OVERNIGHT NEWS
# Dollar trims losses after jumps in US wages to 5.7% in January spurs debate over 25bp or 50bp Fed rate increase in March. UST 10y steady around 1.90%. ECB’s Knot sees first rate increase in 4Q22 and second in spring 2023.
# Week ahead: US CPI Thursday, Riksbank rate decision Thursday. Poland CB decides tomorrow. India, Thailand and Romania rate decisions on Wednesday, Bank Indonesia, and Banxico on Thursday; Russia CB on Friday.
# China: PBoC fixes yuan midpoint dramatically weaker at 6.3580 vs cons 6.3328 on return from LNY holiday. Caixin services PMI falls to 5-month low of 51.4 in January from 53.1 in December, PMI composite drops to 50.1 from 53.1.
# CFTC positioning: HFs cut long Euro positions to 4.3% of OI, GBP shorts raised to 12.8%, AUD shorts reduced to 40.5% and JPY shorts to 31.2%. CAD longs rise to 12.6%. UST 10y net shorts trimmed marginally to 7.0%.
# Nikkei -0.7%, EUR 10y IRS -1bp at 0.63%, Brent crude -0.1% at $93.1/b, Gold +0.2% at $1,811/oz
We’re in the final innings of EM credit spread widening while USD’s bull run is coming to a close. Greater market pricing for a 50bp Fed hike in March poses a risk, but not a long-term one. EM meetings this week provide an opportunity for central banks to reinforce their hawkish mettle.
FX & EM Strategy: EM local markets ex Russia have had a reasonable start to the year – impressive, considering the move in US rates. We stay neutral for now, with last week’s US employment report and potentially upcoming CPI data creating market momentum for a possible 50bp Fed hike in March.
Sovereign Credit Strategy: Higher US real yields and wider US credit spreads post-NFP support our still cautious stance. However, we are likely in the final innings of EM credit spread widening, with the recent EM HY outperformance versus US HY notable. This week we look into the rating outlook for EM. 23-28% of EMBI sovereigns still have negative outlooks yet the downgrade momentum has slowed. Looking ahead, we expect most ratings to be on hold apart from idiosyncratic stories. An upgrade cycle would require fiscal balances to return to pre-pandemic levels and debt paths to be on a sustainable downtrend, which is not yet the case. When it comes to pricing versus ratings, Chile, Saudi Arabia, Colombia and Egypt all look very cheap versus what can realistically happen with ratings.
LatAm Macro Strategy: We add long EUR/BRL as the end of Brazil’s Congressional recess should mark the start of new fiscal easing discussions, amid unattractive positioning/valuations. We stay received Jan 24 DIs (as positioning looks much lighter versus FX) and 2y CLPxCAM versus 2y US IRS, and keep 1y TIIE payers, 10y COPxIBR payers, Chile 10y breakeven shorts and long CLP/MXN. We extend the target on 1s5s COPxIBR flatteners to 0bp.
We remain neutral on COP for now, but we acknowledge rising risks associated with the upcoming election, particularly given less cohesive messaging from centrist candidates and as polls continue to show a higher preference for unorthodox platforms. In addition, COP remains highly exposed to the global backdrop and to a more hawkish FOMC, given its wide current account deficit.
Dislike: Pay 10-year COPxIBR (10k DV01), COPxIBR 1s5s flattener: We extend the target on our 10-year IBR payer to 8.00%, given rising risks around longer-dated UST. For 1s5s, we extend the target to 0bp and tighten our stop to 100bp amid a 100bp hawkish surprise, which should prompt markets to price in a higher probability of larger hikes at the upcoming meetings. Curve pricing continues to shift towards a potential 125bp hike in March.
Idiosyncratic factors were at play as calm markets gave way in the European session. USD ticked modestly higher while UST yields were flat. The profit taking and positioning post the ECB was one of the factors, as some of the biggest gainers post ECB lost ground. EURJPY retreated, while AUD gained modestly. Oil prices were another factor in the day, as oil prices which had reached 7 year highs on Friday, dipped. NOK was affected significantly, being the biggest loser amongst G10. In terms of news, we saw more hawkish headlines from ECB speaker Knot over the weekend, while INR saw its MPC pushed out by a day, with the decision now expected on February 10.
Looking ahead, talks and speeches are on the horizon. ECB will see Lagarde’s speech at 15:45 GMT, while RUB will eye talks between French President Emmanuel Macron and Russian President Putin. We monitor both for headline risk, with markets likely to be sensitive in particular to the the language used by the former.
MXN: London trader Till Hani writes The odds of a 50bp hike have risen, noting that This Thursday at 19:00 GMT, Citi Economics is calling for a 4-1 vote in favor of +50bps to 6.0% and keep the door open for further hikes, depending on new information. This will be the first meeting since Victoria Rodriguez Ceja took over as Banxico’s chief. High inflation and lingering price pressures support additional hikes. Inflation in the first two weeks of January was close to 7.13%. Core inflation rose to 6.11%.
– Markets have 46bps priced for February and USDMXN met resistance at 20.80, above which we have strong resistance at 20.90/21.00 and support around 20.40. On Friday, we saw systematic funds and RM accounts selling MXN and small MXN inflows from Corporates and Banks.
· BRL: Looking forward we eye FGV Inflation IGP-DI MoM at 11:00 GMT for January Citi Economics forecasts 1.81% vs 1.25% prior. We expect IGP-DI inflation to gain momentum in Jan-22 due to higher wholesale prices. Both the industrial and the agricultural wholesale components (IPA-Industrial and IPA-Agro) should accelerate.
Colombia: High Headline and Core Inflation in January, Surprises to the Upside
In January, consumer prices recorded a high 1.67% mom variation, above our 1.08% mom forecast, the 1.14% mom Bloomberg consensus expectation, and the 0.91% mom median forecast in the latest central bank survey. As a result, annual headline inflation accelerated to 6.94% yoy, a 132bp increase from its December print, and visibly above the 6.2% peak inflation forecasted by the central bank in the January Monetary Policy Report.
Core ex-food increased an also high 1.21% mom, and core ex-food and energy increased 1.17% mom in January. As a result, the annual core inflation measures visibly accelerated: core ex-food increased 103bp to 4.47% yoy and core ex-food and energy inflation increased to 3.84% yoy (from 2.84% in December and 1.11% yoy one year ago). Both core-inflation measures are now above the 3% midpoint inflation target.
We note the rebound in prices of the clothing and footwear category that registered a sequential 4.03% mom variation in January, following negative prints in October-December (-1.51% mom average variation) driven by VAT holidays and other seasonal sales.
Finally, services inflation printed at a high 0.91% mom in January, with the annual rate increasing 72bp to an above target 3.20%. Energy prices (gas for domestic use, electricity, and vehicle fuels) rose a high 1.73% mom during the month, continuing to pressure inflation. Energy prices are now tracking at a high 11.75% yoy (from as low as -1.91% one year ago).
In our assessment, going forward inflation will rise further and remain elevated with the headline print likely to peak in 1Q2022. In consequence, we expect the MPC to continue normalizing monetary policy in the upcoming meetings, with the policy rate crossing its neutral level to reach a slightly restrictive monetary stance (policy rate at 6.00% by the end of 2022). In our assessment, an above-neutral monetary stance is warranted given visibly above-target inflation, drifting inflation expectations, a challenging fiscal outlook, an uncertain political environment, and a large current account deficit that could become more difficult to finance as global financial conditions tighten.
KEY NUMBERS (January):
Headline CPI: 1.67% mom (6.94% yoy) vs consensus at +1.14% mom and GS at +1.08% mom.
Core ex-Food: 1.21% mom (4.47% yoy vs 3.44% yoy prior).
Core ex-Food & Energy: 1.17% mom (3.84% yoy vs 2.84% prior).
Services: 0.91% mom (3.20% yoy vs 2.48% yoy prior).
DETAILS:
A clear sign of inflation dissemination is that all CPI groups resisted positive monthly variations in January, and seven of the twelve group registered monthly readings above 1% (the education category remained constant in January as it is typically updated in February, August and September). Furthermore, nine of the twelve CPI groups now register annual readings above the 4% upper limit of the central bank’s inflation target (from six in December).
Food and non-alcoholic beverages prices increased a high 3.79% mom in January (67bp contribution to the mom headline print) and are up 19.94% year to date. In addition, inflation during the month was also pressured by high prints in the clothing and footwear category (+4.03% mom; 14bp contribution), furniture and home goods and services (2.93% mom 12bp contribution), restaurants and hotels (2.40% mom; 24bp contribution), transportation (+1.85% mom; 24bp contribution), and rent and home utilities (0.46% mom; 15bp contribution).
