LatAm Weekly – August 5-9

LatAm central banks will continue cutting rates and intervening in currency markets How will the central banks of Latin America respond to the escalating US-China trade war? Our view is that they will likely continue to ease monetary policy and if necessary, intervene in markets to defend their currency. Mexico Inflation, not perfect, but below 4% July CPI was reported on Thursday (08/08) morning. The comparison with the market’s expectations is not particular important at this stage. What is important however, is if inflation is converging on the 3% target or if inflation is below the 4% upper target bound. The results have been mixed empirically. First, yes, inflation is converging on the target. In July, the annual CPI came to 3.78% YoY, which is the lowest reading since December 2016. Also, both the core and non-core inflation components are below 4.0% YoY. Second, however, is that the bulk of the decrease in headline inflation has been due to non-core inflation. Since peaking in August 2017 at 5.00%, core inflation has decreased at a much lower pace than non-core. In fact, year-to-date core inflation has even somewhat increased. Even more worrisome is that core-services, a subcomponent that Banxico carefully monitors, is stuck between 3.70% and 3.80% with no signs of slowing. This is an obstacle that Banxico must contend with to feel comfortable cutting. Central banks around the world are cutting their policy rates because growth is falling. If Banxico does not cut its own rate on August 15th, monetary policy would be effectively tight relative to the rest of the world. Argentina – On the primary elections, PASO (August 11) The market will focus squarely on the primary elections, PASO, on August 11th. President Mauricio Macri seems to be running a more effective and discipline campaign than Alberto Fernandez/Cristina Kirchner. Macri’s main political message is reminding voters of the disastrous policies of former President Cristina Kirchner. Despite the recent bout of FX depreciation, which is primarily due to Trump’s announcement of additional tariffs on China, macroeconomic variables seem to be improving as inflation is trending lower while GDP is bouncing up to positive territory. In contrast, Alberto Fernandez is running a campaign that has not gone very smoothly.