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Mexican yields narrow as Banxico unanimously leaves rates on hold

November 9, 2017

A united board leaves rates on hold.

With information available until 6:30pm Brasilia time

Highlights

  • Mexican yields narrowed as a united board left rates on hold (see Macro Backdrop). The market was discounting the risk of for interest rate hikes, given the recent MXN volatility and the fact that in the previous decision two board members sounded open for the possibility of further monetary policy tightening. In TIIE swaps, the 2-year fell 2bps to 7.35% and the 10-year went down 4bps to 7.42%.
  • LatAm FX posted gains at the margin on a weak USD day. The CLP appreciated 0.27% to 630.78/USD (+0.27%) and the COP posted gains of 0.24% to 3,012/USD. By the time of writing, the MXN is trading at 19.0462/USD (+0.21%) and the BRL stood flat at 3.2526/US (-0.06%). 

Macro Backdrop

BRAZIL
  • Paper cardboard dispatches (ABPO) fell 0.3% mom/sa in October (our seasonal adjustment). The soft figure follows a 1.9% decline in September, leading the 3-month moving average to decline 0.1%. The result is slightly worse than other industrial production coincident indicators already released, so we lowered our industrial production forecast to 0.0% mom/sa for October (previously: 0.3%). 
MEXICO
  • As was widely expected, Mexico’s central bank left its policy rate unchanged in October. The accompanying press statement revealed that the board was unanimous in its decision. We believe that there was a risk of some board members voting for interest rate increases, considering the recent volatility in the exchange rate market and the fact that in the minutes of the previous decision two board members sounded open to rate increases. 
  • Although central bank forecasts for inflation remain benign (converging to the 3% target in 2018), the board is more concerned about the inflation outlook. With higher uncertainty over the fate of Nafta, the expectation of monetary policy normalization in the US, the tighter labor market, the possibility of an above-productivity minimum wage hike and potential non-core price increases, the balance of risks for inflation has deteriorated and is now tilted to the upside, in the central bank’s view. In the concluding remarks of the statement, the board added “potential wage pressures” as a variable that it will monitor closely, so concerns that the labor market could be overheating seem to be growing. 
  • On a separate note, October CPI came in slightly above expectations, at 0.63% (consensus and our call: 0.60%). As a result, year-over-year inflation stood at 6.37%, almost unchanged from the 6.35% rate registered the previous month and far above the 3% target. Annual core inflation was also basically unchanged (at 4.8%). We note that seasonally-adjusted figures point to a much faster disinflation process. Our estimates shows that the three-month annualized core inflation rate is already close to the 3% target, while the same measure for headline inflation is somewhat above the upper bound of the target range (but also declining substantially). 
  • We continue to expect the central bank to remain on hold at least until the beginning of the second half of next year. Although, in our view, a significant disinflation is taking place, uncertainty over trade relations with the US, Fed monetary policy decisions and the presidential elections will likely lead the central bank to remain cautious. We note that Governor Carstens is leaving the central bank this month, but we do not expect the change in governorship to alter its policy stance. Full Report
Market Developments
  • GLOBAL MARKETS: The USD weakened vis-à-vis DMs (DXY: -0.43%) and equity markets were on the red on market concerns over the tax GOP tax overhaul. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed in the session. In energy, oil posted gains (WTI: +0.58% to USD 57.38/bbl). On the other hand, corn and soybean dropped after the USDA revised global stockpiles upwards: -1.94% and -1.35%, respectively. LatAm FX posted gains at the margin on a weak USD day. The CLP appreciated 0.27% to 630.78/USD (+0.27%) and the COP posted gains of 0.24% to 3,012/USD. By the time of writing, the MXN is trading at 19.0462/USD (+0.21%) and the BRL stood flat at 3.2526/US (-0.06%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) widened in the region. In Colombia, CDS increased 4bps to 124bps and in Brazil they went up 3bps to 179bps. Mexican spreads increased 2bps to 111bps. In Chile, country risk was stable at 53bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The belly of the Brazilian curve widened in the session. In DI futures, the Jan-19 increased 3bps to 7.28% while the front end and the long end were broadly stable (Jul-18 at 6.97%; Jan-25 at 10.36%). Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican yields narrowed as Banxico unanimously left rates on hold (see Macro Backdrop). The market was discounting the risk of for interest rate hikes, given the recent MXN volatility and the fact that in the previous decision two board members sounded open for the possibility of further monetary policy tightening. In TIIE swaps, the 2-year fell 2bps to 7.35% and the 10-year went down 4bps to 7.42%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates traded range bound in the session. In Camara swaps, the front end inched up (18-month: +1bp to 2.59%) whereas the long end went down (10-year: -1bp to 4.16%). Chile Rates Tracker Short Colombian yields fell 2-3bps in tandem with US Treasuries. In IBR swaps, the 1-year went down 2bps to 4.47%. Colombia Rates Tracker

Friday Events

  • In Brazil, October’s IPCA consumer inflation will be released. We forecast a 0.50% monthly increase, with year-over-year inflation rising to 2.78% from 2.54%. On economic activity, traffic of heavy vehicles (ABCR) for October may be released.
  • In Mexico, the statistics institute (INEGI) will publish September’s industrial production. We estimate that industrial production fell by 2.2% year-over-year.
  • In Colombia, Banrep will publish the minutes of the surprise decision to cut the policy rate by 25-bp (to 5.0%) at the October monthly meeting. We expect the minutes to show that further cuts will be data dependent.

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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