News & Analysis

Headline inflation in Mexico continued to fall in October, in both annual and sequential terms. The month-on-month pace of overall price growth fell from 0.44% to 0.38%, dragging the 3-month annualised pace 0.4 percentage points lower to 5.6% as a result, while the year-on-year growth rate fell from 4.45% to 4.26%, undershooting Banxico’s Q4 August projection of 4.6%.

Furthermore, core CPI also continued to exhibit disinflation on a year-on-year basis, falling from 5.76% to 5.5%; this is consistent with Banxico’s projections suggesting core should fall from 6.2% to 5.1% in Q4. While on the surface, this should suggest that the conditions are becoming more favourable for Banxico to begin considering bringing its policy rate back to neutral levels.

However, the underlying data remains consistent with our view that Banxico is unlikely to publicly discuss rate cuts until early 2024, consistent with its guidance that “it will be necessary to maintain the policy rate at its current level for an extended period.”

Sticky core services inflation suggests progress on overall core inflation is likely to flatline too 

This is primarily due to the progression of core services inflation, which at 0.44% MoM exhibits a high degree of persistence. This is evidenced in the 3-month annualised rate of services inflation, which has been stuck in the range of 4.5-6.5% since November 2021, with June 2023 standing as the sole exception. Currently, this run rate of services inflation sits at 4.8%, but is set to rise in November should the current monthly pace be sustained as August’s softer monthly reading of 0.27% drops out of the calculation window. Furthermore, the more timely measure of headline inflation sits almost 1.5 percentage points above the year-on-year measure, suggesting that once base effects fade out of the calculation, headline inflation is likely to rise too. All told, today’s data is consistent with the message relayed by Banxico over previous meetings. That is, risks to their inflation forecasts remain tilted to the upside. This is only reinforced further by the fact that economic growth continues to exceed expectations, driven primarily by the labour-intensive tertiary sector, and tightness in the labour market.

The current run rate of core and headline inflation suggests upside risks to year-on-year measures 

For financial markets, today’s data out of Mexico did little to move the needle as it instead confirmed what has become the prevailing consensus view on Banxico’s policy path. With policy likely to remain on hold until year-end, this means that tonight’s Banxico meeting is likely to be a non-event for MXN. Instead, focus is likely to remain on the back-end of the US Treasury curve, especially with further bond auctions and fresh commentary from Chair Powell, likely on the recent developments in US financial conditions. While pushback from Powell on the recent decline in 10-year yields from 4.9% to 4.5% should pressure carry conditions just a week after markets re-engaged in long LatAm trades, the fact that Mexico’s rate profile looks to remain on hold over coming months should see MXN outperform regional peers under such a scenario.

The peso and yields on the 2-year are relatively unmoved from today’s inflation report

Author:

Simon Harvey, Head of FX Analysis

 

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