Latam Weekly: Regional Inflation, BCRP Decision, State Elections in Mexico

ECONOMIC OVERVIEW

• Next week presents a four-of-a-kind of CPI releases as well as the first of the regional policy announcements of the cycle, the BCRP’s.

• Inflation is seen lower in each of Brazil, Chile, Colombia, and Mexico. Regarding the first two, the discussion has centred around pinpointing exactly when in the next few months rate cuts could come. For the latter two, it’s still a bit hazy when their policy rate pauses may end.

• The BCRP will leave its reference rate steady for the sixth consecutive meeting at its announcement next Thursday—while sticking to an optimistic forecast that sees inflation fall to 3% at year-end.

• Gubernatorial elections on Sunday in the State of Mexico and in Coahuila will also be in focus as the results of these contests may be extrapolated to the 2024 presidential election.

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: Chile, Colombia, Mexico and Peru.

MARKET EVENTS & INDICATORS

• A comprehensive risk calendar with selected highlights for the period June 3–16 across the Pacific Alliance countries and Brazil.

Chart of the Week

ECONOMIC OVERVIEW: REGIONAL INFLATION, BCRP DECISION, STATE ELECTIONS IN MEXICO

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

• Next week presents a four-of-a-kind of CPI releases as well as the first of the regional policy announcements of the cycle, the BCRP’s.

• Inflation is seen lower in each of Brazil, Chile, Colombia, and Mexico. Regarding the first two, the discussion has centred around pinpointing exactly when in the next few months rate cuts could come. For the latter two, it’s still a bit hazy when their policy rate pauses may end.

• The BCRP will leave its reference rate steady for the sixth consecutive meeting at its announcement next Thursday—while sticking to an optimistic forecast that sees inflation fall to 3% at year-end.

• Gubernatorial elections on Sunday in the State of Mexico and in Coahuila will also be in focus as the results of these contests may be extrapolated to the 2024 presidential election.

We’re bracing for the next round of central bank decisions in Latam, with the next few days presenting a four-of-a-kind of May inflation data as well as the first of the regional policy announcements of the cycle, the BCRP’s.

Before next week’s important regional data run, Sunday’s gubernatorial elections in the State of Mexico and in Coahuila will be in focus as markets extrapolate the results of these contests to the 2024 presidential election. A victory in Edomex by President AMLO’s ally Delfina Gomez (as part of the Morena/PT/PVEM alliance), prying away from the PRI one of its traditional strongholds (see more in last Friday’s Latam Weekly), is an important victory for the President, and the PRI/PAN/PRD alliance taking (or rather keeping) Coahuila would be but a small consolation prize when losing a key asset.

The week starts out quietly with only limited data or events of note. We have the usual weekly BCB and bi-weekly Citibanamex surveys of economists on Monday and Tuesday, respectively, accompanied by some fixed investment data out of Mexico and vehicle production figures for Mexico and Brazil; composite/services PMIs, out on Monday for Brazil, are worth but a quick look as the data tend to have little impact on markets.

Things pick up a bit on Wednesday thanks to Brazil’s May IPCA inflation numbers that are seen edging closer towards 4% (median at 4.06%) in line with the mid-month print that showed a marginal deceleration from 4.16% to 4.07%. Chile’s INE will also release wages data for April, where another double-digit y/y increase in hourly pay is likely—marking almost a full year of 10% (or just below) increases since May 2022; the stats agency also publishes May international trade data for May that morning.

On Wednesday evening, after-hours, May Colombian CPI is projected to continue its slow break lower. Our Bogota economists are eyeing a 12.6% y/y pace of headline prices growth, down from 12.82% in April, with some downside risks owing to food prices; core inflation is forecast little changed in the mid-11s (very high). Inflation has peaked, so BanRep will be happy that readings come in lower each time and will thus hold its policy rate unchanged this month, but they’re certainly not ready to clearly tee up lower rates later in the year given double-digit prints—though FinMin and BanRep board member Bonilla has shown his preference for this. Political processes and debates are in focus for our Bogota economists in today’s weekly.

Thursday’s Mexican and Chilean inflation data will combine with the BCRP’s decision for the busiest day of the week in Latam. The teams in Mexico City and Santiago preview the releases in today’s report, anticipating slowdowns to 6.0% from 6.25% and 8.8% from 9.9%, respectively. Banxico seems firm in its stance of a long hold and the H1-May core reading of 7.45% (falling from 7.75%) supports this position. The bank’s meeting minutes and quarterly inflation report also add to a sense that the conversation is not about whether to hike again, but when the first rate cut could come (though the minutes were more hawkish than expected).

In Chile, stubbornly-high inflation is keeping Q2 rate cut bets at bay (by traders and economists), but the team believes that the BCCh will be ready to discuss at its June meeting the possibility of easing policy in July. In today’s report, our economists also provide an update on the constitutional re-write process.

Peru’s central bank received May inflation figures on Thursday to help it in refining its guidance at the upcoming rate announcement on the 8th. Year-on-year inflation pulled marginally further away from 8%, going from 7.97% to 7.89% last month. But it has not yet pulled sufficiently away from the figure. The team believes that inflation should begin to show clearer signs of decelerating starting with the June/July releases owing, in part, to base effects and the fading impact of the avian flu on poultry prices. That’s yet to be seen by the BCRP, and it’s practically a given that the board will leave the reference rate unchanged at 7.75% for the sixth consecutive meeting.

Alongside key events in Latam, markets will follow US macro data (ISM services above all) ahead of the mid-month Fed announcement, policy decisions in Canada and Australia (which may see rate increases) , Canadian employment data, and Chinese international trade and consumer/producer prices figures. This weekend, OPEC+ delegates also meet to discuss current crude oil supply settings, though no more cuts are expected. 

PACIFIC ALLIANCE COUNTRY UPDATES

Chile—We Expect Annual Inflation to Continue to Decelerate in May

Anibal Alarcón, Senior Economist
+56.2.2619.5465 (Chile)    
anibal.alarcon@scotiabank.cl

THE CONSTITUTIONAL COUNCIL WILL BEGIN WORK ON JUNE 7 ON THE BASIS OF THE EXPERTS' MODERATED PROPOSAL

On Tuesday, May 31, the Commission of Experts submitted the draft of the new Constitution, which will be delivered to the Constitutional Council in the next few days. Recall that the experts were elected by Congress and the draft was prepared under 12 limiting guidelines as part of a comprehensive political agreement. Broadly speaking, the draft continues the path of political moderation that has been observed after the September plebiscite.

Given the high participation of right-wing parties in the Constitutional Council—more than three-fifths—the parties of the governing alliance have the great challenge of generating and achieving a dialogue with the right-wing parties in order to reach a new Constitution that can be approved in the next electoral process. On the contrary, if the necessary dialogue to discuss the leftist proposals is not achieved, the probability of having a new rejection of the Constitution in December could increase.

The elected Council will begin its work on June 7, considering the draft issued by the Commission of Experts. Finally, the exit referendum will take place on December 17.

WE PROJECT INFLATION IN MAY AT 0.2% M/M (8.8% Y/Y). REFERENCE RATE CUTS WOULD START IN Q3-23

On Thursday, June 8, the INE will release May CPI data, for which we project a 0.2% m/m increase (8.8% y/y), below surveys (Economic Expectations Survey: 0.4%; Financial Traders Survey: 0.3%) and the median of forecasts submitted to Bloomberg (0.3%). At the underlying level (excluding volatiles), we forecast an increase of 0.2% m/m (9.5% y/y), explained by services (0.3% m/m); this would mark the first single-digits ex volatiles print since June 2022. On the goods side, we see no change in prices from the previous month, and they will continue to decline rapidly on a year-on-year basis.

As for the BCCh, we expect the central bank to hold the benchmark rate at its next meeting on June 19, where it will probably start discussing the possibility of rate cuts for the July meeting. In this regard, we reiterate our projection for cuts in the benchmark rate starting in Q3-23, towards 7.50% in December 2023.

Colombia—Quiet Days in Colombia and New Economic Releases Calendar 

Sergio Olarte, Head Economist, Colombia
+57.601.745.6300 Ext. 9166 (Colombia)                                    
sergio.olarte@scotiabankcolpatria.com 

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

Santiago Moreno, Economist
+57.601.745.6300 Ext. 1875 (Colombia)
santiago1.moreno@scotiabankcolpatria.com

The past few weeks have been very quiet in Colombia. On the political front, the government continues its push to discuss social reforms in Congress. However, President Petro knows it is impossible to have any definitive approval before the end of the first legislative period on June 20.

The health reform passed the first debate in the seventh commission of the House. Having said that, there is still a long way to go before final approval. There are still deep concerns about the role of the public versus the private sector in administrating all the funds to cover health expenses. The second debate is expected to start in coming weeks. Meanwhile, the labour reform faced headwinds in its discussion as its first session was cancelled after failing to form a quorum.

The Government also presented the first draft of the Pension Reform to kick off debate in the seventh commission of the Senate; the bill keeps the main ideas revealed in preliminary documents. The proposal aims to reduce competition between the public (defined benefit / pay as you go), and the private (defined contribution) systems, creating a pillar structure where employees must contribute to a public fund if they earn less than three minimum wages and make additional contributions to the private system for earnings above three minimum wages. The main question is about how the public savings fund will work, which is still an open topic of discussion during congressional debates and then in the proper regulation of the law. Another critical variable under debate is the threshold that divides contributions to the public and private systems; the Government’s proposal is for three minimum wages, but Senators in charge of the debate are asking for a lower number (between 1 and 2 minimum wages). The pension reform is the reform with the highest probability of passing. However, its passage is expected to be in the second legislature but before the regional elections on October 29.

On the economic front, economic activity indicators continue to show an economic slowdown. Employment gains were more moderate in April, while credit continues decelerating. On the external front, imports have slowed down significantly, especially on investment-related items such as capital goods and raw materials, resulting in a significant narrowing of the trade deficit. This dynamic is relevant for the analysis of the currency; the COP has appreciated more than 7% in the YTD and, during May, touched its strongest levels since September 2022. The cash position in dollars of banks and a weaker demand from the real sector (lower imports) are potential sources of why, despite international volatility, the COP hasn’t deteriorated significantly. According to our macro model, a 4,300 pesos level in the USDCOP would imply that the risk premium due to political noise will vanish. However, we must wait for more information before changing our structural forecast.

Finally, next week, DANE will shift its new schedule for CPI releases. Data will be out on the fifth business day of the week instead of the fifth calendar day. BanRep also decided to change the schedule for the monetary policy meetings; now, meetings will be on the last business day of each month, except in December. BanRep left unchanged the months when they will discuss monetary policy rates: January, March, April, June, July, September, October, and December. Minutes will now be published the third business day after the monetary policy meeting. The Monetary Policy Report Release will be on the second business day after the monetary policy meetings of January, April, July, and October. And, the press conference for the Monetary Policy Report will now be on the fourth business day after the monetary policy meetings of January, April, July, and October.

Calendar and detailed info: https://www.banrep.gov.co/es/noticias/jdbrc-informa-cambios-fechas-reuniones-mensuales

See table 1 for the next relevant dates for the remainder of 2023:

Mexico—More Twists in the Banamex and Grupo Mexico Situations; Banxico Speakers and Inflation Up Ahead

Eduardo Suárez, VP, Latin America Economics
+52.55.9179.5174 (Mexico)
esuarezm@scotiabank.com.mx

As days go on, more details are emerging on the potential resolution of the Grupo Mexico and Citibanamex transactions in Mexico. On Thursday, Bloomberg reported (and President Lopez Obrador stated) that Mexico’s government and Grupo Mexico reached an agreement whereby the government would take control of the seized railway on the Tehuantepec Isthmus and, in exchange, Grupo Mexico would see its concession on the Isthmus-Veracruz rail segment extended 8 years. If confirmed, this could mark the end of one of the recent sources of tension in Mexico’s private sector.

The Tehuantepec Isthmus project, if executed correctly, could present interesting opportunities. The gap is seen as a potentially attractive center for wind farms, which could provide power for setting up a manufacturing hub in the region. It would be strategically located near ports in the Pacific and Atlantic Oceans. The execution challenges are: 1) setting up high speed transportation infrastructure to move merchandise, 2) improving shipping ports on both coasts, 3) developing the human capital of the labour force in the area to meet the demands of modern industry (it’s near a large existing Volkswagen plant), 4) tackling insecurity issues in the surrounding area.

In separate news, Reuters reported in an interview with Undersecretary of Finance Gabriel Yorio that a new potential solution for the Citibank sale of Banamex was being considered. According to the interview, the government is considering potential options for the government to buy all of, or a stake in, Banamex, which could potentially be merged with other state-owned banks, such as the Banco del Bienestar. Were the government to purchase Banamex, it would give the public sector a large player in the domestic financial sector. It will be interesting to see how that potential transaction could interact with the Official Gazette decree from February 15, 2023, which demands that all public sector entity accounts with private banks get shut (with a few exemptions). 

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

Among next week’s indicators, May’s inflation print will once again be the focus, particularly regarding the details of the services prices dynamics. Banxico noted in its Inflation Report as well as in the last policy meeting minutes that uncertainty regarding the core inflation trend remain high, and the case of a stronger persistence on the core component, or even a bounce back is not totally out of the question. The May meeting minutes’ forward guidance also contrasted with market pricing, as at least two Board members explicitly stated that they do not consider rate cuts for this year, in contradiction of both survey and market expectations of the cutting cycle starting in Q4-23. On the bright side, despite uncertainties, inflation expectations seem to have anchored in recent months.

Peru—Looking Forward to Trend Changes in Inflation and GDP; the Reference Rate Will Have to Wait 

Guillermo Arbe, Head Economist, Peru
+51.1.211.6052 (Peru)
guillermo.arbe@scotiabank.com.pe

The BCRP will not raise its reference rate at its June 8 meeting. That was easy! The market consensus is nearly unanimous in expecting the same. The BCRP has not modified its reference rate since January, when inflation was 8.7%. Yearly inflation in May has just come in at 7.9%, which is better, but not nearly enough for the BCRP to lower its policy rate. Inflation in May was, moreover, only negligibly below April’s 8.0%. Simply put, things have not changed enough to warrant a change in policy.

But things may start to change soon. We expect a sharp downturn in inflation in June/July. If, as we expect, monthly inflation stays in the vicinity of 0.3% per month (perhaps a bit more in July due to seasonality issues), this would be significantly lower than monthly inflation in June/July 2022 (chart 1). In fact, we would not be surprised to see yearly inflation below 7% in two months’ time. 

The wholesale price index provides additional support for this view (chart 2). It now stands at 1.7%, the only inflation indicator that has fallen within the BCRP inflation target range (1.0% to 3.0%). The trend is even more impressive. Wholesale inflation has plummeted from 8.1%, yearly in February, to 1.7% yearly in May. Nearly half of this decline took place in May alone, as WPI inflation declined from 4.2% to 1.7% in a month. CPI inflation typically lags the WPI, but not by all that much. 

Inflation expectations, currently at 4.21%, and down from 4.25% last month, has been trending down for some time, but is more adaptative in performance, and, thus, will probably move down more noticeably once the CPI declines with more conviction after June.

Even if inflation plays out as we expect, a cautious BCRP is not likely to lower rates in a hurry. Inflation continues to be in line with our 5.0% year-end forecast, and we maintain our expectation that the BCRP will hold off lowering rates until Q4.

On another note, the mining GDP growth figure for April was released on June 1, and it was strong. Mining and Oil & Gas rose 17.4%, y/y, with mining alone up over 20%. This result was the combination of two factors: a return to normal in mining activity in April, but also a low y/y comparison base due to the partial pause in production at the Las Bambas and Cuajone copper mines in April 2022. As a result, copper output was up an unusual 31% y/y in April 2023.

Fishing GDP, which was also released, was down 2.5% y/y in April, but the sector carries little weight. In any event, we were expecting even worse.

The upshot of the mining data is that April GDP is likely to be above our original 1.5% y/y growth expectation, and could be enough to push April GDP towards, or even a little bit over, 2.0% y/y. The figure is to be released on June 15.