- The MXN will continue to face headwinds as an unfavourable inflation print on Wednesday could cloud the outlook for Banxico’s monetary policy meeting in August. Furthermore, the US elections are starting to impact local markets.
- Last week we published the Bondholders and Flows Report for June 2024, in which we stated that overall foreign appetite for Mexican sovereign bonds remained subdued as accumulated flows in 1H24 stand close to zero.
- Today, the INEGI released the latest figures on economic activity, revealing a monthly change of 0.7% MoM in May, which translates into an annual growth rate of 1.6%. Additionally, preliminary data unveiled on Friday, suggests that the Mexican economy is expected to stagnate in June (0.0% MoM).
- Moving forward, we believe that economic activity will continue to show signs of deceleration. Consequently, economic growth by the end of the year is likely to fall below the prevailing market expectations of 2.0% YoY.
- On the inflation front, the INEGI will publish July’s bi-weekly CPI print next Wednesday. We forecast that headline inflation was 0.69% MoM (5.59% YoY) and core inflation 0.20% (4.04% YoY). The drivers behind this forecast are several non-core shocks related to soaring agricultural and livestock prices and to a lesser extent energy inflation reflecting the increase in oil prices between the second half of June and the first days of July.
- July’s expected inflation surprise is unwelcome at a juncture when Banxico’s Board recently acknowledged the weakness in economic activity, which was not enough to gather unanimous support to continue cutting rates in the near term.
- If inflation comes in at around our forecast, the feasibility of a cut in August would diminish. However, the cut would be fully justified, in our view, as even with this move, the monetary stance should remain well in restrictive territory. Moreover, keeping excessively high rates in response to supply shocks could prove inefficient if it leads to a protracted period of underwhelming economic activity.