Latam Weekly: Mexico and Brazil CPI Await, but Global PMIs May Call the Shots

ECONOMIC OVERVIEW

• Strap in for a hectic Thursday, when global PMIs and Mexican and Brazilian CPI are scheduled for release, in contrast to a fairly quiet start to the week where the BoC’s (likely) 50bps cut will be the main event.

• Global markets are set to swing on the PMIs’ early read of economic conditions (after very poor European PMIs in September) while local markets tick a box for more steady easing by Banxico but consider a possibly upsized hike by the BCB.

• Peru’s and Chile’s calendars are quiet and it will mostly be about watching political news and possible comments by central bank officials. There’s a bit more in Colombia with trade data on Monday, but the labour reform process may be more interesting as well as trends in Colombian markets, which our team discusses in today’s report.

PACIFIC ALLIANCE COUNTRY UPDATES

• We assess key insights from the last week, with highlights on the main issues to watch over the coming fortnight in the Pacific Alliance countries: Colombia and Mexico.

MARKET EVENTS & INDICATORS

• A comprehensive risk calendar with selected highlights for the period October 19–November 1 across the Pacific Alliance countries and Brazil.

Charts of the Week

ECONOMIC OVERVIEW: MEXICO AND BRAZIL CPI AWAIT, BUT GLOBAL PMIS MAY CALL THE SHOTS

Juan Manuel Herrera, Senior Economist/Strategist
Scotiabank GBM
+44.207.826.5654
juanmanuel.herrera@scotiabank.com

• Strap in for a hectic Thursday, when global PMIs and Mexican and Brazilian CPI are scheduled for release, in contrast to a fairly quiet start to the week where the BoC’s (likely) 50bps cut will be the main event.

• Global markets are set to swing on the PMIs’ early read of economic conditions (after very poor European PMIs in September) while local markets tick a box for more steady easing by Banxico but consider a possibly upsized hike by the BCB.

• Peru’s and Chile’s calendars are quiet and it will mostly be about watching political news and possible comments by central bank officials. There’s a bit more in Colombia with trade data on Monday, but the labour reform process may be more interesting as well as trends in Colombian markets, which our team discusses in today’s report.

Next week will be a tale of two halves, with limited market risks on Monday and Tuesday, followed by a busier mid-point with the BoC’s decision, and then a flood of Latam and global data over the course of Thursday and Friday. Overall, however, we should expect to see the largest market shifts on Thursday, when October PMIs from Japan, through Europe, and ending with the US will give us the best early indicator of the health of the global economy during the current month. Briefly, we expect the BoC to cut by 50bps, with a change in our forecast following the recent CPI data (see here).

That same day, we also get a look at the evolution of prices in Mexico and Brazil, with both countries releasing mid-month CPI data for October. There’s no good news yet for Brazilians, nor the BCB, as IPCA-15 figures are expected to show an acceleration in inflation to the mid-4s from the low-4s in the mid-September reading—which roughly aligns with the trend set by full-month September inflation at 4.4%. Further upside pressure in food prices and new electricity bill hikes will be to blame for the acceleration, but that may not stop markets to bet on an upsized BCB hike given elevated inflation expectations and better-than-expected growth (there’s currently 55–60bps in implied hikes).

In Mexico, our team projects that there will be a small uptick in headline CPI growth from the 4.50% seen in H2-Sept to now 4.58%. As our economists explain in today’s report, the higher print will owe to higher food prices amid adverse weather and some strength in merchandise prices. That should really not bother Banxico—or at least the current more dovish contingent—to prevent another well-expected 25bps rate cut at its mid-November decision. This decision should be made easier by the worsening growth outlook in the country. In today’s Weekly, the Mexico team discusses their updated growth forecasts, where 2024 is expected only a bit lower but their 2025 projection goes from 1.4% to 1.0%; economic activity and retail sales data for August is also on tap next week, which may shape these forecasts further.

Outside of Mexico and Brazil, it’s fairly quiet in the region. It’s as dry as it gets in Peru, where there’s no key data scheduled and maybe we’re just watching political noise unfold and keeping an eye on Petroperu developments. It’s a bit of the same in Chile, with the exception of PPI data due on Thursday and being on the lookout for comments by BCCh officials after their latest rate cut decision. In Colombia, the labour reform process will continue through the legislature—and likely be watered down at the remaining two debates—but we also have imports and trade balance figures to analyze on Monday. In today’s Weekly, our colleagues in Bogota discuss financial market developments, with international and domestic developments influencing local rates and the currency. 

PACIFIC ALLIANCE COUNTRY UPDATES

Colombia—International Volatility and Domestic Assets

Jackeline Piraján, Head Economist, Colombia
+57.601.745.6300 Ext. 9400 (Colombia)
jackeline.pirajan@scotiabankcolpatria.com

The Federal Reserve kicked off the easing cycle faster than expected; however, the “higher for longer” message was affirmed again as the Fed forecast suggests a terminal rate close to 3% in its upper bound. Having said that the easing cycle is almost priced in market prices, however the fact that the US rate could equilibrate in levels not seen in 30 years, brings to the table the conversation about the correct risk premium that should be involved in global assets, that is probably why since the Fed’s meeting most yield curves across the globe steepened and why the discussion is turning to long-term fundamentals. In parallel, geopolitical tension continues, increasing the risk aversion and the volatility in commodity prices. To the above, we must add the proximity of the US election and the usual anxiety it generates across markets. All in all, the international context implied volatility and negative pressure for Colombia’s domestic assets, and at this point, it is important to distinguish between what is a temporary shock and a structural shock.

In the case of the FX market, recent depreciation is a combination of potential structural changes but also of short-term volatility. In the case of monetary policy, the expectation that the Federal Reserve will stop the easing cycle at a higher rate could almost be net off with the expectation that the central bank in Colombia will continue implementing cautious and gradual rate cuts. Having said that, monetary policy is not changing our expectation for the USDCOP by the end of the year of 4116 pesos. In the case of the impact of commodity prices, especially oil, the debate between the structurally lower demand versus the international conflict makes the Brent price to range between 80 to 70 USD/b. On that front, we see it as an important debate to define if the level of the exchange rate can change structurally or not. In our models, a change of 10 USD per barrel could impact our FX expected level between 30 to 50 pesos. Our current forecast involves a Brent price averaging 80–85 USD per barrel; in the case of talking about 70 USD per barrel, the expectation could go up to around 4150 pesos. Having said that, current levels above 4200 pesos could respond to temporary factors or overshooting effects due to global uncertainty.

In the case of FI markets, the main discussion is around the long-term level of international rates and the discovery of risk premiums in different assets. The expectation of a monetary policy rate in the US stabilizing at 3% puts the markets in the mindset that the fair term premium for a 10 year tenor is not lower than 100bps, something that makes the 10y treasury jump from 3.60% on September 18^th (last Fed meeting) to levels closer to 4.10%, in the same space of time the COLTES curve has jumped by 47bps, almost maintaining the empirical spread and suggesting that the local noise around fiscal accounts is just noise and does not mean major changes for the public debt. In that regard, our macroeconomic view continues pointing that Colombia’s yield curve could appreciate if BanRep continues with the easing cycle; however, in the equilibrium, higher risk premiums could mean a steep curve in COLTES markets. In our calculations, the yield curve slope between the COLTES 2050 tenor and the 10y reference could continue hovering around 90 to 100bps, attributed to the fact that the world is operating under an environment of structurally higher interest rates but also higher risk premiums that combine fiscal risks and political uncertainties.

All in all, there is certainty that interest rates are going down. However, the high terminal rate increases the vigilance of markets around macroeconomic fundamentals to assess the right risk premiums. In the case of Colombia in the FX market, the forecast of 4116 pesos for Dec-2024 is still reasonable, and the only source of structural change could be derived from the oil price. In the case of the yield curve, despite the local noise, what matters more has been the assessment of risk premiums on the treasury markets, which points to structurally steeped curves.

Mexico—Lower Growth Forecasts

Mitch Cervera, Director of Economic and Sectoral Analysis 
+52.55.3977.4556 (Mexico)
mitchell.cervera@scotiabank.com.mx

Brian Pérez, Quant Analyst
+52.55.5123.1221 (Mexico)
bperezgu@scotiabank.com.mx

Miguel Saldaña, Economist
+52.55.5123.1718 (Mexico)
msaldanab@scotiabank.com.mx

We are updating to the downside our Mexican GDP forecast for 2024 and 2025 forecast as a result of a slowdown in consumption, public and private investment, as well as an expected tightening deficit on the net trade. This change in our base scenario has resulted from two main factors, one external and one internal. On the international side, there is an increasing probability of a victory of the Republican candidate in the US election and the proposals to impose tariffs. On the other hand, at the national level, the new administration faces challenges in relation to the 2025 budget. Hence, these events could negatively affect investment plans of the private sector in Mexico, as well as consumption decisions in the short- and medium-term due to weaker job creation, as the latest numbers of formal employment has shown. For its part, this adjustment responds to the expectation of lower government spending for the following year. As a result of the above, we slightly modified downward our GDP growth estimate from 1.5% to 1.4% for this year and modified our forecast for 2025 from 1.4% to 1.0%.

IGAE Slowdown, Small Inflation Uptick

In Mexico, relevant figures will be published by the National Institute of Statistics (INEGI) next week. On Tuesday, the Global Indicator of Economic Activity (IGAE) for August will be published, for which an increase of 1.1%, in annual terms and seasonally adjusted, is forecasted. This change implies a slowdown compared to the previous month’s figure, which showed 2.0% growth. In detail, industrial activities are expected to increase by 0.7% y/y from 0.6% in July, while services are projected to rise 1.5% y/y, below the 2.2% reported in July.

Additionally, on Wednesday, August retail sales will be released, where data, in real annual terms, have shown signs of weakness in recent months, despite the fact that the sales of the National Association of Self-Service and Department Stores (ANTAD), a proxy for retail sales in nominal terms, have grown. In this sense, ANTAD reported a nominal growth in total sales of 8.4% in August from an increase of 4.0% in July. For its part, retail sales, reported by INEGI, showed a decrease of 0.6% in July compared to the same month of the previous year. Thus, we anticipate that retail sales could present a slight rebound following the data published by ANTAD.

Finally, on Thursday inflation for the first half of October will be published; where we anticipate that general inflation will increase, in annual terms, from 4.50% in Q2 September to 4.58% due to a pickup in agricultural prices related to bad weather conditions, as well as a rebound in merchandise component prices. It’s worth mentioning inflation in the first half of September stood at 4.66%, while in September inflation registered at 4.58%.