We are beginning to become more constructive on EM. The main trigger for some optimism is the shifting US-China dynamic. In our view, the partial trade deal reveals weakness on the part of the US. Reports suggest China will begin pushing for all existing tariffs to be dropped as part of Phase 2, which would be very positive for EM. That is still likely months away but this shifting dynamic bears watching. We will be putting out a longer MarketView piece on this topic this week.
AMERICAS
Brazil reports mid-October IPCA inflation Tuesday, which is expected to ease to 2.67% y/y from 3.22% in mid-September. If so, inflation would move below the 2.75-5.75% target range. Next COPOM meeting is October 30 and another 50 bp cut to 5.0% is expected. CDI market is starting to price in a 75 bp cut. September current account and FDI data will be reported Thursday.
Chile central bank meets Wednesday and is expected to cut rates 25 bp to 1.75%. CPI rose 2.1% y/y in September, the lowest since April and near the bottom of the 2-4% target range. Meanwhile, political risk has risen after protests against a transportation fare hike turned into looting and arson in Santiago. President Pinera declared a state of emergency in the capital but rioting spread to other major cities. He later suspended the fare hike but the damage was done.
Mexico reports mid-October CPI Thursday, which is expected to rise 3.04% y/y vs. 2.99% in mid-September. If so, inflation would remain near the 3% target. Next policy meeting is November 14 and another 25 bp cut to 7.5% is expected. Political risk is back in the spotlight after a botched raid that saw armed forces overpowered, allowing the escape of El Chapo’s son
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady. However, it is likely to add back some of the excess liquidity that was withdraw earlier this year. Deputy Governor Nagy said that inflation has “basically disappeared” and that low interest rates are the new norm.
South Africa reports September CPI Wednesday and inflation is expected to remain steady at 4.3% y/y. If so, it would remain just below the midpoint of the 3-6% target range. Given how weak the economy is, we were surprised the SARB didn’t cut rates at its last meeting. Next policy meeting is November 21 and a cut then is likely if the rand remains firm.
Turkey central bank meets Thursday and is expected to cut rates 100 bp to 15.5%. However, expectations range from no cut to cuts of 50, 75,100, 125, 150, 200, and 225 bp. Inflation fell to 9.3% y/y in September, which should allow the bank to cut rates aggressively again. It has already cut twice for a total of 750 bp and we look for a larger than consensus cut of 250 bp to 14.0% this week.
Central Bank of Russia meets Friday and is expected to cut rates 25 bp to 6.75%. CPI rose 4.0% y/y in September, right at the target. If inflation continues to fall, some further easing is likely as the economy remains sluggish. Indeed, Governor Nabiullina said the bank can “act more decisively, suggesting larger or deeper rate cuts ahead. Low oil prices are another headwind.
ASIA
Korea reports trade data for the first twenty days of October Monday. Q3 GDP will be reported Thursday, with growth expected to remain steady at 2.0% y/y. BOK just cut rates 25 bp to match the record low 1.25% policy rate. Next policy meeting is November 28 and another cut then seems likely. Political risk is rising as President Moon issued a public apology for the resignation of a close aide due to corruption concerns.
Taiwan reports September export orders Monday, which are expected to contract -4.6% y/y vs. -8.3% y/y in August. September IP will be reported Wednesday and is expected to rise 0.7% y/y vs. 2.3% in August. The economy remains under pressure from the trade war and orders data suggests little relief over the next six months.
Malaysia reports September CPI Wednesday, which is expected to rise 1.3% y/y vs. 1.5% in August. While Bank Negara does not have an explicit inflation target, low price pressures will allow it to cut rates again if the slowdown persists. Next policy meeting is November 5 and a 25 bp cut to 2.75% is possible.
Singapore reports September CPI Wednesday, with inflation expected to remain steady at 0.5% y/y. While the MAS does not have an explicit inflation target, low price pressures will allow it to ease policy again if the slowdown persists. Next semi-annual policy meeting is in April but the MAS has moved intra-meeting if needed. September IP will be reported Friday, which is expected to contract -4.8% y/y vs. -8.0% in August.
Bank Indonesia meets Thursday and is expected to cut rates 25 bp to 5.0%. September CPI rose 3.4% y/y, just below the midpoint of the 2.5-4.5% target range. President Joko Widodo was sworn in for a second and final term this weekend and announced a cabinet shuffle, as expected. He urged to overhaul laws to encourage investment and job creation in order to rid his nation of poverty.
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