Last week, Mexico’s inflation data for Jan. 09 suggested that headline inflation continued normalizing while core CPI stayed somewhat sticky (please read our piece posted on February 10th). Moreover, Mexico’s growth indicators were not encouraging at all. Indeed, investment in Nov. 08 fell harder than expected (down 2% y/y), and economic activity indicators for Jan. 09, such as auto data (production down 51% y/y, exports down 57% y/y, and sales down 28%), collapsed. The latter suggests that industrial output continued on a severe slowdown at the beginning of the year. In Chile, trade dynamics in Jan. 09 deteriorated swiftly (exports plus imports down 35% y/y), pointing to harsh downside stress on economic activity, and the central bank delivered a massive cut of 250bps to 4.75% to stimulate an ailing economy. We expect Chile’s central bank to bring the MPR to 3.5% by cutting 125bps in the March meeting; however, a less aggressive approach cannot be ruled out (please read our Focus piece). Finally, in Peru, the trade surplus shrank rapidly to USD 47mn in Dec. 08 from USD 1.02bn in Dec. 07, indicating that the external shock (exports down 31% y/y vs. -4% y/y 3MMA) and slowing domestic demand (imports up 6% y/y vs. +36% y/y 3MMA) are taking their toll on overall economic activity.
Mexico— Primary CETES Auction Showed Mixed Results. The 10yr M-Bond Yield Increased by 10bps. MXN Weakened Sharply
In the primary CETES auction, the 28dys and 336dys CETES declined by 9bps and 10bps to 7.07% and 7.14%, respectively. However, the 91dys and 175dys increased marginally by 1bp and 4bps to 7.29% and 7.1%, respectively. This continues to suggest that market participants already have discounted another rate cut of at least 50bps in February. Concurrently, in the M-Bond public sale, the 10yr bond yield went up by 25bps to 8.24% as risk appetite deteriorated.
Headline and core inflation in January came in at +0.23% m/m (6.28% y/y) and +0.43% m/m (5.76% y/y), respectively, according to Banxico. The central bank target range for the 1Q09 is 5.75% y/y to 6.25% y/y. The monthly headline print was well below our expectation (+0.35% m/m) and that of the Bloomberg and Reuters consensus (+0.33% m/m), while core CPI was in line with forecasts (Ours +0.44% m/m; Bloomberg and Reuters +0.43% m/m).
Last week’s data from Mexico continued showing a poor economic environment at the beginning of the 1Q09, as consumer (ICC down 20.8% y/y) and producer confidence (ICP down 17.6% y/y), as well as IMEF’s manufacturing (down 11.7% y/y) and non-manufacturing indexes (down 12.6% y/y), continued under pressure in January. Moreover, Banxico’s monthly survey showed sharp adjustments to growth (down), inflation (down), the MXN (weaker) and CETES (lower). Finally, the central bank started intervening directly in the FX market in order to avoid destabilizing movements in the local currency. In Colombia, inflation continued improving in January (0.59% m/m), thus providing the CB the ammunition to keep on cutting interest rates by at least another 50bps during the February 27th meeting. In Chile, economic activity in December (IMACE up 0.5% y/y) and inflation in January (-0.8% m/m) indicated that the output gap widened considerably by the end of 2008 and that inflation continued normalizing rapidly. Both results, coupled with the CB willingness to continued easing, as reflected in the dovish minutes, bode well with our view that the CB will likely cut the MPR by 100bps in the February 12th meeting. Finally, in Peru, low inflation in January (0.11% m/m) suggested that prices stayed on a downward trend and provided the CB the comfort to lower the reference rate unexpectedly by 25bps to 6.25% during the February 5th meeting. We anticipate the BCRP to cut rates to 4.5% by mid-year.
Mexico:—Banxico’s Survey Showed a Swift Improvement in Inflation Expectations, Sharp Downward Revisions to GDP Growth Forecasts, and Weaker MXN for 2009
Banxico’s latest survey on economic expectations, in which we participated, suggests that analysts expect January headline inflation to be about 0.35% m/m (BD 0.35% m/m) and core CPI to be about 0.39% m/m (BD 0.44% m/m). Headline inflation expectations improved rapidly to 4.12% from 4.56% (BD 3.7%) and core inflation projections decreased swiftly to 4.07% from 4.42% (BD 3.84%) for 2009. Moreover, headline CPI forecasts went down to 3.74% from 3.79% (BD 3.43%) and core CPI expectations were reduced to 3.67% from 3.79% (BD 3.61%) for 2010. Finally, averaged headline inflation for the medium-term (2010-2013) is expected to be around 3.56% (BD 3.45%).
INEI reported that headline inflation decelerated to 0.11% m/m or 6.63% y/y and that core (ex-food) CPI declined sharply by -0.69% m/m to 3.21% y/y. Both readings are above the central bank’s inflation target of 2% (+- 1%), but they indicate that disinflationary forces are at play. Although the headline number was slightly higher than our expectation (0.05% m/m) and that of the Bloomberg consensus (0.09% m/m), the core reading was sharply lower than our forecast (-0.3% m/m).
INEGI reported that economic activity (IGAE) shrunk by 2.7% y/y in November (4.1% y/y in Nov 07 and 0.3% y/y 3MMA), thus, bringing economic growth to a sluggish performance of 1.5% YTD (3.2% YTD in 11M07). The result was worse than our expectation (-2.1% y/y) and that of the consensus (Bloomberg -1.5% y/y).
Headline and core inflation for the first two weeks of January increased by 0.15% 2w/2w and 0.25% 2w/2w, respectively, according to the central bank. These results bring headline and core CPI to 6.35% y/y and 5.77% y/y, respectively. Both readings are above Banxico’s inflation target range for the 1Q09 (5.25% to 5.75%). The headline print was lower than our expectations of 0.22% 2w/2w (Bloomberg consensus 0.24% 2w/2w); however, core CPI came in close to our forecast of 0.24% 2w/2w (Bloomberg consensus 0.20% 2w/2w).
Colombia—Industrial Production and Retail Sales Plunged in November
DANE reported that industrial production contracted by 13.3% y/y (7.1% y/y in Nov 08 and -6.7% y/y 3MMA) and real retail sales declined by 2.9% y/y (9% y/y in Nov 08 and -0.6% y/y 3MMA). Both readings were well below expectations: industrial production (BD -8.8% y/y; Bloomberg consensus -8.1% y/y) and real retail sales (BD -2.6% y/y; Bloomberg consensus -1.5% y/y). This result brings industrial production to a decline of 3% YTD (10.9% YTD in 11M07), and real retail sales to a rapid deceleration of 1.9% YTD (11% YTD in 11M07).
Favorable changes in global conditions in the last few years, along with improvements in domestic fundamentals in the last decades, have allowed Latin America to enjoy prosperous times and to become less vulnerable to a US economic slowdown and to sudden adverse changes in market volatility. Furthermore, the possibility that these external settings stay somewhat […]