Macro Analysis /

Mexico: October CPI – Below expectations again on energy and agricultural goods

  • Headline inflation rose 0.57% m/m, help by the non-core at 0.38%, but with the core still pressured at 0.63%

  • As such, annual headline inflation moderated to 8.41% from 8.70%. However, the core increased to 8.42% from 8.28%

  • We restate our call of +75bps by Banxico tomorrow, with the reference rate closing the year at 10.50%

Juan Carlos Alderete Macal
Juan Carlos Alderete Macal

Director of Economic Research

Leslie Thalia Orozco Velez
Manuel Jimenez Zaldivar
Francisco Jose Flores Serrano
9 November 2022
Published byBanorte
  • Headline inflation (October): 0.57% m/m; Banorte: 0.60%; consensus: 0.60% (range: 0.56% to 0.67%); previous: 0.62% 

  • Core inflation (October): 0.63% m/m; Banorte: 0.66%; consensus: 0.65% (range: 0.58% to 0.69%); previous: 0.67% 

  • The print was aided by lower pressures at the non-core. Despite the return higher in electricity tariffs (17.5% m/m), LP gas (-7.3%) and agricultural goods (-0.5%) declined. At the core, goods kept increasing (0.9%), particularly processed foods (1.0%). In services (0.3%), advances remain centered in ‘others’ (0.5%) 

  • Annual headline inflation moderated to 8.41% from 8.70% in the previous month. Nevertheless, the core accelerated for 23rd straight month, climbing to 8.42% (previous: 8.28%) 

  • We restate our call of +75bps by Banxico tomorrow, with the reference rate closing the year at 10.50% 

  • Market widely expects a 75bps hike tomorrow

October’s inflation climbs 0.57% m/m, helped by the non-core. The core remained high at 0.63%. The second half of the month showed an extension of several of the trends seen in the first fortnight. Goods were high at 0.9%, driven both by processed foods (1.0%) –highlighting increases in key goods such as corn tortillas and milk–, as well as ‘others’ (0.7%), albeit not ruling out that the latter could have started to be affected by preparations ahead of El Buen Fin (Mexico’s Black Friday). In services (0.3%), pressures remained in ‘others’ (0.5%), with some adjustments in tourism categories, but with most of the brunt still in ‘dining away from home’. At the non-core (0.38%), and as already known, energy has a negative seasonality due to the end of summer discounts on electricity tariffs (17.5%). Nevertheless, LP gas fell sharply throughout the month (-7.3%), helped by lower prices in the US. On the contrary, gasolines likely started to reflect actions by OPEC+, among other factors, with low-grade fuel up 0.7%. Agricultural goods were mostly positive (-0.5%), especially fruits and vegetables (-1.3%). Meat and egg moved modestly to the upside (0.1%), albeit with slight signs of pressures in the second half on reports of a new bout of bird flu, although still at an early stage.

Annual inflation moved lower, but underlying problems persist. With these results, headline inflation fell to 8.41% from 8.70% y/y, its first monthly decline since May. However, the core accelerated for a 23rd month in a row to 8.42% from 8.28%. This is more concerning and implies a challenging backdrop, especially as additional risks seem to be materializing. In our opinion, concerns on energy remain in place, both due to the trend on reference prices in gasolines –with actions by the US government not enough to offset for OPEC+ cuts–, as well as possible sways in gas prices as winter approaches. As already stated, news on chicken prices are negative, with reports of bird flu outbreaks in seven states and US supplies also under pressure because of the same factor. Possibly better, we will be looking into dynamics stemming from El Buen Fin discounts –which will take place from November 18th to 21st– and the possible spillover sales related to the 2022 FIFA World Cup –from November 20th to December 18th. Finally, we will keep monitoring the effects from the Complementary Measures to the Plan Against Inflation. Considering the balance of risks, we maintain our forecast for year-end inflation at 9.0% –still above consensus–, albeit acknowledging that the final figure could be below our forecast given recent dynamics, particularly at the non-core level.

Banxico will keep tightening monetary policy given a complex and uncertain backdrop. In our view, the decision to hike the reference rate by 75bps in tomorrow’s decision is quite clear, considering: (1) The adjustment of the same magnitude by the Fed last week; (2) an additional deterioration in core inflation; and (3) the need to maintain caution in an environment of high volatility in global financial markets and capital flows. As several of these factors –if not all– will remain at play in future decisions, we believe the central bank will keep tightening monetary conditions, anticipating the reference rate by year-end at 10.50% and a terminal point for this cycle at 11.00% (to be reached by the end of 1Q23).

From our fixed income and FX strategy team

Market widely expects a 75bps hike tomorrow. In a complex inflationary backdrop, the market is fully pricing-in a 75bps hike by Banxico tomorrow, in tandem with the last Fed decision. Moreover, market expectations point towards greater conviction about a moderation in the pace of hikes in December (+50bps) –in similar fashion with the US– and a terminal rate of 11.00% next year. In this context, we expect volatility in the fixed-income market to remain high, so we reaffirm our preference for relative value strategies vs directional positions. The latter, despite recognizing an attractive valuation in long-term Mbonos, mainly in tenors Nov’38 and Nov’42, which both ended October at 10.00% and are now trading at the same level of 9.91%. Meanwhile, despite a recent compression of breakevens across all maturities, CPI-linked bonds (Udibonos) continue to reflect an unattractive relative valuation. For example, the 3-year breakeven stands at 5.03% from 5.46% a month ago, well above Banxico’s inflation target. Therefore, we do not see enough attractiveness in Udibonos, at least for now.