Emerging Markets: Week Ahead Preview – Dec. 11

(from my colleague Dr. Win Thin)
 

After the ECB meeting, we saw curve steepening in the eurozone. This is on top of curve steepening in the US since the elections. While we are nowhere near the magnitude of the 2013 Taper Tantrum, these yield curve dynamics remain negative for EM bonds and EM FX. EM equities are a different matter, supported in part by the continued post-election rally in DM equity markets.Higher commodity should also help insulate some EM countries from the selling pressure.

Individual country risk remains important, and likely to be dominated by politics. Brazil, South Africa, Turkey, and Korea are all facing heightened political uncertainty.Several central banks meet this week (Chile, Colombia, Peru, Russia, Korea, and Indonesia) but none are expected to move, especially in this current environment.

Turkey reports October current account and Q3 GDP Monday.  Growth is expected to slow to 0.3% (2.0% WDA) y/y from 3.1% (3.0% WDA) in Q2. The economy remains weak, and so the central bank will remain under pressure to cut rates.Yet it should not ease while the lira remains under pressure.The next central bank policy meeting is December 20.It surprised markets with a hike last month.

Russia reports October trade Monday.  Central Bank of Russia meets Friday and is expected to keep rates steady at 10.0%, though one analyst sees a 25 bp cut. Inflation has fallen to a cycle low 5.8% y/y in November, but remains above the end-2017 goal of 4%.Governor Nabiullina has signaled that rates could resume falling next year, and we see no reason for her to move up that timetable.

Mexico reports October IP Monday.  ANTAD retail sales for November will be reported Tuesday. Banco de Mexico meets Thursday and is expected to hike rates 25 bp to 5.5%. However, the market is split between 25 and 50 bp, while we favor 50 bp. November CPI rose 3.32% y/y, the highest since December 2014 and above the 3% target for the second straight month. PPI ex-oil rose 7.87% y/y while headline PPI rose even more (8.4% y/y).It seems that the inflation pass-through is really starting to bite and will require Banxico tightening next year as well.