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THE LATIN AMERICA ECONOMIC MONITOR
SEPTEMBER 24, 2014
ANDRES ABADIA,SENIOR ECONOMIST
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2014 Pantheon Macroeconomics | 399 Knollwood Road Suite 312, White Plains, NY 10603, United States | All rights reserved | No secondary distribution without express permission.
board believes that growth is not exerting upward
pressure on consumer prices due to the slack in the
economy, which will be reduced only gradually.
Banxicos board also believes that the
interpretation and forecasting of the U.S. Feds
monetary policy has become more complicated,
but expects the start of the hiking cycle in 2015.
Policymakers think the Fed has given mixed signals
and consider, additionally, that it will be difficult for
the U.S.s central bank accurately to identify the level
of slack in the labor market, taking into account both
cyclical and structural factors. It seems reasonable
to think, therefore, that Banxico will now focus more
on domestic economic issues in its policy discussions,
rather than the withdrawal of monetary stimulus in the
U.S. in 2015.
For this reason it is important, in our view, to pay
close attention to measures of inflation over the
coming months. The annual headline CPI inflation
rate rose to 4.1% in August from 4.0% in July, the
highest level since February. The recent upward
trend in inflation rates is due to short-term pressures,
especially in food prices, which will continue to be
felt over the coming months. We expect inflation to
remain at around 4% through the end of this year and
then to head towards Banxicos target of 3%. Under
The minutes of Banxicos latest monetary policy
meeting on September 5, when Mexicos central bank
held rates at record-low 3%, revealed that the decision
was unanimous; the balance of risks has improved.
The board believes that domestic demand is gaining
strength and expects the recovery will continue over
the coming quarters.
As a reminder, Mexicos economy grew 1.0%
quarter-over-quarter in Q2, after 0.4% in Q1,
propelled mainly by the strength of the external
sector, and a slight improvement in domestic demand.
These figures are a clear indication that the economy
is in recovery mode from its weakest growth period for
four years, and we expect the expansion to continue.
At the same time, according to the minutes, the
THE LATIN AMERICA ECONOMIC MONITOR
SEPTEMBER 24, 2014
ANDRES ABADIA,SENIOR ECONOMIST
Mexican Rates on Hold; Inflation
Will Drop Sharply Next Year
Mexico set to keep rates on hold despite elevated
ination; temporary adverse factors will fade.
No pressure from the labor market; unemployment
is set to drop but Banxico sees spare capacity.
Retail sales are gathering upward momentum as
credit conditions ease and condence improves.
2
3
4
5
6
7
8
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14
Mexico CPI, y/y%
Upper end of Banxico's Ination Target
Mexico Core CPI, y/y%
BUT PRICES WILL BE CONTAINED, SO NO RUSH TO HIKE RATES
-10
-8
-6
-4
-2
0
2
4
6
8
10
-12
-9
-6
-3
0
3
6
9
12
08 09 10 11 12 13 14
Mexico GDP, y/y% (Right)
Mexico private consumption, y/y% (Right)
OECD leading indicator, advanced one quarter (Lef)
BANXICO IS OPTIMISTIC ON ACTIVITY
2014 Pantheon Macroeconomics | 399 Knollwood Road Suite 312, White Plains, NY 10603, United States | All rights reserved | No secondary distribution without express permission.
these circumstances we do not expect a rate increase
over the coming quarters.
The convergence towards Banxicos inflation
target in 2015 reflects lower gasoline prices as the
government changes its pricing formula, subdued
telecom prices due to new regulations, and a
favorable basis effect due to the January anniversary
of this years tax increase. This alone will reduce the
headline inflation rate by 0.5%. Policymakers also
believe that core inflation rate will run below the target
center next year. In short, then, we think if inflation
stays close to 3%, in line with our central scenario
over the first half of 2015, monetary policy will be
on hold for some time.
The labor market data published on Monday
also underpin the prospect of tame inflation over the
coming months. The unemployment rate fell to 4.9%
in August, seasonally adjusted, from 5.2% in July. But
it is still high by historic standards, indicating that the
labor market will not be a source of inflation pressures
over the coming months.
Our short-term view of Mexicos labor market is
positive. It will improve moderately over the next
few months, with the unemployment rate heading
near to 4.5%, seasonally adjusted. The improving
labor market is boosting sentiment: Consumers were
slightly more optimistic about their own economic
circumstances last month, and their expectations
also improved. At the same time, the government
recently adopted additional measuressuch as the
announcement of a major new Mexico City airport to
quadruple capacityto stimulate the economy. This,
together with the improvement in the U.S. economy,
will translate into better labor figures in months to
come. The level that we expect for the jobless rate
is still above pre-crisis levels and sufficiently high to
prevent inflationary pressures.
Yesterdays retail sales report was also
encouraging. Retail sales increased 2.0% year-over-
year in July, from 1.1% in June, boosted by a 15%
month-to-month jump in auto sales, thanks in part
to easier financing conditions. The latest car sales
data, for August, show a further 8% month-to-month
increase, indicating that the positive trend is solid.
The surge in sales is being driven by an improving
labor market, especially in the manufacturing sector,
and better consumer confidence, in line with a gradual
recovery of economic activity. These data point
toward stronger domestic demand in Q3. Looking
ahead, we expect the positive trend to persist in
coming months.
Finally, today keep an eye on the economic activity
index in Mexico to see additional evidence of the
gradual improvement of the economy, especially in
the industrial sector. In Brazil, the current account
needs to be watched as the economy is still struggling
to get out of contraction. And in Argentina, look for
the Q2 GDP data to confirm that the country stayed in
recession, hurt by the collapse of consumer spending
and industrial output.
THE LATIN AMERICA ECONOMIC MONITOR
SEPTEMBER 24, 2014
WWW.PANTHEONMACRO.COM
3.5
4.0
4.5
5.0
5.5
6.0
6.5
Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14
Mexico Unemployment Rate
Three-month average
THE MEXICAN LABOR MARKET IS STARTING TO IMPROVE
Andres Abadia +1 914 610 3830
andres@pantheonmacro.com
-8
-6
-4
-2
0
2
4
6
8
10
Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14
Retail sales, y/y%, three-month average
ANTAD sales, y/y%, three-month average
MEXICAN RETAIL SALES ON THE PATH TO RECOVERY?
2014 Pantheon Macroeconomics | 399 Knollwood Road Suite 312, White Plains, NY 10603, United States | All rights reserved | No secondary distribution without express permission.
THE LATIN AMERICA ECONOMIC MONITOR
THIS WEEK IN BRIEF
Note: D prefix denotes Datanotes for these releases.
SEPTEMBER 24, 2014
WWW.PANTHEONMACRO.COM
Monday, September 22
D: Mexico unemployment rate (8)/8:00 Local
The unemployment rate fell to 4.9% in August, from
5.2% in July, pointing to a positive labor market in Q3.
Tuesday, September 23
D: Mexico retail sales (7)/8:00 Local
Mexico retail saes rose 0.4% in July month-to-month, lifting
the year-over-year rate to 2.0% from 1.1%, and pointing to
improving consumer demand in Q3.
Argentina trade balance (8)/17:00 Local
Released post-press. We expect a trade surplus of $780M,
lower than July due to the decline in exports of commodities
and manufactured goods. Consensus: $826M.
Wednesday, September 24
D: Mexico economic activity IGAE (7)/8:00 Local
The activity index is likely to reverse last months solid
increase, falling to 2.4% from 2.7%, but it will stay above its
long term trend, thanks to the improvement of the industrial
and service sectors. Consensus: 2.1%.
Mexico biweekly CPI (H1/8)/8:00 Local
We expect the biweekly CPI to rise 0.18%, keeping the
annual headline close to 4.1%. Consensus: 0.15%.
D: Brazil current account balance (8)/11:30 Local
Better trade figures should cushion the current account
deficit, staying close to -$5000M. Consensus: -$5350M.
Argentina GDP (Q2)/17:00 Local
High inflation, the collapse in tradedue to USD
shortagesand Brazils low growth, will take a toll on Q2
activity data. We expect a -0.3%. Consensus: -0.4%.
Thursday, September 25
D: Brazil unemployment (May-to-Aug)/10:00 Local
We think unemployment increased moderately between
May and August due to weakness in economic activity so far
this year. The rate should rise to 5% in August from 4.8% in
May. The statistical office postponed the publication of the
full report since May due to a strike. Consensus: 4.9%.
Friday, September 26
D: Brazil PPI manufacturing (8)/10:00 Local
Prices should ease further, falling for the sixth consecutive
month. We expect a 0.2% dip. Consensus: N/A.
D: Mexico trade balance (8)/8:00 Local
Increasing auto shipments should continue boosting
exports, but not enough to compensate for capital goods
imports. We expect a -850M deficit. Consensus: -667.5M.
Argentina economic activity index (7)/17:00 Local
Low confidence and import restrictions will continue to hurt
growth, we expect a -0.4% drop. Consensus: -0.3%.
Colombia overnight lending rate (8)/12:00 Local
Minutes of the last meeting took a more neutral stance,
suggesting that the end of the tightening cycle is close.
Consensus: 4.5%.
PANTHEON LATAM FINANCIAL CONDITIONS DASHBOARD
Currency Market
Value Week, % YTD, % Value Week, % YTD, %
Argentina 8.4 -0.2 -22.5 11,536 5.2 114.0
Brazil 2.4 -2.8 0.1 58,374 0.1 13.3
Chile 597.2 -1.3 -12.0 4,028 -0.9 8.9
Colombia 1,970 0.6 -2.1 14,224 -0.1 9.0
Mexico 13.2 0.3 -1.3 46,168 0.6 8.1
Peru 2.9 -0.2 -2.3 16,908 -1.0 7.3
Venezuela 6,292 -- -- 2,777 2.3 1.5
Real GDP Ination Interest rate
2013 2014 2013 2014 2013 2014
Argentina 3.0 -1.0 27.0 25.0 -- --
Brazil 2.5 0.6 5.9 6.1 10.0 11.00
Chile 4.2 2.5 2.9 3.9 4.5 3.00
Colombia 4.7 5.1 1.9 3.0 3.25 4.50
Mexico 1.1 2.5 3.9 3.9 3.5 3.00
Peru 5.8 4.5 2.9 3.1 4.0 3.25
Venezuela 1.4 -2.5 56.2 64.0 15.5 --
PANTHEONS ECONOMIC FORECAST
65
75
85
95
105
115
125
135
145
155
Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14
Coee
Soybean
Crude WTI
Copper
COMMODITY PRICES, (PRICE INDEX, 01/01/2013=100)
90
110
130
150
170
190
210
Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14
EMBI LatAm
Brazil
Mexico
INDEX EMBI SPREAD LATAM HISTORY (01/01/2013=100)
2014 Pantheon Macroeconomics | 399 Knollwood Road Suite 312, White Plains, NY 10603, United States | All rights reserved | No secondary distribution without express permission.
THE LATIN AMERICA ECONOMIC MONITOR
SEPTEMBER 24, 2014
ANDRES ABADIA,SENIOR ECONOMIST
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Economic Monitor, click here:
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