EM Preview for the Week Ahead

This is one of the most eventful weeks for the markets in recent memory. US elections, an FOMC meeting, and October jobs data will likely ensure that markets remain volatile. The election outcome will probably be the biggest driver near-term for risk assets. While we believe the base case is for a Blue Wave that helps risk assets, the 2016 election showed that tail risk can sometimes happen, leaving a lot of scar tissue. Yet looking through the noise, we must reiterate what we perceive to be the true signals. To us, that includes (but is not limited to) limited potential for US fiscal stimulus until 2021, an ultra-dovish Fed, a softening US economic outlook, and rising virus numbers that are leading to lockdowns globally. These main drivers still support our weak dollar call extending well into Q1.

AMERICAS

Brazil central bank minutes will be released Tuesday. Last week, the bank left rates unchanged at 2.0% and kept the forward guidance mostly unchanged. While the door seems to remain open to further easing, we think the next move in rates will almost certainly be up. That said, we think the curve is showing an overly aggressive tightening schedule, with nearly 50 bp already priced in over the next few months due largely to concerns on the fiscal/political side. Next scheduled policy meeting is December 9. October trade data will also be reported Tuesday. September IP will be reported Wednesday and is expected to rise 2.2% y/y vs. -2.7% in August. October IPCA inflation will be reported Friday and is expected to come in at 3.88% y/y vs. 3.14% in September. If so, it would be the highest since February but would remain in the bottom half of the 2.5-5.5% target range.

Colombia central minutes will be released Tuesday. The central bank just left rates steady at 1.75% last week, the first time it stood pat after seven straight cuts dating back to March. Governor Echavarria said the rate would remain unchanged for “several months.” He is not seeking a second term after his current one expires in January and so it appears that it will be up to his successor to determine the next move in rates. October CPI will be reported Thursday, with headline inflation expected to come in at 1.96% y/y vs. 1.97% in September. If so, it would remain well below the 2-4% target range. Next scheduled policy meeting is November 27 and no change is expected then.

Chile reports October CPI Friday. Headline inflation is expected to come in at 2.6% y/y vs. 3.1% in September. If so, it would move back into the bottom half of the 2-4% target range after spending only one month in the top half. Next scheduled policy meeting is December 7 and no change is expected then. September data reported last week suggest the economy is recovering, with unemployment falling and IP and retail sales growth accelerating. Minutes from the October meeting show the bank will keep policy “highly expansive” for a prolonged period as the speed of the recovery remains uncertain.

 

EUROPE/MIDDLE EAST/AFRICA

Turkey reports October CPI Tuesday. Headline inflation is expected to accelerate to 11.97% y/y vs. 11.75% in September. If so, it would move further above the 3-7% target range. The lira has weakened over 7% since the central bank’s dovish surprise October 22. As such, we see upside risks for inflation going forward. Next scheduled policy meeting is November 19. Backdoor tightening has remained modest but if lira weakness continues, we think a large hike in all policy rates will be seen before that meeting.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. The bank has left rates steady since the last 40 bp cut in May. The weak zloty reflects in large part the headwinds coming from the rising virus numbers. Social unrest is also rising as anti-government protests spread. Minutes will be released Friday.

Czech National Bank meets Thursday and is expected to keep rates steady at 0.25%. Here too, the weak koruna reflects the negative impact of the rising virus numbers. The bank has left rates steady since the last 75 bp cut in May. Earlier that day, September retail sales will be reported and are expected to fall -0.6% y/y vs. -2.6% in August. Trade and industrial and construction output will be reported Friday.

 

ASIA

Caixin reported October China manufacturing PMI Monday. It came in at 53.6 vs. 52.8 expected and 53.0 in September. Services and composite PMIs will be reported Wednesday, with services expected to rise a couple of ticks to 55.0. China reports October trade and foreign reserves data over the weekend. Exports are expected to rise 8.5% y/y and imports by 7.4% y/y. Some leaked details of upcoming plans for the next -5-year plan suggest growth priorities will be qualitative rather than quantitative. Still, policy settings are likely to remain loose for the time being.

Indonesia reports October CPI Monday. Headline inflation is expected to come in at 1.45% y/y vs. 1.42% in September. If so, it would remain well below the 2.5-4.5% target range. Next scheduled policy meeting is November 19 and steady rates are likely. Bank Indonesia has left rates steady at 4.0% since the last 25 bp cut in July due to concerns about capital outflows and a weak rupiah. Q3 GDP data will be reported Thursday and is expected to grow 5.52% q/q vs. -4.19% in Q2. In y/y terms, GDP is expected to contract -3.30% vs. -5.32% in Q2.

Korea reports October CPI Tuesday. Headline inflation is expected to come in at 0.8% y/y vs. 1.0% in September. If so, it would remain well below the 2% target. Next scheduled policy meeting is November 26 and steady rates are likely. Bank of Korea has left rates steady at 0.50% since the last 25 bp cut in May, choosing instead to let fiscal policy carry the load for the time being. September current account data will be reported Thursday. October manufacturing PMI came in at 51.2, the first reading above 50 since December 2019 and the highest since September 2018.

Bank Negara Malaysia meets Tuesday and is expected to keep rates steady at 1.75%. A couple of analysts look for a 25 bp cut to 1.50%. The bank has left rates steady since the last 25 bp cut in July. CPI fell -1.4% y/y in September. While the central bank does not have an explicit inflation target, deflation risks should keep it in dovish mode for the foreseeable future. October manufacturing PMI came in at 48.5, the lowest since May and bucking the regional improving trend.

Philippines reports September trade Wednesday. Exports are expected to contract -9.1% y/y and imports by -20.9% y/y. October CPI will be reported Thursday, with headline inflation expected to remain steady at 2.3% y/y. If so, it would remain in the bottom half of the 2-4% target range. Next scheduled policy meeting is November 19 and steady rates are likely due to concerns about capital outflows. The central bank has left rates steady at 2.25% since the last 50 bp cut in June.

Thailand reports October CPI Thursday. Headline inflation is expected to come in at -0.50% y/y vs. -0.70% in September. If so, it would remain well below the 1-4% target range. Next scheduled policy meeting is November 18 and steady rates are likely as the burden of stimulus is likely on fiscal policy for the time being. Bank of Thailand has left rates steady at 0.50% since the last 25 bp cut in May. October manufacturing PMI came in at 50.8, the first reading above 50 since December 2019 and the highest since April 2019.