Latam Weekly: Banxico to Cut, Regional and G10 Inflation On Tap

ECONOMIC OVERVIEW

• A key week awaits in Latam and the G10 with top-tier data on tap and a few more central bank decisions to possibly prolong the market whiplash of recent days.

• Mexican CPI and economic activity data could surprise significantly lower and lift the odds of a 50bps cut by Banxico on Thursday. Still, as discussed by our team in today’s weekly, a cautious 25bps rate cut remains the likelier move.

• Brazilian mid-month inflation could influence BCB expectations, but markets may get more insights to move to from the bank’s meeting minutes and its quarterly inflation report.

• Colombia’s government is fast approaching a September 25^th deadline to present a budget proposal to congress after the rejection of its most recent plan. Data-wise, it’s quiet in Colombia, but today our colleagues outline their call for a 75bps cut by BanRep when officials meet on the 30^th.

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 September 21–October 4 across the Pacific Alliance countries and Brazil.

Charts of the Week

ECONOMIC OVERVIEW: BANXICO TO CUT, REGIONAL AND G10 INFLATION ON TAP

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

• A key week awaits in Latam and the G10 with top-tier data on tap and a few more central bank decisions to possibly prolong the market whiplash of recent days.

• Mexican CPI and economic activity data could surprise significantly lower and lift the odds of a 50bps cut by Banxico on Thursday. Still, as discussed by our team in today’s weekly, a cautious 25bps rate cut remains the likelier move.

• Brazilian mid-month inflation could influence BCB expectations, but markets may get more insights to move to from the bank’s meeting minutes and its quarterly inflation report.

• Colombia’s government is fast approaching a September 25^th deadline to present a budget proposal to congress after the rejection of its most recent plan. Data-wise, it’s quiet in Colombia, but today our colleagues outline their call for a 75bps cut by BanRep when officials meet on the 30^th.

A key week awaits in Latam and the G10 with top-tier data on tap and a few more central bank decisions to possibly prolong the market whiplash of recent days. Last Thursday, traders were close to going into the weekend confident that the Fed was going to cut by 25bps to then be sharply jolted by talk of a 50bps cut that Powell and company ultimately delivered. Today, markets are a bit undecided about what the Fed may do in November, but also what Banxico on Thursday, and BanRep on the 30^th may decide on.

Data releases and events next week will help us get a bit more clarity for these central bank decisions, but there’s also important items on the calendar that may impact the outlook for policy rates in Brazil, the Eurozone and the UK, and Canada. For the ECB and the BoE Monday’s PMIs out of the Eurozone, France, Germany, and the UK should be closely monitored, as should August CPI data out of France and Germany (only 5bps are priced in for the ECB’s October meeting). Canadian GDP out on Friday for July with an August ‘early indicator’ may trim the implied toss-up odds of a 50bps cut by the BoC next month. On Tuesday, the RBA is expected to hold its policy rate at 4.35%, and on Thursday, the SNB is seen cutting 25bps.

In Brazil, IPCA-15 (mid-month) inflation figures out on Wednesday are the data highlight, but Tuesday’s BCB September meeting minutes (when it hiked 25bps) and Thursday’s BCB quarterly inflation report may be of greater importance for markets that are pricing in almost another 100bps in BCB tightening over the balance of the year. This is already an extremely hawkish stance by traders that they hope will be validated by next week’s two BCB publications, but they have already set a high bar and maybe Campos Neto and Galipolo may not want markets to get carried away.

Before getting into what awaits in the Pacific Alliance, we should highlight the key US figures on tap. Monday’s PMIs for August will be closely watched for signs that the domestic economy is perhaps slowing faster than feared, especially as it may impact the employment side of the dual mandate; PMIs out of Europe are also relevant for global growth perspectives. Thursday’s Q2 GDP revisions, jobless claims, and durable goods orders figures are also worth a look, but it may be Friday’s PCE inflation (the Fed’s preferred measure) that catches the market’s attention as a lower print may embolden those betting on another 50bps cut by the Fed in November (35bps priced in).

Moving on to the PAC, Mexico’s calendar is the busiest of all with retail sales, economic activity, international trade data and, above all, Banxico’s rate decision on Thursday. In today’s report our colleagues in Mexico outline their expectation for a 25bps cut—though after the Fed’s 50bps there may be some forecasters expecting a parallel move in Mexico. Could next week’s data push Banxico towards 50? Maybe, but economic activity would have to come in well lower than expected and mid-month inflation would have to show a more pronounced decline in core inflation.

The week will start with retail sales and economic activity readings, with the latter expected to show an ok increase of 1.5–2.0% y/y that would leave behind the 0.6% y/y contraction in June when the economy held flat on a month-on-month basis. On Tuesday, bi-weekly CPI for September is expected to show a 3-handle for core inflation—even if just a few hundredths below 4%—while headline inflation ticks lower but remaining above 4.50%. Banxico does not seem too concerned with the trends in headline inflation, where food prices have been a key explanation for its acceleration from 4.4% in February to as high as 5.6% in July in full-month data. Softish growth, a big Fed cut, core inflation looking better behaved, etc., they may just go for it, though we think 25bps is the more adequate, cautious, move; markets are pricing in about a one-in-three chance of a half-point cut.

Calendars are relatively bare elsewhere in Latam, but we highlight the release of the BCCh’s meeting minutes on Monday. These may inform markets that are split regarding the size of October’s rate cut. On Tuesday, before Chilean markets closed for three days, implied market pricing showed about 35bps in cuts, but this was before the Fed, of course. Tuesday PPI data should not be a market mover, nor should Wednesday’s BCCh traders survey, though this last one could give us a fresh look into the view of market participants (do note it often doesn’t differ significantly from what we actually see on screens...from traders).

In Colombia, we only have a couple of confidence survey readings, but the main thing to watch will be the progress—or maybe lack of it—in budget negotiations after the government’s proposal was slapped down by lawmakers earlier this month, and now the September 25^th deadline is fast approaching (we’ve seen this before in Colombia, however, of waiting until the last moment). In today’s report, our team in Colombia also takes the opportunity to update us on their views for BanRep’s rate decision on the 30^th. Then, despite some recent upside surprises in growth (with poor breadth, notably), they expect that policymakers led by Villar will lower the reference rate by a larger 75bps with an eye on supporting the economy amid better-behaved (albeit still-elevated) inflation. 

PACIFIC ALLIANCE COUNTRY UPDATES

Colombia—Recent Macro Developments At-A-Glance and Expectations About BanRep’s Future Debate

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

Daniela Silva, Junior Economist
+57.601.745.6300 (Colombia)
daniela1.silva@scotiabankcolpatria.com

BanRep will have an interest rate decision on September 30^th, and the outlook seems to favour an acceleration in the easing cycle, however, it is important to remember that BanRep is looking for consistent signals to make an acceleration in the easing cycle that can be sustained for more than just one meeting. In this piece we will highlight some elements to keep in mind.

Inflation has made significant progress since the peak reached in March 2022 (13.3%) falling by 7.22 ppts to the current 6.12%, and in the last two months, it has surprised well below expectations. Most of the components in the CPI basket are showing inflation pressures that are even lower compared to the usual pre-pandemic behaviour, while few but still relevant items such as rent fees are taking longer to normalize due to their indexed nature.

Interest rates have had a much more gradual decline, a reduction of 2.5 ppts from their maximum of 13.25%, reflecting a much more cautious stance by the BanRep board than was estimated at the beginning of 2024. This cautious behaviour was the common approach for many central banks, even the Federal Reserve delayed the kick off of the easing cycle more than initially expected.

But time flies and the year is almost over, and the outlook is more optimistic. And although in the past, the macroeconomic outlook was not sufficiently compliant with expectations, it now seems to provide the confidence to pave the way for a new economic cycle.

• Since the beginning of BanRep’s easing cycle in December 2023, the board has made it clear to us that the objective is to get inflation back to the target by mid 2025, emphasizing a gradual reduction in rates that in the future does not generate an interruption of the easing cycle.

• The behaviour of economic activity, although it may have been present in some discussions of the board, has not been of significant concern for the majority of the board, despite the signs of a rather weak economy. In 2023, the lowest economic growth in history was recorded (0.6%). In 2024 growth has been leveraged by a minority of activities, in addition to the fact that the current account deficit has reached the lowest level in the last fifteen years (which in the case of Colombia shows economic weakness).

• We expect international financial conditions will influence BanRep’s next steps. The Federal Reserve started its easing cycle by aggressively cutting their rates by 50bps, but signaling that the pace of cuts will be data dependent and that the terminal rate will be higher than in recent history. In our perspective, the Fed’s decision provides confidence to accelerate the easing cycle in Colombia.

• The fiscal risk premium is still incorporated in local assets, and the exchange rate operates at a fair level according to the fundamentals, however, recent market volatility could be part of the list of concerns against accelerating the easing cycle for some board members, especially in the middle of the discussion of next year’s fiscal budget.

• Regarding inflation, as mentioned at the beginning, it has shown favourable behaviour. Analysts’ expectations for the end of 2024 have been adjusted downwards. However, weather events are uncertain, and the lack of rain can affect utility fees at the beginning of 2025, as well as the price of some agricultural foods that depend on rain for their cultivation.

• Additionally, the increase of the minimum wage will be an intense discussion, since in the last three years we have seen increases based on historically high inflation, and it may be worrying if the adjustment in this year far exceeds inflation.

In conclusion, we believe that the evolution of inflation, more relaxed international financial conditions, and the need to support economic recovery, may provide BanRep with the appropriate scenario to accelerate the cycle of cuts by 75bps and take the rate to 10% at its next meeting. If this is the case, and understanding the characteristics of consistency in BanRep’s movements, a 75bps cut in September would be on track for the rate to reach 8.50% by the end of the year.

Mexico—Growth and Inflation: Banxico’s Key Monetary Policy Decision

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

Next Thursday, Banxico will make its monetary policy decision, which will be decisive in setting the pace of the cutting cycle, after the Federal Reserve was more aggressive than expected. For our part, we expect a cut of 25 basis points, reaching a rate of 10.50%, and a rate at the end of the year of 10.25%, at least in the base scenario. However, the environment may change, since the Citibanamex Survey will be published on Friday, where analysts will announce their position on Banxico’s cut. Several participants will probably point to a cut of 50 basis points, in addition to reviewing the trajectory of inflation, the exchange rate and growth (chart 1).

On the one hand, economic activity has decreased so far this year, mainly in the industrial sector, while the services sector has maintained a good pace. We believe that the members of the Governing Board will focus on this argument of lower growth to justify the cut, since last week the industrial production indicators were mixed, private consumption slowed, and gross fixed investment fell.

We consider that the pace of cuts should be moderate to ensure convergence to the 3.0% target, after the significant rebound that brought inflation to 5.57% in July, and which slowed to 4.99% in August, mainly due to the increase in the non-core component, specifically in fruits and vegetables, as well as in energy. We expect inflation to continue to slow, but Banxico must act cautiously to prevent significant increases in inflation.

At the moment, the implicit rate curve expects a rate of 10.22% in three months, that is, two cuts of 25 basis points, while the TIIE curve at the three-month node is observed close to 10.97% (chart 2). The cut will also depend on the inflation print for the first half of September, which will be published on Tuesday, September 24^th, with markets expecting to see at lower levels than previously recorded.