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  • Emerging Markets Debt Daily

    No Signs of Life in Mexico Domestic Activity

    Natalia Gurushina ,Economist, Emerging Markets Fixed Income
    April 26, 2019

    A small upside surprise in Mexico’s economic activity does not change the fact that the growth outlook remains soft, creating headwinds for the government’s ambitious social agenda and fiscal performance. Domestic activity expanded by 1.11% in year-on-year terms in February, moderating from 1.25% the month before (see chart below). Slack in the economy should help to reduce inflation pressures (at least in theory). However, the exchange rate dynamics will be as important. The market continues to believe that economic slack leaves room for 50bps of easing in the next twelve months. However, the central bank’s board members remain mostly cautious—especially in the light of policy uncertainties on the government’s side.

    Argentine assets are bouncing this morning, following reports about a USD6B lifeline from the World Bank and a counter-offensive from President Mauricio Macri’s “men” who said that it was too early to look at “crystal balls”—aka election polls, some of which showed a big lead for the opposition candidate. The World Bank money should come in USD1.5B annual batches to be used both in the private and the public sectors, but this is too small to affect the situation in a meaningful way if pressure resumes.

    The main reason why the U.S. Dollar and rates looked through today’s significant upside surprise in Q1 gross domestic product (GDP) growth is a big inventory buildup. The economy expanded by 3.2% on a quarterly basis, with personal consumption performing better than expected and the gross private domestic investments growth accelerating to 5.1% quarter-on-quarter. However, inventory stockpiling is usually not a sustainable source of growth—hence the market’s response. In addition, core Personal Consumption Expenditures (PCE) (down to 1.3% quarter-on-quarter) showed no evidence of underlying inflation pressures, giving the Federal Reserve plenty of room to contemplate its next policy move.

    Chart at a Glance

    Mexico Domestic Activity

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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