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Mexican rates narrow amid lower-than-expected CPI

September 22, 2017

Mexican yields went down 4-6bps past the 1-year as bi-weekly CPI came in below expectations.

With information available until 6:30pm Brasilia time


  • Mexican yields went down 4-6bps past the 1-year as bi-weekly CPI came in below expectations (see Macro Backdrop). In TIIE swaps, the 1-year fell 2bps to 7.20% and the 5-year narrowed 5bps to 6.67%. Likewise, the breakevens curve went down 4-6bps. 
  • LatAm FX (+0.48%) strengthened ahead of the weekend. The MXN outperformed in high-beta space (+0.79% to 17.7406/USD). The BRL posted gains of 0.39% to 3.1260/USD. Andean pairs also strengthened (COP: +0.33% to 2,906/USD; CLP: +0.11% to 624.34/USD). 
Macro Backdrop


  • According to FGV’s industry survey preview, business confidence in the industrial sector (FGV) rose 0.1% mom/sa in September. After reversing the decline in May due to a more turbulent political scenario, the index continues to gradually rise, in line with a gradual recovery in economic activity. Meanwhile, the preview of the capacity utilization decreased further (0.1 p.p.) to 74.0, the lowest level in 2017 and barely above the low figures in 2016. 
  • Meanwhile, consumer confidence (FGV) rose 1.7% mom/sa in September, partially reversing the 3.9% decline between May and August. The improvement was driven by expectations (2.5%), while the current situation component improved only 0.3%. The percentage of people reporting that jobs are hard to get rose 0.6 p.p. to 92.8%, reinforcing the view that the job market continues to show a sizable slack. The component of expected inflation rose for the first time in more than a year, but remains at very low levels. Finally, intention to purchase durable goods fell slightly.
  • The Brazilian government published its bimonthly report with estimates for 2017 primary revenues and expenditures in order to comply with the BRL 159 billion (or 2.4% of GDP) deficit. This new target had already been announced in August. The upward revision in the fiscal target (to BRL -159 billion, from BRL -139 billion) for 2017 allowed the government to decrease BRL 12.8 billion of the budget freeze this year. The rest of the revision came from lower revenues (BRL -4.9 billion) and a BRL 2.3 billion increase in non-discretionary spending.
  • BCB placed the full offering of 12,000 FX swaps. After closing, the central bank announced another rollover auction of up to 12,000 contracts (USD 600 million) on September 25. 
  • CPI is showing more benign price dynamics across core and non-core components. Bi-weekly inflation came at 0.34%, below our forecast and median market expectations (both 0.40%). The main source of the pressure was education fees (given the beginning of the school year), which climbed 2.21% and contributed 12bps to bi-weekly CPI. Another driver of inflation in this period was adverse weather; namely, the hurricane in the US (Harvey) which disrupted refining activities and, thus, increased Mexico’s fuel import prices (mainly gasoline and LPG). In fact, energy prices went up by 1.1% and added 10bps to the CPI print. 
  • We expect the downward trend of inflation to accentuate in the next months, falling to 5.7% by the end of 2017. The appreciation of the MXN observed so far this year (14% year-to-date, almost matching last year’s 19% depreciation) will be the leading driver for disinflation, with a benign impact on core tradable prices. Moreover, agricultural inflation (which is volatile and still running at an abnormally high level) will likely continue to show a reversion in the coming months. Moreover, we highlight that we do not expect a material impact of the earthquakes on inflation. In our view, transport infrastructure has not been damaged to the extent that it can trigger shortage of goods in the main local markets. Far from it; Mexico City has multiple access points and the capital cities of the other affected states are also very well connected to the national highway network. Agricultural output is unlikely to be affected meaningfully either, considering that the states that are the main agricultural powerhouses are located elsewhere. Granted, construction material prices could be pressured by the reconstruction works that will likely follow, but these are not part of the consumer price index. Full Report
  • Domestic demand picked up in 2Q17 on a year-over-year basis, as the strength of private consumption more than offset weak investment and public sector demand. Aggregate supply - the sum of GDP and imports - expanded 2.6% year-over-year in 1Q17, in line with median market expectations and above our forecast (2.3%). According to working-day adjusted data, which nets out the effect of the Easter holidays, aggregate supply expanded 4% year-over-year (same as in 1Q17), explained by solid GDP growth (2.9% year-over-year, 2.6% in 1Q17) and slightly softer imports of goods & services (7.2% year-over-year, 8.4% in 1Q17). Looking at working-day adjusted data, domestic demand expanded 2.8% year-over-year (from 1.8% in 1Q17). Private consumption (4.4% year-over-year, from 3.2% in 1Q17) continued surprising to the upside - in spite of some weaker fundamentals (falling real wages, slower consumer credit, softer remittances converted into pesos, subdued consumer confidence) - underpinned by a tight labor market. 
  • We expect GDP growth of 2.3% in 2017, unchanged with respect to the previous year. The headwinds that have battered domestic demand over the past quarters - mainly the uncertainty surrounding trade relations with the US (discouraging investments), higher inflation (affecting real wages), and tighter macro policies (in the form of higher rates and fiscal cuts) - did not lead to an economic slowdown, as US economic growth continues to shield the Mexican economy. Furthermore, we expect all of these shocks to moderate in the coming quarters. In fact, there is more clarity on the course of Nafta renegotiation (deal will likely be reached by 1Q18), inflation has begun to fall, and fiscal policy will become less restrictive (fiscal cuts announced for 2018 are much smaller compared to the previous two years). Moreover, economic growth in the US will likely continue to boost Mexico’s manufacturing exports. On the negative side, the mains points to be considered are the proximity of the presidential elections and the after-effects of the earthquakes (which have disrupted economic activity in six states accounting for one third of Mexico’s GDP). Full Report


  • The coincident activity indicator (ISE) for the month of July shows activity is improving, in line with sectoral activity data published last week. Favored by a weak base of comparison (amid the trucking strike in July 2016), the seasonally adjusted activity series expanded 3.0% yoy (1.4% in June), falling in between our 4.0% forecast and market consensus of 2.3%. Growth in the quarter ending in July improved to 2.1% (1.7% in 2Q17 and 0.5% in 1Q17). Moreover, growth in the first seven months of the year came in at 1.4% (2.0% in the 2016 equivalent period), while the rolling 12-month growth rate improved to 1.6%, the highest growth rate since February. Sequentially, activity retreated (-0.2% mom), however activity improved to 4.4% qoq/saar in the quarter ending in July, from 2.3% in 2Q17 and -1.8% in 1Q17. We expect GDP growth of 1.6% this year, a slowdown from the 2.0% recorded last year. Higher oil prices (compared to last year) and the monetary stimulus already implemented would support an improvement in activity in 2H17. 

Market Developments 

  • GLOBAL MARKETS: The VIX index increased but it’s still below 10 on renewed geopolitical concerns in the Asia-Pacific region. According to the Wall Street Journal, the North Korean foreign minister Ri Yong Ho said “perhaps we might consider a historic aboveground test of a hydrogen bomb over the Pacific Ocean”. Haven assets posted gains (gold: +0.43%; JPY: +0.36%). Moreover, the GBP dropped (-0.41%) after Moody’s cut the United Kingdom’s Long-Term issuer rating to Aa2 from Aa1 and changed the outlook from negative to stable. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Energy and agriculture commodities posted gains in the session. Oil (Brent: +0.46% to 56.35/USD), Gasoline (+0.67%) and natural gas (+0.37%) strengthened. In grain space, corn (+0.93%) and soybean (+1.39%) outperformed. LatAm FX (+0.48%) strengthened ahead of the weekend. The MXN outperformed in high-beta space (+0.79% to 17.7406/USD). The BRL posted gains of 0.39% to 3.1260/USD. Andean pairs also strengthened (COP: +0.33% to 2,906/USD; CLP: +0.11% to 624.34/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) tilted downwards in the session. Chilean, Mexican and Colombian spreads inched down 1bp to 60bps, 113bps and 128bps, respectively. In Brazil, CDS narrowed 3bps to 201bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, the Apr-18 fell 2bps to 7.23% and the Jan-25 widened 3bps to 9.75%. Meanwhile, short real rates fell as the May-19 went to 3.21% (-6bps). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields narrowed as bi-weekly CPI came in below expectations (see Macro Backdrop). In TIIE swaps, the 1-year fell 2bps to 7.20% and the 5-year narrowed 5bps to 6.67%. Likewise, the breakevens curve went down 4-6bps. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates traded range bound. In Camara swaps, while the 1-year widened 1bp to 2.45%, the 5-year fell by1bp to 3.41%. Chile Rates Tracker Long Colombian rates narrowed, tracking US treasuries. In IBR swaps, the 10-year went down 5bps to 6.11%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the National Monetary Council is scheduled to meet to decide on the TJLP long term interest rate (Thu.). We expect the National Monetary Council to cut TJLP to 6.5% from 7.0%. Moreover, the nationwide unemployment rate for August will come out on Friday - we expect it to be unchanged at 12.7% (according to our seasonal adjustment). In addition, FGV’s business confidence surveys for September on industry, services, retail and construction will be released through the week. Also, the economic uncertainty indicator for September, also from FGV, will be released (Thu.).  Onto the balance of payments report (Tue.), we expect a USD 0.1 billion current account surplus in August and direct investment in the country (DIC) to register inflows of USD 7.2 billion in August. On fiscal accounts, the consolidated primary budget balance for August will come through (Fri.). We expect a BRL 14.9 billion deficit, with the central government result (due Thur.) posting a BRL 13 billion deficit. Finally, lawmakers in the Lower House Constitution and Justice Committee will choose a rapporteur for the second round of charges against President Temer. 
  • In Mexico, the statistics institute (INEGI) will publish July’s monthly GDP proxy, IGAE (Mon.). We expect growth to slow down to 1.8% year-over-year. Moving forward, INEGI will announce August’s unemployment rate (Tue.). We expect the unemployment rate to post 3.4%. Then, INEGI will announce August’s trade balance (Wed.). We expect the trade deficit to continue narrowing in August, helped by exports. Moreover, Banxico will hold its monetary policy meeting (Thu.). We expect the Board to maintain the reference rate at 7%.  Finally, the Ministry of Finance (Hacienda) will announce August’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of August (Fri.). We expect manufacturing production to expand 1.1% from last year (+2.6% in July). Also, INE will release the national unemployment rate for the quarter ending in August (Fri.). With job growth dynamics expected to endure, we see the unemployment rate reaching 6.9%, stable from one year ago. 
  • In Colombia, think-tank Fedesarrollo will release the August Industrial and Retail confidence indices (Wed.). We expect confidence levels to remain depressed in coming months amid a still timid activity recovery. Then, the institute of statistics (DANE) will release the August unemployment rate (Fri.). We expect the urban unemployment rate to rise to 10.7% in August from 9.9% recorded in the same month last year. Still, DANE will publish exports for the month of August (Fri.). We expect exports to come in at USD 3.1 billion, a 1% annual expansion, amid a higher base of comparison following the end of the transportation strike one year before. The highlight will be the BCCh’s monthly monetary policy meeting (Fri.). We expect the central bank board to leave the policy rate unchanged at 5.25%. In early 2018, as inflation eases, further easing is likely. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We expect rates on-hold as inflation remains uncomfortable. The trade balance for August will also come out (Tue.). We expect a trade deficit of USD 65 million in August.  Then, the INDEC will publish the EMAE (official monthly GDP proxy) for July (Wed.). We expect activity to grow 3.7% year-over-year (0.5% mom/sa). Moreover, the INDEC will release the current account balance for 2Q17 (Wed.). We expect a current account deficit of 4.0% of GDP this year. Furthermore, the INDEC will publish the manufacturing and construction data for August (Thu.). Finally, the INDEC will publish the wage index for July (Thu.). 

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa

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