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%).
In terms of GDP, the survey indicated that analysts adjusted down their economic forecasts to a decline of 1.09% from 0.1% (BD –2%) for 4Q08. Consequently, GDP growth was trimmed down to 1.4% from 1.7% (BD 1.3% from 1.5%) for 2008. Furthermore, economic activity is expected to contract by 1.62% (BD -2.46%) in 1Q09 and by 1.16% (BD -1.7%) in 2009. Moreover, analyst lowered their growth expectations to 2.1% from 2.4% (BD 2.1% from 2.4%) for 2010. Finally, analysts revised their local currency forecasts to MXN 13.5 from MXN 12.84 (BD MXN 13.65 from MXN 13.3) for 2009, and to MXN 13.61 from MXN 12.87 (BD MXN 13.79 from MXN 13.2) for 2010. Finally, participants lowered their 28days CETES expectations to 6.47% from 7.3% (BD 6% from 6.75%) for the end of 2009, and to 6.69% from 7.04% (BD 5.5% from 6%) for 2010. Overall, the survey results are in line with our view that the economy is under intense downward pressure. We expect inflation and inflation expectations will continue to normalize and the currency will remain under stress, especially in the 1H09. It is important to point out that inflation moved lower despite the fact that the local currency revised sharply up, thus indicating that the FX pass through is not likely to be a concern, or at least much less than in the past. As expressed in the past, these results are consistent with the view that the widening of the output gap, on top of sharply lower commodity prices, is also contributing in keeping the FX pass through limited. The rapid change in expectations should provide comfort to the central bank to go ahead and continue easing monetary conditions. MEXICO—Mixed Results in the Primary CETES Curve. The 5yr M-Bond Dropped by 10bps. MXN Weakened Sharply. FED extended the Currency Swap facility to Oct 30th from April 30th
In the primary CETES auction, the 28dys CETES declined by 15bps to 7.16% and the 91dys CETES stayed stable at 7.28%. However, the 175dys CETES increased by 3bps to 7.06%. In the M-Bond public sale, the 5yr bond yield declined by 56bps to 7.60%.
The CETES behavior indicates that market participants have discounted another rate cut in February. On this end, Banxico will likely cut the reference rate by another 50bps (75% probability) during the February 20th meeting. This is due to the economy decelerating rapidly, and inflation and inflation expectations receding and continuing to do so in the near term. As expressed before, inflation is likely to improve during this quarter because 1) administrative measures have been taken to control prices, 2) the output gap is widening rapidly (the economy likely contracted by 2% in the 4Q08 vs. 3% potential output), and 3) the lagged effect emanating from lower international prices of commodities will likely improve local prices. Despite expected improvements in prices, headline inflation will likely stay above 6% in the 1Q09; however, it will most likely enter a more pronounced normalization trend in the 2Q09 to reach 3.7% by the end of the year. In this context, Banxico will probably cut the reference to around 6% by mid-year; however, further easing might be necessary, especially in the 2H09, if growth dynamics and expectations worsen and inflation normalizes faster than expected.