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Stronger activity and core CPI pressure Mexican yields

October 24, 2017

Mexican rates widened after the bi-weekly core CPI and the GDP proxy (IGAE) surprised to the upside

With information available until 6:30pm Brasilia time


  • Mexican rates widened after the bi-weekly core CPI and the GDP proxy (IGAE) surprised to the upside (see Macro Backdrop). In TIIE swaps, the 1-year increased 5bps to 7.54% and the 10-year went up 7bps to 7.41%. 
  • In LatAm FX, the COP was the regional laggard (-0.80% to 2,976/USD). The MXN is trading at 19.2078/USD (-0.66%) – the weakest level since May - and the BRL closed at 3.2427/USD (-0.37%). The CLP (-0.05% to 632.29/USD) was supported by higher copper prices (+0.39%). 

Macro Backdrop

  • According to FGV’s industry survey preview, business confidence in the industrial sector rose 2.0% mom/sa in October to 94.7. After reversing the decline in May due to a more turbulent political scenario, the index maintains an upward trend, in line with a gradual recovery in economic activity. The confidence breakdown shows the 2% increase came from a 4.9% increase in the current situation (to 95.0), while the expectations component fell 0.4% to 94.5. The preview of the capacity utilization rose 0.6 p.p. to 74.6, yet it remains barely above the low figures in 2016. 
  • CPI inflation was pressured by energy and regulated prices in the first half of October, while the appreciation of the MXN observed in 2017 and a normalization of non-core food prices were offsetting factors. Bi-weekly CPI inflation came in at 0.62%, slightly below our forecast and median market expectations (both 0.64%). The main source of inflationary pressure were electricity prices (up by 19.99%) – which are always hiked in October and November of every year – accounting for 33bps of the bi-weekly CPI print. Liquefied petroleum gas (4.11%) and gasoline (0.51%) also increased. Moreover, regulated prices (electricity and gasoline are not considered regulated prices) rose by 3.38%, adding 18bps to the CPI. This increase in regulated prices is explained by the fact that some transport services were free in the weeks following the earthquakes, but now their prices have been adjusted back to normal levels. Conversely, in the first half of October the difference between inflation for core goods (tradables) and its 5-year median variation (proxy for normal prints) was negative, from an average of 15bps in the preceding 18 bi-weekly periods. Headline inflation increased to 6.30% year-over-year (from 6.17%), while core inflation increased slightly (to 4.75%, from 4.70%). 
  • We expect the downward trend of inflation to accentuate in the next months, falling to 5.7% by the end of 2017. In spite of the recent MXN sell-off (over higher US treasury yields and Nafta risks), the exchange rate is still 7.5% stronger year-to-date (after depreciating 19% in 2016). This will be the leading driver of disinflation, with a benign impact on core tradable prices. Furthermore, agricultural inflation (which is volatile and still running at an abnormally high level) will likely continue to show a reversion in the coming months (as it did in September and October). Full Report
  • The GDP proxy (IGAE) surprised to the upside in September, driven by an acceleration of the services sector and manufacturing output. The IGAE expanded 2.3% year-over-year, above our forecast (1.4%) and median market expectations (1.7%). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was slightly lower (2.2% year-over-year), with the three-month moving average growth rate standing unchanged at 2% year-over-year. By the same metric (calendar-adjusted, three-month moving average), we note that services sectors’ growth picked up (to 3.5%, from 3.4% in July) while industrial sectors contracted (by 0.7%, after falling 0.5% previously). Within industrial output, manufacturing outperformed construction and mining. 
  • We expect GDP growth of 2.3% in 2017, unchanged with respect to the previous year. Manufacturing output will likely be boosted by the strength of the US industry, as the US ISM manufacturing index reached 60.8 in September (the highest level in thirteen years). Furthermore, we believe falling inflation coupled with robust employment (growing consistently above 4% year-over-year in the first nine months of 2017) will sustain consumption growth, helping the Service sector. Still, we note that in the short-term, the recent earthquakes will likely translate into a poor IGAE print in September, as a recent survey published by INEGI indicated that 40% of the businesses operating in the affected states (which account for one third of the economy) closed their doors for one day. In fact, according to this same survey, 16% of businesses in Mexico City (17% of Mexico’s GDP) shut down for more than three days. However, a rebound afterwards is likely, also influenced by reconstruction efforts. At the current juncture, the main risks for the Mexican economy continue to be the proximity of the presidential elections and the fate of Nafta, which are probably already having negative effects on investment. Full Report


  • Argentina’s central bank raised the monetary policy rate by 150 bps, to 27.75%, at its October meeting. The decision was unexpected given that Central Bank President Federico Sturzenegger recently downplayed the September inflation reading (1.9% headline inflation and 1.6% core inflation), which showed an acceleration from August that brought YoY inflation to 23.8%.  Instead, Sturzenegger argued that the disinflation process remains on track, albeit not at the pace targeted by the monetary authority. 
  • According to the press release announcing the decision, the monetary authority noted that the insufficient pace of disinflation and a higher-than-expected increase in fuel prices merits a tighter monetary stance. The central bank reiterated its commitment to bringing core inflation down to lower levels and putting the disinflation process on a path consistent with the 2018 target of 10% (±2%). 
  • Contrary to the previous hike in April (also 150bps), the central bank did not clearly indicate in the latest statement whether or not the move is a one-off, although the magnitude suggests that additional hikes in the very short term are unlikely. Full Report
  • The primary fiscal deficit in the first nine months of the year was below the official target, helped by the economic recovery and cuts in government subsidies. The deficit has accumulated ARS 222.4 billion (approximately 2.2% of GDP) year to date, one point below the fiscal deficit target for the same period (3.2%).  
  • The treasury is in a comfortable position to meet the fiscal target for the year (4.2% of GDP). We expect a deficit of 4.2% of GDP and a nominal deficit of 6.3% of GDP. As a result, we expect the debt-to-GDP ratio (excluding central bank and social security holdings) to climb 33.9% of GDP from 29.2% last year. However, it will be more challenging to meet the 2018 target (3.2% of GDP), as there will be no revenues related to the tax amnesty program. In fact, if we exclude tax amnesty revenues the 12-month primary deficit currently stands at 5.2% of GDP. Full Report
Market Developments
  • GLOBAL MARKETS: Equity markets were on the green and core yields widened (EONIA 5-year: +2bps to 0.06%) as the Euro area manufacturing PMI increased above expectations (actual: 58.6; consensus: 57.8). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green (CRB futures: +0.60%) in the session. Oil prices increased (WTI: +1.09% to USD 52.65/bbl) as, according to Bloomberg, Opec negotiates the extension of its oil production cuts until the end of 2018 alongside exit strategy. In metallic commodities, iron ore rose 1.93% and copper posted gains of 0.39%. LatAm FX posted losses, pressured by the external scenario. The COP was the regional laggard (-0.80% to 2,976/USD). The MXN is trading at 19.2078/USD (-0.66%) – the weakest level since May - and the BRL closed at 3.2427/USD (-0.37%). The CLP (-0.05% to 632.29/USD) was supported by higher copper prices (+0.39%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) traded range bound once again. In Brazil, spreads inched up 1bp to 172bps. In Colombia, CDS was stable at 112bps. On the other hand, Chilean and Mexican country risk fell 1bp to 53bps and 106bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened ahead of the Copom meeting. In DI futures, while the very front end narrowed (Jan-18: -2bps to 7.28%), the belly and the long end widened 3-4bps. Short Breakevens widened (1-year: +10bps to 4.49%) after power regulator Aneel proposed an increase in the flag tariff system. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened after the bi-weekly core CPI and the GDP proxy (IGAE) surprised to the upside (see Macro Backdrop). In TIIE swaps, the 1-year increased 5bps to 7.54% and the 10-year went up 7bps to 7.41%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Most Chilean yields widened 2-3bps, tracking higher US Treasuries. In Camara swaps, the 1-year increased 2bps to 2.39%. Chile Rates Tracker In Colombia, the belly and the long end of the IBR swaps curve widened 3-5bps, also pressured by the rise in core yields (5-year: +4bps to 5.39%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom will meet again (Wed.). We maintain our call for a 0.75 p.p. cut, followed by two 0.50pp reductions in the December and February meetings, bringing the Selic rate to the final level of 6.5%. On fiscal accounts, the central government result for September will come through on (Thu.); we expect a BRL 26.4 billion deficit. Onto the balance of payments report (Thu.), we expect a USD 0.6 billion current account deficit in September. Also, we expect direct investment in the country (DIC) to register inflows of USD 6.5 billion in September. Finally, the charges against President Temer are expected to be voted in the Lower House floor (Wed.).
  • In Mexico, the statistics institute (INEGI) will announce August’s retail sales (Wed.). We estimate that retail sales’ growth deteriorated to 0.3% year-over-year. INEGI will also announce September’s trade balance (Thu.). We expect the trade deficit to narrow.
  • In Colombia, think-tank Fedesarrollo will release the September Industrial and Retail confidence indices (Wed.). Furthermore, Banrep holds its monthly monetary policy meeting (Fri.). It remains likely that the majority of the board will opt to extend the pause (policy rate at 5.25%) in the easing cycle as it evaluates the inflation trend.

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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