Getting Ready for Mexico Inflation

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Later today we have some key data coming out of Mexico which could move the markets: CPI.

This is the last chance at major data before next week’s Banxico monetary policy decision. Since Banxico has been trying to deal with the high inflation in the country, we might want to pay extra attention to this data.

Just as recently this Monday, the head of the Finance Ministry said that he expected interest rates to decline in order to boost demand. This is representative of the government’s wanting to ease in order to support the economy and keep pace with other world central banks.

It contrasts with Banxico’s view, which cares more about inflation. If inflation trends continue, the government might get its wish.

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What We Are Looking For

There are three CPI measures published at the same time.

Typically, the market focuses on the monthly figure since that’s the freshest data. However, it’s the annualized that guides policy. For reference, the Banxico has an objective of 3% annual inflation, the midpoint of an “acceptable” range of 2% to 4%.

The consensus of expectations is that the monthly CPI figure will register at 0.33%, substantially up from 0.06% in the prior month. This would bring the annualize drate to 4.06%. This slightly up from 3.95% but barely above the top of the range. We can actually expect the monthly core rate to decrease to 0.21% from 0.30% in the prior month.

What it Means for the Markets

Under normal circumstances, higher inflation is usually interpreted as negative for the currency.

But, given the recent data trends out of Mexico, the perception is reversed because higher inflation would imply that Banxico will have a reason to hold off on a rate cut. Lower inflation gives them breathing room to take action to prop up the economy.

Mexico has slipped into a position of unofficial stagflation. The CPI has remained relatively high while the economy fails to gain momentum. Last week, the National Statistics Institute (Inegi) disclosed the first year over year contraction in the economy since 2009.

There Isn’t Much Room for an Upside

A recent survey of financial advisors by the Banxico showed that the vast majority said it was a bad time to invest in the country. The survey indicated that most businesses are holding off on both acquisitions and expansions.

On the other hand, retail sales during June came in above expectations. And this supported the comments by President Lopez that he saw domestic demand increasing.

However, the consensus among analysts is that consumer demand doesn’t drive Mexico’s inflation. What drives it is fiscal policy and structural issues. The new government’s economic plan is largely seen as the opposite of the sorts of measures that would lower inflation.

Expectations for the Market

In the end, it’s down to the expectations of what Banxico will do. With high expectations of a rate cut, a significantly higher than expected inflation rate might actually strengthen the currency quite a bit. The market appears to be pricing in a lower inflation rate, limiting the risk on the downside.

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