9/7/13

Mexico: stocks, bonds, peso rally on surprise rate cut | beyondbrics

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Mexico: stocks, bonds, peso rally on surprise rate cut

Sep 6, 2013 5:35pm by Jude Webber

Charity begins at home. Thats the message from Mexicos central bank, which on Friday cut its policy interest rate by 25 basis points to 3.75 per cent. Few analysts saw the cut coming, despite the economys lurch to its first contraction in four years in the second quarter this year. Many in the market had expected Banxico to hold fire until there was more clarity on the US Federal Reserves expected tapering of its stimulus, especially given the pesos recent weakening against the dollar. But what Banxicos second cut in its key rate since a 50 point reduction on March 8 shows, says Alonso Cervera at Credit Suisse, one of the the few to predict the move, is simply that: Local developments matter The Fed matters, but growth also matters. The Central Bank of Mexico has to look after Mexico. News of the rate cut sent Mexicos benchmark IPC index up 1.1 per cent in early trading on Friday. The Mexican peso, which fell to a 1 year low against the dollar this week rallied 1.4 per cent to trade at 13.19 pesos to the dollar. Mexican peso bonds also rallied, with yields on the 10-year sovereign falling 2.7 per cent to 6.4 per cent.

Mexicos cut bringing the rate to a record low bucks the emerging market trend. But then its dynamics are different. Brazil is grappling with inflation; India and Turkey with current account deficits, for example. And elsewhere, the only way is up: expectations are growing for a rate hike in Britain two years earlier than flagged. While Banxico highlighted some bright spots in the still fragile world economy such as the continuing pick-up in US demand, crucial to Mexicos exports it zeroed in on the significant weakening of Mexicos economy. That proved faster and deeper than expected, boosting risks to the downside, it said, although overall
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Mexico: stocks, bonds, peso rally on surprise rate cut | beyondbrics

annual inflation remained on track and core inflation at a historic low. Though Alberto Ramos at Goldman Sachs had expected the bank to stay cautious, given the likely impact of a rate cut on the Mexican currency, he said the decision was surprising but not shocking and revealed the banks overriding concern about Mexicos very weak real business cycle and its comfort with the inflation outlook. Market economists have slashed growth expectations in Mexico after the slide to a 0.7 per cent contraction in the second quarter. The newly reduced official forecast for 2013 is 1.8 per cent, but many see that as out of reach and expect growth closer to 1 per cent. The central bank nonetheless remained upbeat, though it conceded that its most recent forecast of 2 to 3 per cent growth for 2013 was now looking over bullish. In its rate cut communiqu, it said:

We expect the Mexican economy to recover during the second part of this year and next year. Nevertheless, we forecast that overall economic growth for 2013 will be considerably lower than the Banco de Mexcios recent forecast and we also anticipate that 2014 will be below our expectations.

But that gloom is leavened by its belief that inflation will continue to behave, and its expectation that any pressure on inflation from planned fiscal reforms will be transitory. The government is expected to unveil a long-awaited tax reform package on Sunday, along with its budget for 2014. Indeed, the bank highlighted the structural strengthening of public finances from the government reform plans which Enrique Pea Nieto bills as transformational for Mexico and is pushing to pull off this year. Related reading: Mexico economy shrinks for first time in four years, beyondbrics Mexican peso: down but not out, beyondbrics Mexican IP: little to cheer about, beyondbrics Mexico central bank cuts growth forecast, peso tumbles, beyondbrics

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