EM FX was weaker across the board as the broad dollar rally continued. INR, KRW, and TRY outperformed while ZAR, THB, and MYR underperformed. We believe global PMIs for November this week will continue to show that economic and policy divergences remain in favor of the dollar. Those divergences will likely be magnified by the incoming Trump administration. EM central banks will continue cutting rates but with U.S. rates remaining higher for longer, the leeway to ease is limited.
AMERICAS
Chile reports Q3 GDP data Monday. Growth is expected at 0.6% q/q vs. -0.6% in Q2, while the y/y rate is expected at 2.2% vs. 1.6% in Q2. With the global growth outlook deteriorating in 2025, policymakers will continue efforts to boost domestic activity. Next central bank meeting is December 17 and another 25 bp cut to 5.0% is expected. The swaps market is pricing in 50 bp of total easing over the next 12 months that would see the policy rate bottom near 4.75%.
Colombia reports Q3 GDP data Monday. Growth is expected at 0.4% q/q vs. 0.1% in Q2, while the y/y rate is expected to pick up two ticks to 2.3%. With the global growth outlook deteriorating in 2025, policymakers will continue efforts to boost domestic activity. Next central bank meeting is December 17 and another 50 bp cut to 9.25% is expected. The swaps market is pricing in 200 bp of total easing over the next 12 months that would see the policy rate bottom near 7.75%.
Mexico reports mid-November CPI data Friday. Headline is expected at 4.64% y/y vs. 4.83% previously, while core is expected at 3.72% y/y vs. 3.74% previously. At last week’s meeting, Banco de Mexico cut rates 25 bp to 10.25% and noted that “Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments.” The bank seemed to downplay peso weakness by attributing recent volatility to the U.S. elections. What’s left unsaid is that peso volatility and weakness has persisted and is likely to feed into inflation. As a result of the dovish cut, the market now sees the policy rate bottoming at 8.75% vs. 9.0% at the start of last week. We do not think Banco de Mexico can cut this much if the peso remains under pressure. Q3 GDP data will also be reported Friday.
EUROPE/MIDDLE EAST/AFRICA
National Bank of Hungary meets Tuesday and is expected to keep rates steady at 6.5%. At the last meeting October 22, the bank kept rates steady and said that "In the Council's assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates." Deputy Governor Kandracs stressed that “We’re not at all afraid to maintain the current base interest level for an extended period.” He added that a “careful and patient approach” was warranted and that future decisions will be made in a “cautious and data-driven manner.” The swaps market is pricing in 50 bp of cuts over the next 12 months followed by another 25 bp over the subsequent 12 months that would see the policy rate bottom near 5.75%.
Turkey central bank meets Thursday and is expected to keep rates steady at 50.0%. At the last meeting October 17, the bank delivered a hawkish hold after softening its stance at the September 19 meeting. Specifically, it noted that "the uncertainty regarding the pace of improvement in inflation has increased in light of incoming data." Indeed, the central bank’s year-end inflation forecast for 2024 was revised up to 44% vs. 38% previously and 2025 was revised up to 21% vs. 14% previously. The swaps market is pricing in 625 bp of easing over the next three months.
South Africa reports October CPI and September retail sales data Wednesday. Headline inflation is expected at 3.0% y/y vs. 3.8% in September, while core is expected at 4.0% y/y vs. 4.1% in September. If so, this would be the lowest headline reading since February 2021 and would put it right at the bottom of the 3-6% target range. SARB meets Thursday and is expected to cut rates 25 bp to 7.75%. At the last meeting September 19, the bank started the easing cycle with a 25 bp cut to 8.0%. The bank signaled a fairly shallow easing cycle as its model saw the policy rate at 7.86% by end-2024, 7.17% by end-2025, and 7.09% by end 2025. This is slightly more dovish than the market, which sees the policy rate bottoming near 7.5%.
ASIA
People’s Bank of China sets its 1-year MLF sometime this week. It is expected to remain steady at 2.0%. China commercial banks will set their Loan Prime Rates Wednesday. The 1- and 5-year LPRs are both expected to remain unchanged at 3.10% and 3.60%, respectively. This would match the cut to the policy-relevant seven-day reverse repo rate on September 27. We remain skeptical that the stimulus measures announced so far will have much lasting impact on the economy.
Bank Indonesia meets Wednesday and is expected to keep rates steady at 6.0%. However, nearly a quarter of the analysts polled by Bloomberg look for a 25 bp cut to 5.75%. It’s going to be a close call but with the rupiah down nearly 3% since mid-October, we lean towards a hold. At the last meeting October 16, the bank kept rates steady as expected at 6.0% after unexpectedly cutting 25 bp at the September 18 meeting. It noted that "The focus of short-term monetary policy is on rupiah exchange rate stability, due to increasing global financial-market uncertainty." Governor Warjiyo said, “BI continues to keep an eye on the room for policy rate cuts while keeping in mind the outlook for CPI, IDR, and economic growth.” We believe the recent depreciation in IDR will keep the central bank resuming easing anytime soon. It intervened last week in FX spot, domestic NDFs, and government bond markets to maintain market confidence and support the rupiah. If and when the rupiah eventually stabilizes, the bank is likely to resume cutting rates cautiously but we’re not there yet.
Malaysia reports October CPI Friday. Headline is expected to remain steady at 1.8% y/y. At the last meeting November 6, Bank Negara kept rates steady at 3.0%. Next meeting is January 22 and another hold seems likely. While Bank Negara does not have an explicit inflation target, low price pressures should allow it to cut rates in 2025 if growth slows too much. The swaps market is pricing in steady rates over the next six months, with 50% odds of a 25 bp cut over the subsequent six months.
