MEXICAN ECONOMY: “MEXICO MACRO DAILY NO. 831”

June 8, 2010 at 6:54 pm | Posted in Economics, Financial, Latin America, Oil & Gas, Research | Leave a comment

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Mexico Macro Daily No. 831

Direccion Estudios Economicos (diresteco@banamex.com)

Tue 6/08/10

What We Think

Arturo Vieyra

+52-55-2262-9555

Joel Virgen

+52-55-2262-2974

Consensus Again Pushes Back Banxico’s First Hike

Once more, the consensus has pushed back its expectations for Banxico’s first hike while a process of easing short-term inflation expectations continued. It is also important to bear in mind that so far this year the expectation of the beginning of Banxico’s hiking cycle has been pushed back to March 2011 from July 2010 (in our survey of January 12, 2010) and headline inflation for 2010 has been revised downward to 4.9% from its peak in 5.25% in the second-half of March. The backdrop of these forecast revisions has been economic slackness, Banxico’s dovish tone, the absence of generalized second round effects associated with fiscal and public prices measures, MXN strength against the USD, and recent downside surprises in observed inflation.

The consensus has pushed back its expectations of the beginning of Banxico’s hiking cycle to March 2011 from January 2011. The consensus has made a moderate downward revision in the magnitude of the hiking cycle. This is the third time in a row that the consensus has pushed back Banxico’s first hike (in our survey of April 19, 2010, the consensus was expecting October 2010). Meanwhile, the consensus has made a moderate downward revision in the hiking cycle magnitude, to 138bp from 150bp in our previous survey. Regarding USD/MXN year-end prospects, we revised them moderately downward to 12.40 from 12.47 and to 12.55 from 12.65 for 2010 and 2011, respectively.

The consensus in our biweekly Banamex Survey of Expectations for Inflation and Monetary Policy anticipates lower annual inflation in May: 3.97% versus 4.27% in April. Based on the negative inflation results published in the first half of May (an observed -0.54% versus an expected -0.28%), the analysts consulted in our survey anticipate monthly headline inflation of -0.58% for the whole month. This means that annual inflation for May (3.97% versus 4.27% in April) will again be below the central bank’s forecast range for the second quarter (4.5%-5.0%).

Inflation expectations for year-end 2010 were adjusted down slightly, but remained within Banxico’s forecast range. For 2011 no changes occurred and they remain high. The inflation forecast for year-end 2010 fell slightly, to 4.92% from 5.0% in the previous survey. In contrast, the adjustment to the core component put it at 4.36%, slightly above the previous survey’s 4.34%. The forecast for year-end 2011 remained unchanged for the headline rate – at 3.8%, it is well above Banxico’s expectation (2.75-3.25%).

GDP growth expectations for 2010 and 2011 show revisions. In the case of the former, it fell slightly to 4.4% from 4.5% in the previous survey, while for 2011 it rose to 3.65% from 3.5%.

Highlights

v Market Color: Relative to the previous trading session, on June 8 the TIIE curve decreased especially on the middle and on the long end of the curve. Our reading of market expectations is that the tightening cycle will start at the beginning of 2011. (p. 2)

v Banxico’s speech weighs on rate expectations: Consensus Again Pushes Back Banxico’s First Hike. In our Banamex Survey Expectations, the consensus has pushed back its expectations for Banxico’s first hike as a process of easing short-term inflation expectations continued. (p. 4)

v Gasoline Price: Surprisingly, the SHCP and PEMEX decided to halt the increase in gasoline and diesel prices on Saturday; unfortunately, they did not clarify whether this is a pause in the increases this year, or a suspension of these for the rest of 2010. (p.9)

News in Brief

Arturo Vieyra

+52-55-2262-9555

Surprisingly, the SHCP and PEMEX decided not to raise the price of gasoline and diesel on Saturday. The price of low-octane gasoline had been increasing throughout the year by 8 centavos a month and the price of high-octane gasoline, by a monthly 4 centavos.

v Neutral: Unfortunately, the SHCP does not state whether this is merely a pause in the monthly increases or is a suspension of the increases for the rest of 2010. The latter, according to our estimates, would imply that inflation could be about 20 bp lower (15 bp because of direct effects and 5 bp for indirect effects). Also, domestic prices would be slightly above international prices (considering the futures market forecast).

Mexico Macro Daily No. 831

Direccion Estudios Economicos (diresteco@banamex.com)

Tue 6/08/10

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