Mexico Weekly Flash
10.24.2014
Economic Analysis
Economic activity in August surprised to the
downside, due to the weak services sector
Arnoldo López / Juan Carlos Rivas Valdivia / Javier Amador / Iván Martínez / Javier Morales
What happened this week …
The Global Economic Activity Index (IGAE) slowed in August, with a monthly (MoM) fall of 0.2%, mainly
as a result of a weaker-than-expected services sector, with seasonally adjusted figures (sa). The monthly fall
of the IGAE was a result of decreases in agriculture, (-0.4% MoM, sa) and in services (-0.2% MoM, sa), although
industry increased by 0.48% MoM, sa. In annual terms, the IGAE grew by 1.9% sa (BBVAe: 2.7% YoY, sa),
while in terms of its components, agriculture grew by 7.2% YoY, sa; industry by 2.1% YoY, sa; and services by
1.6% YoY, sa. These results suggest a slow pace in economic growth, although we should wait and see whether
services do better in September, thanks to strong performance by industry and their high correlation with the
latter sector.
Annual inflation has reached its peak. We expect it to stand at 3.8% by the end of the year. Headline
inflation rose 0.50% QoQ in the first half of October, driven upwards principally as a result of the seasonal
correction in electricity prices. This figure surprised a little to the upside (BBVAe: 0.46%; consensus: 0.46%).
Headline inflation increased to 4.32% from 4.22% the previous fortnight. Core inflation was 0.12% QoQ, lower
than expected (BBVAe: 0.16%; consensus: 0.14%). In annual terms it stood at 3.32%, slightly less than the
previous fortnight (3.34%). Although inflation was a little higher than expected, the breakdown of the fortnightly
increase is consistent with our forecast for the end of the year (BBVAe: 3.8%; consensus: 4.0%), given that it is
clear that there are no demand-side pressures and that pressure on farming and fishery prices seems to be
easing.
Figure 1
IGAE by components, 2012-14
(YoY % change, sa)
Figure 2
Global risk aversion (VIX index, %)
0
-1
-1
16
-2
-2
14
Source: BBVA Research with data from INEGI. sa = seasonally
adjusted.
24
22
20
Source: BBVA Research with data from Bloomberg.
10/23/2014
10/21/2014
10/19/2014
10/17/2014
10/9/2014
10/7/2014
10/5/2014
10/3/2014
10/1/2014
18
10/15/2014
Services
26
10/13/2014
Industry
28
10/11/2014
Total
Aug-14
0
Jun-14
1
Apr-14
1
Feb-14
2
Dec-13
2
Oct-13
3
Aug-13
3
Jun-13
4
Apr-13
4
Feb-13
5
Oct-12
5
Dec-12
6
Aug-12
6
Mexico Weekly Flash
10.24.2014
Retail sales surprised to the upside, rising by 5.0% in August YoY, after seasonal adjustments (sa). This
higher-than-expected increase (BBVAe: 2.7% YoY, sa), represents the biggest annual increase since December
2013 (5.3% YoY, sa). In monthly terms (MoM), the acceleration in retail sales was 0.6%, sa. The faster pace of
formal job generation (57,689 jobs) and the recovery of industrial production (0.37% MoM) in August appear to
account for this rise. This indicator merits close attention, since it uses a new statistical method, which causes
major changes in the results from the earlier calculation method. For example, under the former system of
measurement, July retail sales enjoyed annual growth of 1.6%, sa, whereas the new methodology puts this
increase at only 1.0%.
Week of lower risk aversion influenced by favourable data from the eurozone. Concerns about a slowdown
in the rate of activity at a global level fell over the week, after the figures on the outlook for the manufacturing
industry (PMI) in Europe and China were more positive than expected. In addition, the figures in the third quarter
corporate results in the US do anything but suggest a forthcoming slowdown. Indeed, of the 64 companies on
the S&P 500 index which have published their results so far, 60% have beaten analysts’ expectations. As well as
this round of higher-than-expected corporate results, there is the US August inflation figure (0.2%MoM, 1.7%
YoY) which keeps price increases below the Fed’s target and, as such, generates expectations that the cycle of
monetary tightening will not be brought forward. In this context of lower risk aversion, the S&P 500 stock index
showed gains of 4.13% over the week, while the IPC grew by 0.9%. On the government bond market, yields on
the 10-year T-bond rose by 7 basis points over the week, closing at 2.26%. In Mexico the equivalent M-bond
closed unchanged from the previous week at 5.86%. Finally, on FX markets the MXN depreciated over the week
by 0.26%, the third biggest depreciation among LatAm currencies.
…What is coming up next week
We expect the balance of trade as of September 2014 to register a smaller positive balance. On 27
October the INEGI will publish the balance of trade figures for September. We estimate that the external balance
will be positive in August, at close to USD100mn (consensus: - USD318mn). We have reached our forecast by
taking the estimated annual growth rate to September 2014 for goods exports of 3.6% and an annual growth
rate of imports of 5.5%. In terms of the comparison between the balance of trade and other figures, in
September 2013 the former showed a surplus of USD650mn, while by August 2014 the external balance was
negative, at –USD1.1bn. Insofar as the consensus and this bank both estimate that the balance of trade,
whether surplus or deficit, will be small, both estimates consider that the amounts of goods exports and imports
in September will be similar.
The monetary policy rate will stay at 3.0% in an inflationary context which is still above the inflation
target range of variability. The monetary policy decision will be published next Friday. We do not expect
changes in the rate, for the following reasons: i) inflation remains over 4.0%. In the first half of October inflation
crept up to 4.32% YoY, which we expect will be its peak of the year. Although we forecast that inflation will fall
from this point onwards, down to around 3.8% YoY by December, we cannot yet rule out the short-term risks
represented by fish product prices; ii) mixed figures in terms of economic activity. Although the August figure
from the IGAE surprised to the downside (-0.2% MoM), growth in the industrial sector (0.4% MoM), influenced to
a large degree by an increase in external demand which is expected to hold, leads us to believe that the drop in
the services sector in August (-0.2% MoM) could reverse. In fact, over the last five years there have only been
four occasions on which there has been a monthly fall in the services sector after the industrial sector had grown
0.4% MoM or more during the previous month. Furthermore, higher-than-expected job creation figures (156,432)
and for retail sales (0.6% MoM) in September are signs that the quarter will close in positive territory, and iii) the
Mexico Weekly Flash
10.24.2014
central bank’s communication. Banxico adopted a neutral tone in its latest monetary policy statement and has
reiterated that it holds to its conviction that additional reductions in the foreseeable future are not to be
recommended.
All the attention of the markets will be on the Fed’s monetary policy meeting and the US GDP figure. On
29 October, the Federal Reserve will publish its monetary policy decision, in which it is expected to conclude its
bond-purchasing programme (QE3). The markets will be looking out for any changes in the language of the
statement which might provide more information about any delay in the cycle of monetary tightening.
Furthermore, on 30 October the US Trade Department will issue the initial estimate of 3Q growth in the US
economy.
Calendar of indicators
Mexico
Balance of trade (USD mn)
Monetary policy decision
United States
Durable Goods New Orders Industries (MoM, sa)
Conference Board Consumer Confidence (sa,
1985=100)
GDP Chained 2009 Dollars (QoQ, saar)
University of Michigan Survey of Consumer Confidence
Sentiment
Indicator
period
Publication
date
BBVA
estimate
Consensus
Previous
figure
September
27 Oct
97.0
-317.8
1,123.1
October
31 Oct
3.0
3.0
3.0
Indicator
period
Publication
date
BBVA
estimate
Consensus
Previous
figure
September
27 Oct
3.00
0.50
0.40
October
28 Oct
87.30
87.00
86.00
3Q
30 Oct
2.50
3.05
4.60
October
31 Oct
86.00
86.40
86.40
Source: BBVA Research with data from Bloomberg. YoY = annual rate of variation. sa = seasonally adjusted. MoM = monthly rate of variation.
Mexico Weekly Flash
10.24.2014
Markets
Figure 3
MSCI stock market indices
(Index 1 Jan 2014=100)
Figure 5
Figure 6
Global risk and exchange rate
(VIX index and USDMXN)
Currencies vs. USD
(17 Oct 2013 index=100)
VIX (lhs)
Mexican Peso
MXN (rhs)
Source: BBVA Research, Bloomberg
1-Oct
Latin American*
oct-14
sep-14
Asian*
* JP Morgan indices of Latin American and Asian currencies vs.
USD; weighted averages by trade & liquidity.
Source: BBVA Research, Bloomberg
Annual information and forecasts
2012
2013
2014
Mexico GDP (YoY % change)
4.0
1.1
2.5
General inflation (%, average)
4.1
3.8
4.0
Core inflation (%, average)
3.4
2.7
3.2
Monetary Policy Rate (%, average)
4.5
3.8
3.2
M10 (%, average)
5.7
5.7
6.0
US GDP (YoY % change)
2.8
1.9
2.0
Source: BBVA Research
22-Oct
20-Aug
9-Jul
10-Sep
ago-14
12.8
↑ appreciation
jul-14
1-Jan
16-Jan
31-Jan
15-Feb
2-Mar
17-Mar
1-Apr
16-Apr
1-May
16-May
31-May
15-Jun
30-Jun
15-Jul
30-Jul
14-Aug
29-Aug
13-Sep
28-Sep
13-Oct
12.9
abr-14
13.0
mar-14
13.1
feb-14
13.2
ene-14
13.3
dic-13
13.4
102
100
98
96
94
92
90
88
86
84
nov-13
13.5
oct-13
13.6
3.1
3.0
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
10-yr TN, rhs
Source: BBVA Research, Bloomberg
28
26
24
22
20
18
16
14
12
10
30-Jul
18-Jun
7-May
28-May
16-Apr
5-Mar
26-Mar
12-Feb
1-Jan
M10, lhs
S&P
jun-14
LATAM
Source: BBVA Research, Bloomberg
may-14
Mexico
6.7
6.6
6.5
6.4
6.3
6.2
6.1
6.0
5.9
5.8
5.7
5.6
5.5
22-Jan
10-year government bond yields (%)
1-Jan
15-Jan
29-Jan
12-Feb
26-Feb
12-Mar
26-Mar
9-Apr
23-Apr
7-May
21-May
4-Jun
18-Jun
2-Jul
16-Jul
30-Jul
13-Aug
27-Aug
10-Sep
24-Sep
8-Oct
22-Oct
118
114
110
106
102
98
94
90
86
Figure 4
Mexico Weekly Flash
10.24.2014
Recent publications
Date
Description
20 Oct 2014
Mexico Banking Flash. Banking deposits: growth slows, but stays in double figures
23 Oct 2014
Mexico Inflation Flash. Annual inflation has peaked. We expect it to reach 3.8% by year-end
Disclaimer
This document has been prepared by BBVA Research at the Banco Bilbao Vizcaya Argentaria, S.A. (BBVA) and by BBVA Bancomer. S. A.,
Institución de Banca Múltiple and the BBVA Bancomer Financial Group, on their own behalf and is for information purposes only. The
opinions, estimates, forecasts and recommendations contained in this document refer to the date appearing in the document, and, therefore,
they may undergo changes due to market fluctuations. The opinions, estimates, forecasts and recommendations contained in this document
are based on information obtained from sources deemed to be reliable, but BBVA does not provide any guarantee, either explicit or implicit,
of its exactitude, integrity or correctness. This document does not constitute an offer, invitation or incitement to subscribe to or purchase
securities.