WEEKEAHEAD-Inflation data tops agenda, Mexico warrants due

By Daniel Bases

NEW YORK, Oct 7 (Reuters) - Emerging market investors are likely to feel the lingering positive impact of stronger-than-expected U.S. September jobs report while Mexican and Brazilian inflation data will help set the tone this week.

Analysts think the respective central banks will leave monetary policy unchanged at their upcoming meetings while Asian central banks are likely to do the same.

The new week starts slowly due to Monday's U.S. bond market holiday and likely eases into Tuesday until the meeting minutes of the U.S. Federal Reserve's Sept. 18 decision to aggressively cut interest rates are released at 2 p.m. EDT (1800 GMT).

The general underlying tone remains strong, helped on Friday by stronger-than-expected U.S. jobs data for September, plus a hefty upward revision for August where 89,000 jobs were created rather than a loss of 4,000.

Emerging debt market yield spreads tightened significantly after the jobs data, but further narrowing is expected to come only sparingly.

"I think the tone in the market for the most part is positive. There is risk appetite, there is liquidity. I think there is some credit differentiation favoring emerging markets, so barring some kind of unexpected shock the trend should continue to be supportive of emerging markets," said Paulo Leme, managing director for emerging markets research at Goldman Sachs in Miami.

For the week, the benchmark JP Morgan Emerging Markets Bond Index Plus 11EMJ.JPMEMBIPLUS narrowed 7.548 basis points to 193.806 basis points over comparable U.S. Treasuries.

"Emerging Market asset classes continue to drift up, as the opinion that central banks will remain favorably engaged still prevails in the markets. That said, the U.S. payroll number (Friday) has raised the possibility that the Fed may take a temporary pause on 31 October," Merrill Lynch said in a note.

"Many risky assets have rallied to record heights, and some risk metrics have continued to improve. In contrast to six weeks ago - when markets were discounting huge uncertainties, the question now is whether too much of a positive scenario may not be priced in," Merrill said.

INFLATION REPORTS

Mexico reports September inflation data on Tuesday. The Reuters consensus poll sees headline inflation rising 0.86 percent with core inflation up 0.24 percent.

"The high print of the headline may mislead a few in the direction that the central bank is prone to hike when I don't think it will," said Goldman's Leme.

Leme thinks Mexico will leave its benchmark interest rate unchanged at 7.25 percent on Oct 26.

Increases in Mexican food prices are the likely culprit behind the rise in the headline inflation data.

Mexico is seen as the most vulnerable to any cooling of the U.S. economy, which would in turn weaken inflation pressures.

"Inflation has been close to the ceiling of the band and somewhat sticky downwards. But the reason essentially is a slew of relative price shocks, namely food prices, which are exogenous. Monetary policy is not very effective to deal with the first round effect of the shocks," Leme said.

It is a similar story for Brazil, which reports its main inflation data on Wednesday and holds a monetary policy meeting on Oct. 17.

"Lower pressure on food prices probably reduced the IPCA in September," Deutsche Bank said in a research note.

Deutsche Bank expects September month-on-month IPCA of 0.23 percent and a 4.20 percent year-on-year reading.

MEXICO WARRANTS

Investors will exercise warrants on Oct 11, exchanging U.S. dollar denominated Mexican sovereign bonds with maturity dates from 2009 through 2033 for peso-denominated issues. A further exercise date is on Nov. 7.

Mexico sold warrants on March 15 to exchange foreign bonds worth $2.66 billion for peso-denominated paper as part of a plan to bolster the country's financial markets and economy.

The Finance Ministry said it sold warrants that will let investors swap $2 billion of dollar bonds and 500 million euros of euro bonds into peso debt, reducing the government's foreign exchange risk.

On Sept 25, investors exchanged $669 million worth of euro bonds for peso-denominated bonds.