EM starts the FOMC week off on a soft footing. Besides the prospects of Fed liftoff Wednesday, oil prices are making new cycle lows. Uncertainty about China’s FX policy is also making markets nervous, though we think this concern is misplaced. Overall, the global backdrop for EM remains very negative and we do not see much chance for a rebound after Fed lift-off is seen. In recent days, USD has made new all-time highs against COP, MXN, and ZAR. Others are likely to follow suit in the coming weeks.
Within EM, the usual idiosyncratic risks remain in play. ZAR has been a big mover (in both directions) due to Zuma’s handling of the Finance Minister portfolio, and we think investor confidence will be difficult to regain near-term. South Africa, Turkey, and Brazil are all subject to downgrades into sub-investment grade, with poor economic fundamentals compounding heightened political risk.
Indonesia reports November trade Tuesday. Exports are expected at -11.5% y/y, while imports are expected at -21.3% y/y. Bank Indonesia then meets Thursday and is expected to keep rates steady at 7.5%. We believe an easing bias is in place, given the various macro-prudential policy moves seen in recent months. We think outright easing will be seen in 2016, as inflation at 4.9% y/y in November has finally returned to the 3-5% target range.
Singapore reports October retail sales Tuesday, and are expected to rise 2.6% y/y vs. 4.6% in September. It then reports November trade data on Thursday, with NODX expected to rise 1.6% y/y vs. -0.5% in October. The economy remains soft, even as deflation risks continue as CPI came in at -0.8% y/y in October. We think the MAS will ease policy further in 2016.
Hungary’s central bank meets Tuesday and is expected to keep rates steady at 1.35%. CPI rose 0.5% y/y in November, the highest since June but still well below the 2-4% target range. Deflation risks remain in play, though the bank has shifted to unconventional policies to boost activity.
Israel reports November CPI Tuesday, and is expected to remain steady at -0.7% y/y. This is well below the bank’s target range of 1-3%. Deflation risks persist, but we do not think the central bank is ready to take unconventional measures yet. The next policy meeting is December 28, and no change is expected then.
Bank of Thailand meets Wednesday and is expected to keep rates steady at 1.5%. CPI came in at -1.0% y/y in November, which is well below the 1-4% target range. However, the bank sees inflation turning positive early next year, which will keep the bank cautious for now in light of heightened inflation risks from El Nino.
Brazil reports October retail sales Wednesday, and are expected at -8.2% y/y vs. -6.2% in September. It then reports mid-December IPCA inflation Friday, and is expected to rise 10.64% y/y vs. 10.28% in mid-November. Brazil also reports the second preview of December IGP-M wholesale inflation Friday, and is expected to rise 0.55% m/m. The economy remains in recession, but rising price pressures could push COPOM into resuming the easing cycle next year.
Czech central bank meets Wednesday and is expected to keep policy steady. CPI rose 0.1% y/y in November, the lowest since February and well below the 2-4% target range. Deflation risks remain in play, and so there is a risk that the CNB tweaks its forward guidance a bit after the ECB recently extended the timeframe for its QE program.
Colombia reports October retail sales and IP Wednesday. The former is expected to rise 1.6% y/y and the latter is expected to rise 1.5% y/y. The central bank meets Friday and is expected to hike rates 25 bp to 5.75%. Of the 29 analysts polled by Bloomberg, 2 see no change, 25 see a 25 bp hike to 5.75%, and 2 see a 50 bp hike to 6.0%. With USD/COP making new all-time highs and inflation still rising, there is a chance for a hawkish surprise of 50 bp this week.
Philippine central bank meets Thursday and is expected to keep rates steady at 4.0%. For now, the risks to inflation appear balanced and so no change in rates is seen near-term. Governor Tetangco last month expressed concern about rising inflation. CPI rose 1.1% y/y in November, the highest since June but still below the 2-4% target range. El Nino poses some upside risks to inflation, which should keep the central bank cautious.
Taiwan’s central bank meets Thursday and is expected to cut rates 12.5 bp to 1.625%. The market is split, however. Of the 21 analysts polled by Bloomberg, 9 see no change, 11 see a 12.5 bp cut to 1.625%, and 1 sees a 25 bp cut to 1.5%. The economy remains soft, while CPI rose only 0.5% y/y in November. As such, we favor a 12.5 bp cut this week with some risk of a 25 bp cut.
Poland reports November industrial output, retail sales, PPI, and construction output Thursday. The data are expected to firm, for the most part. The central bank also releases its minutes that day. For now, the bank is on hold but we may see a more dovish tilt in Q1 when virtually the entire MPC will be replaced as their terms expire. We expect Law and Justice to name dovish replacements that will be more willing to cut rates.
Russia reports November real retail sales Thursday, and are expected at -11.5% y/y vs. -11.7% in October. The economy remains weak, but the central bank cannot cut rates with the ruble so weak and inflation so high. Lower oil prices are complicating matters, as the economy is likely to remain soft.
Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 3.25%. Of the 19 analysts polled by Bloomberg, 4 see no change and 15 see a 25 bp hike to 3.25%. The weakness of the peso and official comments have fanned expectations that on the day after the Fed hikes rates, Mexico will do the same. Given that the peso's weakness has not spilled over to boost prices, the urgency to follow suit is not immediately evident. However, we believe the central bank may be extra cautious and hike rates now in order to anchor inflation expectations.
Chile’s central bank meets Thursday and is expected to keep rates steady at 3.25%. The market is split, however. Of the 18 analysts polled by Bloomberg, 10 see no change and 8 see a 25 bp hike to 3.50%. The economy has been getting some limited traction recently, but the continued slide in copper prices will weigh on growth.