EM Preview for the Week Ahead

EM FX was mixed as the dollar gained some modest traction as risk-off sentiment picked up. We continue to believe any dollar gains are temporary and that the weakening trend will continue well into Q1. As far as EM foes, global investors should continue to be drawn both to the higher yielding bond markets (especially China, Mexico, South Africa, and Indonesia) as well as the surging equity markets (MSCI EM is up six straight weeks and ten of the past eleven).  EM should remain in a sweet spot of a low rate environment in DM coupled with an improving global growth outlook in 2021.

AMERICAS

Brazil central bank minutes will be released Tuesday. At last week’s meeting, the bank left rates unchanged at 2.0% but made some important hawkish changes to its forward guidance. The bank maintained much of the forward guidance language from the August meeting, saying it doesn’t intend to raise rates soon because the conditions for the “unusually strong monetary stimulus” are still being met. However, it admitted that “inflation expectations reversed their declining trend” and that they may soon change its forward guidance. CDI market is pricing a chance of the first hike at the January 20 meeting, followed by a series of hikes throughout the year.  November current account and FDI data will be reported Friday.

Banco de Mexico meets Thursday and is expected to keep rates steady at 4.25%. However, a handful of analysts look for a 25 bp cut to 4.0%. At its last meeting in November, the bank delivered a hawkish surprise with no cut when a 25 bp cut was expected. However, it left the door open for more cuts.  We see risks of a dovish surprise this week, especially if the peso remains firm.  Note November CPI came in at 3.33% y/y, the lowest since June and moving closer to the 3% target.

Colombia reports October manufacturing production and retail sales Monday. Production is expected to fall -1.5% y/y vs. -3.0% in September, while sales are expected to rise 3.5% y/y vs. -0.8% in September. The central bank meets Friday and is expected to keep rates steady at 1.75%. The bank has left rates steady at 1.75% since the last 25 bp cut September 25. At the November meeting, Governor Echavarria maintained 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.

 

EUROPE/MIDDLE EAST/AFRICA

Bank of Israel releases its minutes Monday. It kept policy unchanged at the November 30 meeting but sounded upbeat as “The positive results in coronavirus vaccine tests are increasing optimism regarding the rapid return of the economy to a path of growth in the coming year.” Still, it warned that “the adverse impact on the economy, and particularly on the labor market, is expected to be prolonged, and the Committee will therefore continue to utilize a range of tools in order to increase the extent of the monetary policy accommodation and to ensure the continued orderly functioning of the financial markets.” Israel then reports November CPI Tuesday, with deflation expected to ease slightly to -0.7% y/y vs. -0.8% in October. Q3 GDP will be reported Wednesday.

National Bank Hungary meets Tuesday and is expected to keep rates steady at 0.60%. The base rate has been on hold since the last 15 bp cut in July. CPI rose 2.7% y/y in November, the lowest since May and in the bottom half of the 2-4% target range. With the forint firm, the bank may eventually take back the 15 bp hike in the 1-week deposit rate from back in September. Otherwise, it’s steady as she goes for the central bank.

Czech National Bank meets Thursday and is expected to keep rates steady at 0.25%. The bank has been on hold since the last 75 bp cut in May. CPI rose 2.7% y/y in November, the lowest since October 2019 and back within the 1-3% target range after several months above it. The 4% drop in EUR/CZK since the end of October is equivalent to about 100 bp of tightening, according to the central bank’s model. As a result, we see no need for the bank to even discuss rate hikes at this juncture.

Russia central bank meets Friday and is expected to keep rates steady at 4.25%. However, a handful of analysts look for a 25 bp cut to 4.0%. The bank has been on hold since the last 25 bp cut in July as inflation rose steadily to 4.4% y/y in November, the highest since July 2019 and above the 4% target. Governor Nabiullina said the policy rate could be cut below 4% if conditions change substantially, adding that isn’t the base case and that the remaining room for easing “ is very modest in our base case.”

 

ASIA

India reports November CPI and WPI Monday. CPI is expected to rise 7.20% y/y vs. 7.61% in October. If so, inflation would be the first deceleration since August and would move a little closer to the 2-6% target range. WPI is expected to rise 1.70% y/y vs. 1.48% in October. The Reserve Bank of India releases minutes from last week’s meeting Friday. It left rates steady and has been on hold since the last 40 bp cut in May as inflation rose steadily. Next policy meeting will be held February 5.

China reports November IP and retail sales Tuesday. IP is expected to rise 7.0% y/y vs. 6.9% in October, while sales are expected to rise 5.0% y/y vs. 4.3% in October. A robust economy and relatively high interest rates continue to draw foreign investment inflows. USD/CNY traded last week at the lowest level since June 2018 near 6.5205 and is on track to test the March 2018 low near 6.2430.

Taiwan central bank meets Thursday and is expected to keep rates steady at 1.125%. CPI rose 0.09% y/y vs. -0.26% in October and was the first positive reading since January. While the bank does not have an explicit inflation target, low price pressures should allow it to maintain steady policy throughout 2021.

Bank Indonesia meets Thursday and is expected to keep rates steady at 3.75%. The bank just delivered a dovish surprise last month with a 25 bp cut, and so it’s too soon to expect another cut. CPI rose 1.6% y/y in November, the highest since June but still well below the 2.5-4.5% target range. While price pressures are rising, they remain relatively low and so we cannot rule out further easing in 2021.

Philippine central bank meets Thursday and is expected to keep rates steady at 2.0%. The bank just delivered a dovish surprise last month with a 25 bp cut, and so it’s too soon to expect another cut. CPI rose 3.3% y/y in November, the highest since March 2019 and in the top half of the 2-4% target range. If price pressures continue to rise, then the easing cycle may finally be over.