Itaú BBA - Evening Edition – Inflation decelerates in Mexico

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Evening Edition – Inflation decelerates in Mexico

September 9, 2019

Moderating inflation means higher odds of further monetary easing, likely already in September.

Talk of the Day


Headline inflation reached 3.16% yoy in August, down from 3.78% in July and closer to Banxico’s inflation target of 3%. Core inflation also decelerated slightly, reaching 3.78% in August (from 3.82% in July). In monthly terms, consumer prices declined 0.02% mom in August, in line with our forecast and market expectations. The monthly figure was dragged down by non-core prices, which decreased 0.70% mom, mainly due to a 1.5% fall in agro prices. In turn, core inflation stood at 0.20% mom. Looking forward, we now expect inflation to end the year at 3.3% (3.5% previously). Core inflation remains persistent, which has been one of the main worries of Javier Guzman, the only board member who voted for the policy rate to remain on hold in the last monetary decision. However, the rest of the members of the board seem to have diverted their focus away from this indicator, with two of those members stating in the last policy decision that risks for inflation are lower. Thus, we believe the drop in headline inflation increases the odds of further monetary easing in September. ** Full story here.

The Ministry of Finance (MoF) sent the budget for 2020 to Congress. The report kept responsible fiscal targets, although they were relaxed somewhat. The primary balance target for 2020 was set at 0.7% of GDP (down from the previous MoF estimate of 1.3% of GDP), while the nominal fiscal deficit and the Public Sector Borrowing Requirements (PSBR), the broadest measure of fiscal deficit, were increased slightly to 2.1% (from 2.0%) and 2.6% (from 2.5%), respectively. The revision of the fiscal targets is due to a drop of more than 10% in the budgeted oil price for 2020, when compared to estimates for this year. Meanwhile, for 2019, the primary balance was kept stable at 1.0% of GDP and the nominal fiscal deficit target improved slightly to 1.9% of GDP (from 2.0%). However, the PSBR forecast for this year deteriorated to 2.7% of GDP (from 2.5%) due to the expected use of the stabilization fund resources to offset the fall in fiscal revenues in 2019, which is necessary to reach fiscal targets. In all, AMLO’s administration is again committing to responsible public finances, but the odds of fiscal slippage increases with MoF’s optimistic oil output and growth projections, while expected expenditures remained unchanged. Fiscal accounts will face a complicated environment in 2020: increasing (or even stabilizing) oil production will be challenging amid weak economic activity next year, expected expenditure and fewer fiscal buffers. Regarding the approval of the budget for 2020, we do not expect major problems, as AMLO’s coalition holds a simple majority in both chambers of Congress. ** Full story here.


A wider-than-expected trade surplus was recorded in August. Declining exports of manufacturing goods along with weakened imports of consumer and capital goods hint that the unfavorable activity dynamics seen in 1H19 are likely to persist. The USD 143 million surplus came in above our USD 75 million surplus forecast, which was also the market consensus. Our seasonally adjusted series shows a USD 5.0 billion (annualized) trade surplus in the quarter ended in August, the highest recorded so far this year, amid widespread import slowdown. Looking forward, as copper prices stay low and domestic demand remains weak, we expect the current account deficit at 3.2% of GDP this year (3.1% of GDP), but risks are tilted to an even larger deficit. Furthermore, exports and imports numbers are negative for activity. Falling consumer goods imports underscore the expectation of disappointing consumption, while weak intermediate goods imports and falling manufacturing exports indicate industrial activity would be unsupportive of growth, while retreating capital goods imports do not bode well for the expected investment dynamism. ** Full story here.


The BCB released today its weekly survey with market participants (Focus). The median of IPCA inflation expectations followed on its downward trend by receding 5 bps for 2019 (to 3.54%) and 3 bps for 2020 (to 3.82%). For 2021, inflation expectations remain anchored at the 3.75% BCB’s target. On economic activity, the median of GDP growth forecasts was stable at 0.87% for 2019 and oscillated to 2.07% for 2020 (from 2.10%). On monetary policy, the year-end Selic rate forecasts was unchanged: 5.00% for 2019, 5.25% for 2020 and 7.00% for 2021. Finally, the median of exchange rate expectations oscillated to BRL 3.87/USD for 2019 (from 3.85), to BRL 3.85/USD for 2020 (from 3.82) and remained unchanged at BRL 3.88/USD for 2021.


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