Economics: Yield Curve Becomes Inverted
Mexico’s interest rate yield curves in recent weeks have reached levels that are not consistent with the expected evolution of macroeconomic variables. This week’s Economic Outlook analyzes the government securities yield curve.
Last week’s National Consumer Price Index report revealed that prices increased an unexpectedly sharp 6.31% in June compared to the same month of 2016. It was the most pronounced percentage rise for that month since 2001, when inflation was reported at 6.57%.
The main driver of consumer inflation during June was the NCPI’s energy component, followed closely by the segment of food and beverages, as well as non food goods.
These sub-indexes have sustained an uptrend since the beginning of 2017 that may well be sustained throughout the remaining months of the year.
The market consensus inflation forecast for 2017, according to Banco de México’s monthly survey of private sector economists, was raised to 6.02% at the end of June as opposed to the previous 5.90% projection recorded in late May.
At the same time, analysts lowered their year end foreign exchange rate estimate for 2017 18.74 pesos per dollar from a previous 19.53/USD.
Between February and July of this year, the peso has been recovering ground relative to the dollar, a development that has probably incentivized consumption of imported goods in recent months.
Private spending sustained its expansion in April as Mexico’s index of private consumption rose at a 12 month rate of 5.0% according to seasonally adjusted data, while imported goods acted as the main driver by expanding 9.3%. Purchases of domestically produced goods also contributed to the headline result with a 4.7% increase, as did domestic services, for which consumption accelerated 4.9%.
In contrast to these positive numbers, the index of gross fixed investment for April came in 2.7% below levels of April 2016 as a 4.7% rise in spending on machinery and equipment was more than offset by a 6.7% reduction in construction investment.
June produced a deepening of pessimism among business owners in all three major sectors surveyed although it was most pronounced in the construction industry, whose Business Confidence Index fell (-1.0 point) for a thirtieth consecutive month. The readings for the manufacturing and commercial sectors each declined 0.4 points year on year.
Along the same lines, the national statistics institute’s consumer confidence index fell 6.8% in June, the seventeenth consecutive month of flagging sentiment
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