Stars Align for an Early Hike in Brazil, Mexico’s Regulators Ease Pension Fund Investment Rules


The Central Bank Weekly Focus Survey released on February 17 indicated that inflation expectations for 2010 continued to deteriorate, though marginally, while economic growth forecasts increased rapidly, as expected.  Inflation forecasts moved slightly up to 4.8% from 4.78% for year-end 2010; however, inflation expectations for 12 months in advance and for year-end 2011 stayed well anchored at around 4.5%.  Meanwhile, IGP-M forecast for 2010 moved sharply up to 5.26% from 4.84% the previous week and 4.55% by mid January.  Here too, however, inflation expectations for 2010 stayed at 4.5%.  The central bank target is 4.5% (+- 2%).  Average GDP forecasts were revised up to 5.47% from 5.35% for 2010 and remained stable at 4.5% for 2011.

Moreover, the monetary policy rate (SELIC) was left untouched for year end 2010 at 11.25% for the fifth week in a row, but it was revised up for year-end 2011 to 11.25% from 11%. The markets’ DI curve is pricing in 325 basis points in hikes to around 12% by year-end 2010, starting in March (25 basis points).  Needless to say, the markets were anticipating almost 400 basis points in hikes just a month ago. Finally, the real (BRL) stayed unchanged for the end of 2010 at BRL 1.8 per USD and for year end 2011 at BRL 1.85 per USD.

Finally, the Brazilian economy generated 181,419 new formal job posts in the first month of 2010 according to the Labor Ministry data, after having slashed 415,192 workers during December 2009.  The January result signifies a 27% increase with respect to January 2008 and 0.55% increase over the total amount of employed people by the end of 2009.  The industrial sector led the surge, generating 38% of the total recovery, with 68,920 new positions.  The second driver was the service sector followed closely by construction, with 57,889 (32%) and 54,330 (30%) new jobs, respectively.    The only sectors that lost jobs in January were Commerce and Public Administration, with a loss of 6,787 and 806 jobs respectively. However, the Labor Ministry signals that both of these sectors owe this dynamic to seasonal factors, such as the termination of contracts to meet year-end demands (for the construction sector) and the end of the school cycle (for the Public Administration sector).

Job creation for the past 12 months has been almost 1.3 million, while the monthly average job creation for 2009 was 82,925 (hardly hit by January and December 2009 job losses) and 121,017 for 2008 (dragged down by December 2008 job losses).  The government’s target is to create two million jobs in 2010.

As expressed before, RGE anticipates the central bank (COPOM) to raise the SELIC to 11.25% by year-end 2010 from the current 8.75%.  The possibility that the monetary policy committee initiates the hiking cycle in April has certainly increased because of the recent deterioration in inflation expectations and stronger expected GDP growth for 2010. RGE sees growth at 5.3% in 2010 and the real to close the year at BRL 1.75 (for further detail please read Q1 2010 Brazil Outlook, and RGE Currency Outlook: The Brazilian Real). Lastly, the current employment numbers suggest that economic activity continues to recover, and if employment growth remains strong, demand pull inflation pressure should surface soon.  In RGE’s view, average unemployment will likely drop to 7.6% in 2010 from 8.1% in 2009.


Mexico’s pension funds regulator (CONSAR) will relax investment rules to allow fund managers to deal better with heightened market volatility crises and increase their potential holdings of Mexican assets.  The new rules will likely become effective by the end of February (please read the Critical Issue: Where is the Mexican Peso going? below for further detail).  The authorities are trying to avoid pension fund managers being forced to sell long-term securities in order to comply with regulatory (Value at Risk) limits and thus fuel volatility further during crisis times such as that experienced by the end of 2008 and the beginning of 2009.  This is expected to support the long end of the curve.  Moreover, Mexico’s pension funds (AFORES) will be able to purchase stocks of medium and large cap companies that are part of stock indices in Mexico rather than only small and medium size companies that are not part of any stock exchanges in Mexico.  Here, the regulators are trying to improve funding conditions for medium and large caps by the AFORES, improve efficiency in the stock market, and provide fund managers with more options to diversify their portfolios.

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Free Trade Agreements for Andean Countries and the rest of the world

Where is the Mexican Peso going?