Key events in EMEA and Latam next week

The Russian Finance Ministry is likely to announce around $1.1bn in regular FX sales for October, which should be added to the $0.8bn of residual FX sales coming from a one-off transaction that took place earlier this year. This will mean an increase from $0.7bn of total FX sales in September, but it remains unclear whether this would guarantee a strong recovery in the rouble given the upcoming SBER dividends (up to $2.0-2.5bn could be attributable to foreign institutional investors) and the persistently negative foreign policy backdrop.

In other news, Russian CPI should keep crawling up to 3.7% year-on-year in September on the recovery in demand, the RUB depreciation, and a low base effect. At this point, it appears that even if the Russian key rate, currently at 4.25%, has some downside, any cuts before the year-end are unlikely. The two key unknowns that need to be addressed are foreign policy issues (part of which should be more clear after the US elections) and prospects of fiscal consolidation in Russia (finalisation of plans expected be December).

The slowdown in the recovery is expected to continue in August. We see both the retail sector and industry continuing their upward trend, but the monthly improvement will be lower than what we saw in July. Retail sales will be supported by a very strong domestic holiday season, while industrial production will continue to regain capacity after the sudden stop caused by Covid. As the short-term work scheme ended in August, the budget could see some relief in September, showing a minor improvement before it gets worse again. What matters most, however, is the September CPI reading. Fuel prices increased, which will impact headline inflation but this will be the peak and in the fourth quarter we see a strong decline.

In September, we envisage monthly inflation to be at 1.1% month-on-month, translating into 11.9% on an annual basis - a slight increase from 11.8% a month ago. The resurgent FX volatility is likely to further weigh on an already challenging inflation outlook.

Car production remained 5% lower YoY, so August industrial production is also likely to remain in mild contraction (YoY) as in July. Retail sales will continue to grow slightly, mainly non-food items, except car sales, which will most likely experience a double-digit YoY fall again as indicated by new registrations in August.

We expect the MPC to keep interest rates unchanged this week, in line with the consensus. The Council has already delivered substantial easing, including an open-ended asset purchase programme. The MPC should maintain its dovish bias, despite some central banks in the region tightening policy to slow inflation and defend local currencies. The Polish zloty's weakness is likely welcomed by the Council, as it will be expected to foster exports. In past months, central bankers were concerned with the resilience of the zloty as a factor delaying the post-Covid recovery. We expect no additional rate cuts, as PLN has already eased considerably. Moreover, moving rates into a negative territory is unlikely to improve credit activity. If anything, investors should track the MPC's comments on inflation, which failed to decelerate markedly in the third quarter despite lacklustre demand. Markets are speculating over how much more quantitative easing is in the pipeline in the remainder of 2020 and 2021 but this week's meeting should provide little insight into that.