Closing out the week, we have some important data from Mexico that has the potential to move the markets. Typically there aren’t revisions to GDP figures, but if we get a significant revision in the final number scheduled for publication later today, we could see a move in the peso.
For now, the market focus is calibrating the effect that the Banxico’s rate cut had on the economy. Arguably, the GDP figures and the fact that Mexico slipped into a technical recession during the second quarter, weighed on the central bank’s decision.
However, the move into negative growth was based on technical valuation. And we could see a revision this time around that would change the assessment.
The question on every MXN trader’s mind now is if and when there will be another rate cut. An upward revision of the GDP figures could show the Banxico acted too hastily. It would also likely put off expectations of further action until firmly after the end of the year.
Leading up to the rate decision, the consensus among analysts was that there would be at least one rate cut either in August or September. Depending on the effects, there might be another by the end of the year. Now that we have one cut, the revision to the GDP figure will be instrumental in calibrating when to expect more action from the central bank.
Is a Revision Higher Possible?
Quite a few analysts were caught off guard when Mexico slipped into a technical recession. The outlook for the economy had been less than optimistic, but they did think there was still time before growth became negative. Those analysts are now the ones saying that last quarter’s GDP could see a revision up to flat growth.
The justification for this perspective is that domestic demand has remained relatively healthy during the last quarter. This is despite industrial uncertainty over government policy and trade issues. Mexico’s largest trade partner continues to push ahead, and Trump has focused his tariff action across the Pacific. Although the US did make threats of tariffs, it never actually imposed them. In fact, Mexico has had an increasing trade surplus with the US.
If It’s Not Trade, Then What Is It?
Over the last couple of years, Banxico has been fighting increased inflation. This has pushed the reference rate to reach the highest level in the world in real terms. Naturally, this catapulted the bond yields much higher, even as concern over Mexico’s economy led to capital flight during the beginning of the year.
With the cost of credit high, the central bank has been adamant that structural reforms are necessary to support the economy. It’s hard to encourage capital investment with commercial interest rates available to the public in the two-digit range.
The government accused the central bank of having too high rates, while the central bank accuses the government of letting inflation get out of hand. Meanwhile, the economy isn’t growing despite record trade surpluses.
There is a generalized flight to safe-havens given increasing concern over the health of the global economy. Now, it’s become worse following the official inversion in the US (and UK) bond yield curve.
More risky assets like those offered by Mexico are not attractive investments. So, we could capital flight – and the consequent weakening of the peso – to continue. To make matters worse, there’s a generalized reticence to get involved in emerging markets after Argentina’s recent electoral results.
There is a certain amount of fear of contagion through Latin America, with many of the funds exposed to Argentina also exposed to Mexico. The erstwhile economic star of the region, Chile, is also struggling to get its economy going. It’s not just Mexico! And generalized weakness among emerging markets could imply the peso is in for a rough few months.