Mexico: Previous Week
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—Normalizing Inflation in January and Contracting Investment in November
This week’s data will suggest that inflation somewhat improved in January, and that investment was heavily impacted by a sharp deteriorating in external and local growth prospects as well as the tightening financing conditions.
On Monday February 9th, the central bank will report inflation data for January, which will likely indicate that headline CPI decelerated to 0.35% m/m (0.46% m/m in Jan 08 and 0.69% m/m in Dec 09) and core inflation increased by 0.44% m/m (0.4% m/m in Jan 08 and 0.62% m/m in Dec 08). If we are correct, headline and core inflation should have gone up by 6.41% y/y and 5.78% y/y, of which only headline will be above the central bank target range for the 1Q09 (5.75% to 6.25%). Overall, administrative measures, rapidly decelerating domestic demand and seasonal factors should have eased inflation pressures. Lower international prices of commodities are still to permeate some domestic prices, especially those of processed food, and the FX pass-through effect remains somewhat of a concern. We expect headline inflation to stay above 6% in the 1Q09 but to enter a more pronounced downwards trend in the 2Q09. The Bloomberg and Reuters consensuses expect headline and core CPI to be around 0.33% m/m and 0.43% m/m, respectively.
On Wednesday February 11th, INEGI will disclose data on gross fixed investment (GFI) for November. We expect that indicator to decline by 1.4% y/y (5.2% y/y in Nov 07 and 4.5% y/y 3MMA) driven by a sharp deceleration in capital good imports (2.7% y/y vs. 17% y/y 3MMA) and worsened construction activity (-5.1% y/y vs. -2.1% y/y 3MMA). This will bring investment to an expansion of 5.2% in 11M08 (6% in 11M07). The Bloomberg consensus expects an expansion of 1% y/y, while the Reuters one sees a contraction of 1.3% y/y.
CHILE—The Trade Surplus Likely Narrowed Significantly in January and The CB will probably Cut the Monetary Policy Rate by 100bps to 6.25%
This week’s data will bring important information about the state of the local economy at the beginning of 2009, as it deals with continuing unfriendly external conditions and waning consumer and business confidence. Moreover, the CB board will meet on Thursday to decide on the monetary policy rate and we expect the committee to cut the MPR by 100bps to 6.25% given that the economy is decelerating rapidly in 4Q08 (1.1% y/y or -4.8% q/q SAAR) and strong deflation pressures persisted in January (-0.8% m/m).
On Monday January 9th, the central bank will disclose the trade balance result for January, and we expect it to register a surplus of USD 624mn (USD 2.3bn in Jan 08). Exports likely contracted swiftly by 35.4% y/y to USD 4.2bn (-18% y/y 3MMA); however, imports should have also declined sharply by 15.4% y/y to USD 3.6bn (+ 2.3% y/y 3MMA). Lower international prices of copper (down 54% y/y) and slower external demand should have weighted on mining and industrial exports; however, the ongoing deceleration in domestic demand, especially consumption, and lower international prices of fuel (crude oil down 49% y/y) should have limited growth of consumer and intermediate imports, respectively. Resilient investment, however, likely maintained capital goods growing at a healthy pace. The Bloomberg consensus expects a trade surplus of 154mn.
On Thursday February 12th, the CB committee will meet to decide on the monetary policy rate. We anticipate the CB to lower the MPR by 100bps to 6.25%, and consequently, during the first two months of 2009 it will undo the 200bps increase in all of 2008. Though we do not discard the possibility (25% probability) that the CB lowers the MPR more aggressively. Indeed, the rapid widening of the output gap and sharp normalization in inflation and inflation expectations, together with a willing central bank board (dovish MP minutes and IPoM) and relatively stable currency, indicates that the committee will continue cutting the MPR aggressively in February. Our easing monetary policy outlook implies cuts of 100bps in Feb, 50bps each in March, April, May and June, to 4.5% by mid-year, and reductions of 25bps each in July and August to 4% by 3Q09. The Bloomberg consensus expects the CB to lower the MPR by 100 bps to 6.25%.
PERU—Deteriorated External Conditions likely brought the Trade Balance into a Deficit and limited Economic Expansion in December
This week’s data will likely show that unfriendly global economic and financial conditions continued taking their toll on Peru’s trade accounts and economy. Moreover, a cyclical domestic deceleration that will be exacerbated by a high statistical base in 1H08 (GDP grew 10.4% y/y) will likely keep growth subdued during 1H09 (GDP around 3% to 4% y/y). Finally, INEI will report unemployment data for the Nov-Dec-Jan period and we expect it to be about 9.1% (Bloomberg consensus 8.7%).
On Tuesday February 10th, INEI will inform on international trade data for December, and we expect it to print a deficit of USD 215mn (+USD 1.02bn in Dec 07). Exports likely declined by 33.5% y/y to USD 1.88bn (-4.7% y/y 3MMA) and imports decelerated to 16% y/y to USD 2.01bn (36.4% y/y 3MMA). Lower international prices of copper (down 54% y/y) and oil (down 49% y/y), and to a lesser extend gold (down 2% y/y), should have dragged traditional exports deeper into negative territory (-37.4% y/y), and slowing global and regional demand should have pressured non-traditional exports down (-20% y/y). Concurrently, slowing domestic demand and lower commodity prices likely capped growth in imports, especially those of intermediate goods.
On Friday February the 13th, INEI will disclose economic activity data for December, which will likely print a sharp deceleration to 4.7% y/y (10% y/y in Dec 08 and 8% y/y 3MMA). Overall, poor external conditions and slowing domestic demand, the latter exacerbated by an elevated statistical base, should have weighted on economic activity in December. In fact, expected slow growth in manufacturing (1.2% y/y), other services (3.6% y/y), and commerce (7.5% y/y vs. 12% y/y 3MMA) likely overpowered healthy growth in construction (11.7% y/y) and import taxes (9.7% y/y). Moreover, INEI’s advance report on economic conditions indicated that mining (3.4% y/y vs. 7.4% y/y 3MMA) and utilities (2.9% y/y vs. 5.8% y/y 3MMA) slowed down sharply. The Bloomberg consensus expects GDP to expand by 4.9% y/y.
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