EM Preview for the Week Ahead

EM currency strength took a pause last week as the dollar gained some traction. We believe the dollar bounce is transitory and look for weakness to resume. MSCI EM has risen two straight weeks and nine of the past ten, with MSCI EM FX posting the same record. The backdrop for risk assets and EM remains strong, though investors will be casting a wary eye towards rising US yields. So far, the rise has been slow and steady and easily digestible for the markets, but the pace has picked up since last week. Stay tuned.

AMERICAS

Mexico reports November IP Monday. It is expected to fall -4.2% y/y vs. -3.3% in October. CPI rose 3.15% y/y in December, the lowest since May and nearing the center of the 2-4% target range. Virus numbers continue to rise and will weigh on the outlook. With the economy remaining weak and inflation falling, we expect Banco de Mexico to restart the easing cycle. Next policy meeting is February 11 and a 25 bp cut to 4.0% is likely then. The last vote to hold in December was 3-2 and so it was a close call. The tipping point may be the strong peso, which continues to flirt with the 20 level and should eventually strengthen past that.

Brazil reports December IPCA inflation Tuesday. It is expected to accelerate to 4.37% y/y from 4.31% in November. If so, inflation would be the highest since May 2019. Of note, the inflation target and target range were both shifted 25 bp lower this year to 3.75% and 2.25-5.25%, respectively. Next COPOM meeting is January 20 and rates are expected to remain steady at 2.0%. However, the CDI market is pricing in a 25 bp hike to 2.25% at the March 17 meeting, followed by a series of 50 bp hike thereafter that take the policy rate to 5.0% at year-end. While this seems way too aggressive, we do believe steady tightening of a lesser degree will be seen this year. Bloomberg consensus sees a year-end rate of 3.25%, which seems much more reasonable and likely. November retail sales will be reported Friday and are expected to rise 4.8% y/y vs. 8.3% in October.

Peru central bank meets Thursday and is expected to keep rates steady at 0.25%. CPI rose 2% y/y in December, right at its target. For now, the central bank is on hold but should reaffirm its commitment to low rates. President Sagasti said that a national lockdown was possible but would be an “extreme” measure. It appears the focus will be on fiscal policy, with Sagasti looking at reactivating several infrastructure projects planned by former President Vizcarra.

 

EUROPE/MIDDLE EAST/AFRICA  

Turkey reports November current account data Monday. A deficit of -$3.56 bln is expected. If so, the 12-month total would rise to -$37.3 bln, the largest since September 2018. The good news is that Turkey will likely have less trouble financing its external deficits now that the central bank has raised rates to more attractive levels. Next policy meeting is January 21. With inflation accelerating to 14.6% y/y in December, we think another hike to the 17.0% policy rate is likely then. IP will be reported Wednesday and is expected to rise 10.1% y/y vs. 10.2% in October.

South Africa reports November manufacturing production Tuesday. It is expected to fall -1.7% y/y vs. -3.4% in October. Retail sales will be reported Wednesday are expected to fall -2.3% y/y vs. -1.8% in October. CPI rose 3.2% y/y in November, near the bottom of the 3-6% target range. With the economy remaining weak and price pressures low, we expect SARB to restart the easing cycle. Next policy meeting is January 21 and a 25 bp cut to 3.25% is likely then.

Czech Republic reports December CPI and November retail sales Wednesday. CPI is expected to rise 2.6% y/y vs. 2.7% in November, while sales are expected to fall -7.8% y/y vs. -4.0% in October. If so, inflation would be the lowest since January 2019 and within the 1-3% target range for the third straight month. With the economy weak and price pressures finally easing, the central bank is in wait and see mode. Next policy meeting is February 4 and rates are likely to be kept steady at 0.25% then.

Israel reports December trade Wednesday. Exports fell for most of 2020 but started to recover in Q4 before falling -14% y/y in November. No wonder the Bank of Israel spent a record $4.4 bln in December and $21.2 bln in 2020 intervening to prevent excessive shekel strength. Governor Yaron said record foreign reserves of $173.3 bln won’t prevent further intervention. December CPI will be reported Friday and is expected to remain steady at -0.6% y/y. If so, inflation would remain well below the 1-3% target range. Next policy meeting is February 22. Rates are likely to be kept unchanged at 0.10% but we expect the bank to commit to continued FX intervention.

National Bank of Poland meets Wednesday and is expected to keep rates steady at 0.10%. CPI rose 2.3% y/y in December, the lowest since April 2019 and in the bottom half of the 1.5-3.5% target range. No wonder Governor Glapinski recently started talking about resuming easing again. With rates close to zero, there’s not much room to cut and we think negative rates are unlikely. Rather, we suspect the bank will continue trying to weaken the zloty. November trade and current account data will also be reported that day. Central bank minutes will be released Friday.

 

ASIA

China reports December money and loan data this week. Most measures are expected to remain steady from November, which would suggest that the PBOC is maintaining accommodative policy for the time being in order to help support the recovery. Indeed, the PBOC will also set its MLF rate sometime this rate and is likely to keep it steady at 2.95%. CPI and PPI will be reported Monday, with the former expected to be flat y/y vs. -0.5% in November and the latter expected to fall -0.7% y/y vs. -1.5% in November. Trade will be reported Thursday, with exports expected to rise 15.0% y/y vs. 21.1% in November and imports expected to rise 5.1% y/y vs. 4.5% in November.

India reports December CPI and November IP Tuesday. CPI is expected to rise 5.0% y/y vs. 6.93% in November, while IP is expected to fall -1.2% y/y vs. +3.6% in October. If so, inflation would be the lowest since October 2019 and back within the 2-6% target range. WPI will be reported Thursday and is expected to rise 0.85% y/y vs. 1.55% in November. With price pressures clearly easing, we expect the RBI to restart the easing cycle. Next policy meeting is February 5 and a 25 bp cut to 3.75% is likely then. December trade will be reported Friday.

Bank of Korea meets Friday and is expected to keep rates steady at 0.50%. CPI rose 0.6% y/y in December, well below the 2% target. For now, Korea is in the midst of a regional recovery driven in large part by China. Monetary policy will be kept loose throughout this year, with fiscal policy carrying the load if additional stimulus is needed.