is expected to rise 8.7% y/y WDA, while the latter is expected to rise 0.7% y/y. It then reports October trade Thursday. The central bank remains in dovish mode, using unconventional measures to boost the economy. Inflation is well below the 2-4% target range. The next policy meeting is December 15.
Turkey reports October IP Tuesday, and is expected to rise 3.9% y/y vs.2.8% in September. It then reports October current account data (-$200 mln consensus) and Q3 GDP on Thursday (2.8% y/y consensus). The sluggish economy has brought forth new calls by the government for the central bank to resume easing. However, CPI rose 8.1% y/y in November, the highest since December 2014 and well above the 3-7% target range. The next policy meeting is December 22.
South Africa reports Q3 current account data and October manufacturing production Tuesday. The deficit is expected at-4% of GDP vs. -3.1% in Q2, while production is seen at -0.5% y/y vs. +0.9% in September. It then reports November CPI and October retail sales Wednesday, with the former expected to rise 4.8% y/y and the latter expected to rise 2.5% y/y. Given the weak economy and fairly low inflation, we do not think SARB will hike at its next policy meeting January 28.
Czech Republic reports November CPI Wednesday, and is expected to rise 0.4% y/y vs. 0.2% in October. Deflation risks may be easing a bit, but they remain significant. The target range for inflation is 1-3%. The next policy meeting is December 16.
Brazil reports November IPCA consumer inflation Wednesday, and is expected to rise 10.41% y/y vs. 9.93% in October. It then reports the first preview for December IGP-M wholesale inflation Thursday, and is expected to rise 0.95% m/m. If sustained for the month, this would translate into 11% y/y vs. 10.7% in November. The most recent COPOM minutes suggest that rate hikes may resume. We agree, as the inflation trajectory is likely to worsen in the coming months. Next COPOM meeting is January 20, and a rate hike then is possible.
Mexico reports November CPI Wednesday, and is expected to rise 2.28% y/y vs. 2.48% in October. It then reports October IP Friday, and is expected to rise 1.0% y/y vs. 1.7% in September. There is a big debate in the markets over whether Banxico will hike rates December 17 if the Fed hikes December 16. We do not think so, not with inflation making new historic lows.
Malaysia reports October IP Thursday, and is expected to rise 4.8% y/y vs. 5.1% in September. Manufacturing sales will also be reported that day. The economy remains in decent shape, but faces significant headwinds ahead. For now, the central bank is on hold but could lean more dovish in 2016 if the economy slows further.
Colombia reports Q3 GDP Thursday, and is expected to rise 3.2% y/y vs. 3.0% in Q2. Central bank minutes will be released Friday. At this meeting, the bank surprised markets with a 25 bp hike instead of the expected 50 bp. While the tightening cycle remains alive, the minutes may reveal if a more dovish pace should be expected. CPI rose sharply to 5.9% y/y in November, furthest above the 2-4% target range for this cycle.
Bank of Korea meets Thursday and is expected to keep rates steady at 1.5%. The last move was a 25 bp cut to 1.5% back in June. CPI rose 1.0% in November, well below the 2.5-3.5% target range. However, the bank for now seems to be letting fiscal policy and a weak won do the heavy lifting. We cannot rule out further easing in 2016 if the economy remains sluggish.
Peru’s central bank meets Thursday and is expected to hike rates 25 bp to 3.75%. The last move was a 25 bp hike to 3.5% back in September. The bank has signaled a cautious pace of tightening, but the 25 bp per quarter may have to be accelerated after CPI rose sharply to 4.2% y/y in November, furthest above the 1-3% target range for this cycle.
Russia’s central bank meets Friday and is expected to keep rates steady at 11.0%. However, the market is split. Of the 28 analysts polled by Bloomberg, 15 see no change, 12 see a 50 bp cut to 10.5%, and 1 sees a 100 bp cut to 10%. The last move was a 50 bp cut to 11% back in July. For this meeting, we are in the steady policy camp, especially with the ruble weakening to levels not seen since September. Russia also reports November trade Friday.
India reports October IP Friday. The economic recovery continues, but price pressures are rising and so we think further RBI easing will be modest. Late Friday, a government panel proposed a unified sales tax in the 16.9-18.9% range, which also includes a “sin, demerit rate” of around 40% on luxury goods and tobacco products. This would put more upward pressure on inflation. Next Monday, India reports November CPI and WPI.