Santiago Leal Singer

With inflation much higher than expectations and the Fed signaling a faster tapering, we expect Banxico to hike by 50bps on December 16th, to 5.50%. This is the highest for the same month since 1998 (see chart on the right). As already known, electricity tariffs grew 24.2% m/m, explaining 41bps of the headline. Given today’s results which were strongly above expectations and adjusting our path for the two remaining fortnights for this year, we now expect year-end headline and core inflation at 7.8% and 5.7%, respectively. Given high inflation as well as other, more recent drivers, we expect the central bank to hike the rate by +50bps next week, to 5.50%.

S&P Global Ratings ratifies Mexico's rating. Its latest announcement was in June, also ratifying them. S&P assessed recent developments, among them Mexico’s fiscal prudence in the pandemic (positive relative to peers), mid-term elections, trade agreements and public policy proposals, among others. They consider modest current account deficits, stable debt, high remittances and FDI also support the rating. They mention that Mexico could return to a stable outlook if contingent liabilities are contained, higher private investment on increased confidence, budget flexibility and a wider tax base.

Decisions will remain difficult and likely without unanimity. Also, Bostic and Daly have reiterated that it may be appropriate to reduce purchases at a faster pace. Upward inflation surprises in Mexico… In this backdrop, our estimate for inflation in the 2H-Nov, to be published on December 9th, is at 0.22% 2w/2w. Relative to market expectations, inflation could very well keep surprising higher (see chart below). In addition, the potential positive effect of a greater hike from to Banxico’s reference rate could be limited, as this is already partially priced in the short-end of the local yield curve.

Banxico published today its 3Q21 Quarterly Report (QR). Despite of the downward revision to 2021 GDP, employment forecasts were higher for both this year and next. In turn, the forecast for 2022 stands at 3.2%, slightly higher on a more benign base effect. On inflation, forecasts stayed unchanged relative to the latest decision, similar to the previous QR. Given the differences with our call for 2021, the estimate is broadly consistent with our 3.0% for said year. As a result, the TIIE-28 IRS curve reflected was pressured up to 12bps in the short-end, slightly strengthening the market’s pricing for a 50bps hike for Banxico’s decision on December 16th.

In our opinion, the document maintains a hawkish tone. In this sense, a member noted that “…it cannot be assumed that the divergence between short- and long-term expectations will be maintained, given the continuation of the current bubble and the difficulty in fighting it…”. In particular, it would define more precisely the assumptions underlying the inflation forecast path. Nevertheless, information in the minutes, on top of other recent developments, have changed our assessment about the probability of a faster hiking cycle relative to this path.

Inflation at 0.69% 2w/2w in 1H-November, above its 5-year average. In contrast, agricultural goods extended higher (2,2%), mostly in fresh fruits and vegetables (3.5%), with reports of adverse weather (e.g. rain and cold weather) impacting crops. Adjusting our forecasts higher, again. Our forecast path is slightly above Banxico’s latest estimates of average inflation in 4Q21 at 6.8% and 5.5%, in the same order. For further details see our document, Ahead of the Curve.

With this action, the three main agencies have ratified the country’s credit rating this year. Fitch Ratings ratifies Mexico's sovereign rating at ‘BBB-’. The last time they made an announcement was very similar, last May. The agency reiterated the support provided by a prudent macroeconomic stance, robust external finances, and a stronger projected debt/GDP ratio than for the median of ‘BBB’ countries. They argue that the 2022 Budget, approved on Sunday, maintains a modest fiscal impulse, with a small primary deficit of 0.3% of GDP.

In our view, the statement maintains a hawkish bias. ( In our view, the tone remains hawkish, centered around inflation and its expectations. Considering these changes, we reiterate our call of a 25bps hike in December, closing this year at 5.25%. Notwithstanding the latter, these factors also suggest that Banxico will extend the hiking cycle for longer than we thought previously. Lastly, said level would be consistent with an interest rate spread with the Fed of 5.75% (chart below, right), coinciding with the high of the latest hiking cycle –disregarding brief deviations due to differences in the calendars of the Fed and Banxico, as well as the measures taken during the pandemic–.

We expect Banxico to hike the reference rate by 25bps on Thursday, to 5.00%. Inflation at 0.84% m/m in October. We keep seeing pressures, albeit with different dynamics than in the first half. Agricultural goods were up only 0.2% despite some pressures in fresh fruits and vegetables in the second half. We cannot rule out this scenario given current inflation dynamics –with Banxico likely moving its estimates higher again– and less monetary largesse globally.

Inflation at 0.54% 2w/2w in 1H-October, with an adverse seasonality. This was slightly above consensus and our call, which coincided at 0.52%. In our view, the renewed rise in energy commodities and their second-round effects, including at the core level, will keep pushing inflation at least in the short term. In both cases, the base effect going into December will be increasingly difficult, also limiting potential declines. Both expectations are higher than our estimates. In line with the adjustments in global bonds, Mbonos have experienced pressures of 28bps, on average, extending the dynamics seen in September, with greater adjustments focused on short- and mid-term tenors.

In our view, the document reinforces the statement’s more hawkish tone. In this context, one member signaled towards recent downward revisions in growth estimates by international organizations, with a moderation in advanced and Asian economies. In this sense, some structural factors showed up on the debate, especially regarding the core component. On the upward adjustment to the inflation forecast, they state that this responds to recent shocks that were not foreseen. In this sense, the market is currently discounting a more restrictive bias for Banxico vis-á-vis our expectations, pricing in implied hikes for the remainder of this year of +68bps and +149bps for the first half of 2022.

Inflation at 0.62% m/m in September. Services (0.2%) were more mixed, with education higher (1.3%) but tourism and non-tourism helping at the margin. This was partially compensated by low-grade gasoline (-0.2%). In this respect, the share of generic products within CPI that are currently at least 4% y/y higher has been increasing gradually (chart below, right), in our view signaling the wider scope of price adjustments in addition to base effects. We revise our year-end forecast to 6.6% given recent surprises, stronger commodities and signals of more generalized price pressures.

We reiterate our call of two additional 25bps hikes for the rest of 2021, taking the rate to 5.25%. Based on this outlook and a more challenging financial and global monetary policy backdrop, among other factors, we reiterate our view of two additional 25bps hikes for the remainder of 2021, to 5.25%. Locally, we note greater caution because of the possible effect stemming from high and persistent levels of actual inflation. Lastly, and although not our base case, this environment and the more hawkish tone suggest risks of Banxico needing to accelerate the pace in an upcoming meeting, especially if there is an additional deterioration in inflation, the MXN or financial market conditions.

Inflation at 0.42% 2w/2w in 1H-Sep. This was much higher than consensus at 0.28%, and to our 0.29%. First, and contrary to our view, we highlight an acceleration at the core. Considering other potential episodes of volatility (due to the fiscal impasse in the US, for example), we expect Mexico’s central bank to remain prudent despite the diversity of opinions within the Board. We hold a view of greater relative value in mid-term Udibonos. Recent Udibonos performance has been favorable, averaging gains of 4bps in the week, as opposed to Mbonos that have sold-off 7bps.

Annual inflation declined to 5.59% from 5.81% in July. At the core, processed foods (0.7%) remain on the upside, while other goods (0.7%) were affected by an adverse seasonality –the end of summer discounts on clothing–. Services edged up 0.1%, with more modest pressures on education (0.7%) than historically, likely related to the pandemic. Nevertheless, the core increased to 4.78% from 4.66%, remaining at highs not seen since end 2017. Most central bank members will likely remain cautious. Nevertheless, we recognize that the decision is difficult on uncertainty about the impact on prices and activity from ‘delta’.

Banxico published today its 2Q21 Quarterly Report (QR). As a result, the box concludes that inflation during the pandemic has been mostly driven by global factors. Nevertheless, they keep stressing their high data dependency, which is key as the Board remains divided. In this backdrop, our call rests mainly on the idea that the hawkish wing will stay convinced about the need of further adjustments because of sticky core inflation. Modest effect in local markets, with the curve’s pricing reflecting two 25bps rate hikes for this year.

In line with our view, the tone remains hawkish. Finally, Deputy Governor Esquivel remained critical of the hikes, since “…an interest rate increase would have no effect on inflation stemming from supply shocks…” but could compromise the convergence of inflation to the target. In this respect, data dependency remains key, especially for Deputy Governor Heath. This performance suggests a market acknowledging comments from Banxico’s dovish wing, amid the possible bias the Board could tilt to for 2022.

Inflation below expectations in 1H-Aug, at -0.02% 2w/2w. This was lower than consensus at 0.05%, but closer to our 0.03%. In turn, services stand at 3.4%, within the central bank’s variability range around the 3% target. In our view, market participants will remain focused on the outlook of inflation among Board members in this week’s Banxico minutes. For further details, please see our document, Ahead of the Curve. Today’s report should not affect the market’s pricing for Banxico.

Banxico hikes 25bps, in line with expectations. Therefore, and as signaled last week, the institution revised their quarterly inflation forecasts strongly to the upside. Specifically, we maintain our call of three additional 25bps hikes for the rest of 2021, taking the reference rate to 5.25%. However, short- and mid-term rates’ rally is limited to the market’s repricing for Banxico, which is already factoring a feasible monetary stance. Moreover, we hold a view of Treasuries trading at higher levels this year, a situation that will also limit a further rally in local rates.

Headline inflation rose 0.59% m/m in July, with the core at 0.48%. In the latter, processed foods remain pressured. Annual headline inflation fell to 5.81% from 5.88%. However, and more worrisome, the core climbed to 4.66% from 4.58%. Considering thi...

Inflation at 0.37% 2w/2w in 1H-July. We keep thinking these remain affected by passthrough from higher costs. Core inflation remains on the upside. The headline fell to 5.75% from 5.88% y/y on average in June, driven by the non-core, which stood at 9.24% from 10.00% in the same period. In this respect, goods are still running at an uncomfortably high pace of 5.7% y/y while services picked above 3% since early June. Given this backdrop, we expect Banxico hike the reference rate by 25bps in its August 12th, to 4.50%.

In line with expectations, we saw a hawkish tone, with an ample debate on inflation. He possibly argued that “…the monetary policy stance that was needed in 2020 […] is different from what is needed now…”. Finally, Deputy Governor Esquivel mentioned that the decision to hike was hasty, and that it suggests “…an abrupt change in narrative, which sends the signal of an erratic and unpredictable behavior by the Bank…”. To this we add a more difficult global backdrop, with the Fed preparing for tapering its asset purchases.

Inflation at 0.53% m/m in June. This was in line with consensus but below our estimate, mostly on the core which picked up 0.57%, surprising upwards since the first half. Lastly, and very relevant, the core would show a mild uptrend in the rest of 2021. Going to the non-core, agricultural prices might continue to show above average pressures given adverse weather conditions on a more frequent basis and with higher intensity, influenced by climate change. This points to the possibility of a more complex global environment going forward that also supports the need of a more cautious stance ahead.

Banxico surprises with 25bps rate hike to 4.25%. In the statement, we observed several changes about the outlook for prices, with the central bank much more concerned. We believe this hike marks the start of a tightening cycle. Given this scenario, we now expect reference rate hikes of 25bps in the four scheduled meetings of this year, closing at 5.25%. As result, the yield curve depicts implied hikes by year end of slightly above 100bps, a fair valuation in our view, considering the central bank’s bias and our new estimate of a reference rate closing 2021 at 5.25%.

We expect today’s decision by Banxico to keep showing a hawkish tone, likely unanimous in maintaining the rate at 4.00%. Other goods were even higher, at 0.5%, with a potential reversal of Hot Sale discounts. Annual inflation higher at the margin despite a more benign base effect. This was observed even with a less challenging base effect, with inflation at 3.17% from 2.84% in the same period of 2020. For year-end it incorporates +74bps, slightly below the +77bps it reached to price in mid-May. Considering this enriching we prefer to wait for better entry levels in Udibonos.