EM Preview for the Week Ahead

EM currencies benefited from another week of broad-based dollar weakness. However, divergences continue to be seen within EM. The worst performers were BRL, ARS, and TRY, all down against the dollar even as most of EM gained. As the election gets closer and uncertainty regarding the US political outlook rises, we believe EM will be subject to ongoing bouts of volatility and risk off impulses.

AMERICAS

Colombia reports September CPI Monday. Headline inflation is expected to decelerate to 1.77% y/y from 1.88% in August. If so, it would be the lowest since November 2013 and further below the 2-4% target range. At its last policy meeting September 25, the bank cut rates 25 bp to 1.75% and said future decisions would be data dependent. The data continue to come in weak and lower oil prices will add to the headwinds. Next policy meeting is October 30 and another 25 bp cut to 1.5% is likely.

Chile reports September trade Wednesday. CPI will be reported Thursday and is expected to accelerate to 2.8% y/y from 2.4% in August. If so, it would be the highest since May but still in the bottom half of the 2-4% target range. At its last policy meeting September 1, the central bank signaled steady rates for the next two years and added it may take further measures if needed. However, the bank saw signs of a rebound in retail and manufacturing. Next policy meeting is October 15 and the bank is likely to remain in wait and see mode then and keep rates steady at 0.5%.

Peru central bank meets Wednesday and is expected to keep rates steady at 0.25%. CPI rose 2.26% y/y in September, the highest since June 2019 and in the upper half of the 1-3% target range. At its last meeting September 10, the bank said it sees inflation below target this year and next, and pledged to keep policy “strongly expansive” for a prolonged period. As such, we do not think it will be concerned by the recent uptick in price pressures.

Mexico reports September CPI Thursday. Headline inflation is expected to rise 4.06% y/y vs. 4.05% in August. If so, it would be the highest since May 2019 and remain above the 2-4% target range. Banco de Mexico minutes will also be released that day. It cut rates 25 bp to 4.25% at that meeting and consensus sees one more cut to 4.0% in Q4.  Overall, the economy remains very weak and that is why we think the easing cycle may be extended into 2021.  Lower oil prices are another headwind. Next policy meeting is November 12 another 25 bp cut is expected then.

Brazil reports August retail sales Thursday. Sales are expected to rise 5.6% y/y vs. 5.5% in July. September IPCA inflation will be reported Friday and is expected to rise 3.03% y/y vs. 2.44% in August. If so, it would be the highest since March but still in the bottom half of the 2.5-5.5% target range. The economy is starting to pick up more but overall remains quite weak.  No wonder the central bank issued its new dovish forward guidance at the last meeting.  Consensus sees the tightening cycle beginning in Q2 2021 but we think it will much later than that.  Next policy meeting is October 28 and no change is expected then.

 

EUROPE/MIDDLE EAST/AFRICA

Turkey reports September CPI Monday. Headline inflation is expected to accelerate to 12.13% y/y from 11.77% in August. If so, it would be the highest since June and further above the 3-7% target range. After the surprise hike last month, the central bank has continued to do backdoor tightening and has boosted the average cost of funds to 11.32%, above the old ceiling of 11.25% but still well below the new ceiling of 13.25%.  Next policy meeting is October 22 and another outright rate hike is possible then if the lira continues to weaken.

Hungary reports August retail sales Monday. Sales are expected to rise 1.6% y/y vs. 0.4% in July. August IP will be reported Tuesday and is expected to fall -3.2% y/y WDA vs. -7.7% in July. Central bank minutes will be released Wednesday and should be very interesting. After keeping rates steady at its regular meeting September 22, the bank surprised markets with a 15 bp emergency hike just two days later.  Next policy meeting is October 20 and we cannot rule out further tightening if pressure on the forint resumes. September CPI will be reported Thursday and is expected to remain steady at 3.9% y/y. If so, it would remain the highest since March and near the top of the 2-4% target range. August trade will be reported Friday.

Russia reports September CPI Tuesday. Headline inflation is expected to accelerate to 3.7% y/y from 3.6% in August. If so, it would be the highest since October 2019 and closer to the 4% target. After a smaller than expected 25 bp cut to 4.25% in July, the bank kept rates steady in September, as expected. Next policy meeting is October 23 and no change is expected then either. Despite the negative impact of lower oil prices on the economy, we think ruble weakness argues against a rate cut anytime soon.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. The bank has kept rates on hold at 0.10% since its last 40 bp cut in May.  It has signaled rates will remain low for the foreseeable future.  Minutes will be released Friday. September CPI rose 3.0% y/y and remains in the upper half of the 1.5-3.5% target range.

 

ASIA

Thailand reports September CPI Monday. Headline deflation is expected to worsen a bit to -0.55% y/y from -0.50% in August. If so, it would be the seventh straight month of deflation and move further below the 1-4% target range. Next Bank of Thailand meeting is November 18 and rates are likely to be kept steady at 0.5%. The bank has been on hold since its last 25 bp cut back in May.  Governor Veerathai stepped down at the end of September and speculation is growing that his successor Sethaput will deliver a cut upon taking the post.  At its last meeting September 23, Assistant Governor Titanun said policy would remain accommodative but noted that fiscal stimulus would bear the load for now.

Singapore reports August retail sales Monday. Headline sales are expected to contract -5.8% y/y and ex-autos by -6.0% y/y. Advance Q3 GDP will be reported sometime over the next week and is expected to rise 33.1% SAAR vs -42.9% in Q2. The MAS usually meets on the same day.  We expect no change in policy at this semiannual meeting, as policymakers have signaled that fiscal policy will carry much of the load going forward. Its last policy was moved up from April to March 30 and policy was eased then by reducing the slope of the S$NEER band to zero appreciation starting at the prevailing level. The MAS also eased at the October 2019 meeting by reducing the slope of the S$NEEER slightly.

Korea reports September CPI Tuesday. Headline inflation is expected to decelerate a tick to 0.6% y/y. If so, it would move further below the 2% target. Next Bank of Korea meeting is and rates are likely to be kept steady at 0.5%. At its last meeting, the bank kept rates steady while cutting its GDP forecast for this to -1.3% from -0.2% previously. Governor Lee said that “There is still room in the rate policy, but we’ll be careful,” adding the bank must weigh the benefits and side-effects from cutting rates again. August current account data will be reported Thursday.

Philippines reports September CPI Tuesday. Headline inflation is expected to fall a tick to 2.3% y/y. If so, it would be the lowest since May and move closer to the bottom of the 2-4% target range. The central bank just kept rates steady at 2.25% last week. Governor Diokno said “A continued pause will allow prior measures by the Bangko Sentral ng Pilipinas to further work their way through the economy.”  However, the bank approved a PHP540 bln ($11.2 bln) cash advance to the government to help fund virus relief efforts, the second such loan this year.  We believe the easing cycle could resume in the coming months if the peso remains relatively firm.  Next policy meeting is November 19. August trade will be reported Friday, with exports expected to contract -8.3% y/y and imports expected to contract -17.0% y/y.

Caixin services and composite PMI for September will be reported Thursday. Services is expected to improve to 54.2 from 54.0 in August. Last week, the official non-manufacturing PMI came in at 55.9 vs. 54.7 expected and 55.2 in August. The manufacturing PMIs were mixed, however, with the official reading improving half a point to 51.5 and the Caixin reading falling a tick to 53.0. When all is said and done, the mainland economy remains on firm footing and is leading the recovery in the region.