EM Preview for the Week Ahead

EM currencies again took advantage of broad dollar weakness last week. Almost every currency gained, with the exception of CNY, PEN, CLP, ARS, and TRY. We expect the dollar to remain under pressure this week and so EM should build on those gains. Elsewhere, MSCI EM gained nearly 2% last week, up for the fourth straight week and for eight of the past nine. The February 2018 high near 1279 is coming into sight.

AMERICAS

Chile reports October retail sales and IP Monday. Sales are expected to rise 19.0% y/y vs. 9.5% in September, while IP is expected to rise 1.4% y/y vs. 1.9% in September. The economy continues to recover, and will be helped by the recent Senate passage of a government-backed bill allowing workers to tap their pension savings for the second time. The bill goes back to the lower house. As it stands, the pension funds ( AFPs) will have up to 30 business days to provide the money after a contributor requests it, and is expected to lead to around $15 bln in fresh withdrawals that will most likely hurt local asset markets the most. Perversely, the peso is likely to strengthen as offshore investments are repatriated.

Brazil reports November consolidated budget data Monday. A primary deficit of -BRL24.7 bln is expected vs. -BRL64.6 ln in September. November trade data will be reported Tuesday. October IP will be reported Wednesday and is expected to rise 1.0% y/y vs. 3.4% September. Q3 GDP will be reported Thursday, with the economy expected to grow 8.8% q/q vs. -9.7% in Q2. Next COPOM meeting is December 9 and rates are likely to remain steady at 2.0%. However, the CDI market is pricing in a good chance that the tightening cycle will begin with a 25 bp hike in January followed by a series of 50 bp hikes throughout next year. This strikes us as too aggressive.

Colombia central bank minutes will be released Monday. The bank just left rates steady at 1.75% last week, as expected. Governor Echavarria repeated his forward guidance that rates are likely to remain on hold for several months, and noted that the peso has strengthened “significantly.” Since his term ends in January, it will likely be up to his successor to decide what the next move will be. Colombia then reports November CPI Friday, with headline inflation expected at 1.71% y/y vs. 1.75% in October. If so, this would be the lowest on record and below the 24% target range. Next policy meeting is December 18 and no change is expected.

 

EUROPE/MIDDLE EAST/AFRICA

South Africa reports October trade, budget, money, and loan data Monday. M3 and private sector credit growth are expected to pick up modestly to 9.6% y/y and 3.3% y/y, respectively. SARB recently left rates steady at 3.5% last week but it was a close call as the vote went 3-2.  Even more surprising is that the SARB’s model suggests 50 bp of tightening in 2021 and another 75-100 bp in 2022.  This seems highly unlikely.  Next policy meeting is January 21 and is will likely be another close call then.

Turkey reports October trade and Q3 GDP Monday. The deficit is expected at -$2.4 bln vs. -$4.83 bln in September, while the economy is expected to grow 14.0% q/q vs. -11.0% in Q2. November CPI will be reported Thursday, with headline inflation expected at 12.70% y/y vs. 11.89% in October. If so, it would be the highest since August 2019 and further above the 3-7% target range. The bank just delivered a 475 bp hike in the policy rate to 15.0%. Next policy meeting is December 24 and if lira weakness continues, another hike is likely then.

Bank of Israel meets Monday and is expected to keep policy unchanged. CPI fell -0.8% y/y in October, the worst deflation since June and well below the 1-3% target range. At its last policy meeting October 22, the bank boosted its asset purchases by ILS35 bln ($10.3 bln) and extend ILS10 bln of four-year loans to local banks at a fixed -0.1% to help small businesses.  As such, it’s probably too soon to expect any further stimulus so soon. However, it’s possible that the bank pushes back against recent shekel strength, which is trading at its strongest level since July 2008.

Poland reports November CPI Tuesday. Headline inflation is expected at 3.0% y/y vs. 3.1% in October. National Bank of Poland meets Wednesday and is expected to keep policy unchanged. Minutes will be released Friday. The row with the EU’s rule of law clause continues and is weighing on the zloty. While we expect an eventual face-saving compromise that leads to unanimous approval, we cannot rule out the EU adopting the rule of law conditionality by a qualified majority. However, this would not allow approval of the long-term EU budget.

 

ASIA

Korea reports October IP Monday. IP is expected to rise 0.3% y/y vs. 8.0% September. November trade data will be reported Tuesday. Exports are expected to rise 8.6% y/y vs. -3.8% in October, while imports are expected to fall -1.0% y/y vs. -5.6% in October. November CPI will be reported Wednesday. Headline inflation is expected at 0.5% y/y vs. 0.1% in October, which would remain well below the 2% target. BOK kept rates steady at 0.50% last week whilst boosting its 2020 and 2021 GDP forecasts modestly. Next policy meeting is December 17 and no change is expected then. October current account data will be reported Friday.

China reports official November PMI readings Monday. Manufacturing is expected to rise a tick to 51.5, while non-manufacturing is expected to fall a couple of ticks to 56.0. Caixin reports its November manufacturing PMI reading Tuesday, which is expected to fall a tick to 53.5. This will be followed by its services (56.4 expected) and composite PMI readings Wednesday. These are all the first snapshots of the mainland economy for November and are expected to show continued recovery.

Indonesia reports November CPI Tuesday. Headline inflation is expected at 1.53% y/y vs. 1.44% in October. If so, it would be the highest since July but still well below the 2.5-4.5% target range. The central bank just delivered a surprise 25 bp cut to 3.75% this month. Next policy meeting is December 17 and steady rates are likely. However, if inflation remains low and the rupiah remains strong, we cannot rule out another cut then.

Philippines reports November CPI Friday. Headline inflation is expected to remain steady at 2.5% y/y. If so, it would remain the highest since July but still in the bottom half of the 2-4% target range. The central bank just delivered a surprise 25 bp cut to 2.0% this month. Next policy meeting is December 17 and steady rates are likely. However, if inflation remains low and the peso remains strong, we cannot rule out another cut then.

Reserve Bank of India meets Friday and is expected to keep policy unchanged. CPI rose 7.61% y/y in October, the highest since May 2014 and well above the 2-6% target range. GDP contracted -7.5% q/q in Q3 vs -23.9% in Q2. While the weak economy argues for more easing, we do not think the bank can cut rates until inflation moves closer to the target range.