FX - The Week Ahead: Banxico cut policy rate by another 25bp; MXN vulnerable to Trump 2.0

Banxico policy likely to remain stable on improving inflation outlook

• MXN: Banxico cuts its policy rate by 25bps last Thursday, taking the policy rate to 10.25%, in line with market expectations. However, forward guidance remains unchanged, suggesting further cuts are likely - “Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments”. The Board will take into account global shocks and the effect of weakness in economic activity.
   
• MXN: But the balance of risks for inflation remain tilted to the upside, though (as in the previous statement), recognizing that the inflation outlook is improving. Upside and downside risks for inflation are balanced with the former including persistence of core inflation, currency depreciation, greater cost-related pressures, climate-related impacts, and intensification of geopolitical conflicts while downside risks for inflation include a faster than anticipated slowdown in activity, lower pass-through from cost-related pressures and a lower-than-anticipated effect of the peso’s depreciation on inflation. Regarding economic activity, the balance of risks remain tilted to the downside. While the statement recognizes that MXN has registered a marked depreciation amid high volatility in response to the U.S. elections, the statement acknowledges that the move has been orderly so far.  However, the statement also expresses a note of caution about the possibility of policies reversing global economic integration that could impact Mexico’s economic outlook.
   
• MXN: All in all, the statement keeps a relatively dovish tone suggesting further gradual rate cuts. Citi Research’s base scenario is for Banxico to continue cutting its policy rate gradually (at a 25bps pace) reaching an end of 2024 and 2025 level of 10.00% and 8.00% from the current 10.25%, respectively. An acceleration in the pace remains unlikely given external and idiosyncratic risks.

Moody's revises Mexico's outlook to Negative amid policy concerns.

• MXN: On Thursday, Moody's affirms Mexico's long-term foreign debt rating at Baa2, the second-lowest investment-grade score, while revising its outlook from "stable" to "negative." The decision highlights concerns over weakening policymaking and institutional settings, which could undermine fiscal and economic stability.
   
• MXN: Mexico's growing public deficit, surpassing 5% of GDP, and recent reforms impacting judicial independence have raised red flags regarding governance and the business environment. However, Moody's acknowledges the country’s economic strength, driven by its diversified economy and opportunities from nearshoring, as well as modest macroeconomic imbalances supported by historically prudent fiscal and monetary policies.

BCB increases hiking pace to 50bp as inflation expectations continue to de-anchor

• BRL: The BCB last week, increased its pace of hiking rates to 50bp in its November policy meeting, driving the Selic rate to 11.25%. In the policy meeting minutes, BCB highlighted that “[a] further deterioration in expectations could lead to a more prolonged monetary policy tightening cycle”, which is especially relevant considering the continuous de-anchoring process of inflation expectations reinforced in last week’s BCB Focus Survey. The minutes indicated that expectations for food prices (drought and other factors) and industrialized foods (FX) increased, especially for the coming months. In addition, the minutes reinforced that “the labor market, the [positive] output gap, and inflation expectations play a very important role in the medium-term disinflationary dynamics”. All things considered (expectations, output gap, FX, current inflation, dynamism of economic activity), Citi Research still expect BCB to deliver another 50bps hike at the December 2024 meeting, with upside risks for the terminal Selic rate forecast of 12.0% by January 2025.
   
• BRL: Meanwhile, the latest BCB Focus Survey indicates that median consensus inflation expectations have deviated further from the midpoint target of 3.0% in all horizons, rising to 4.62% (from 4.59% last week) for 2024 year-end, to 4.10% (from 4.03%) for 2025 year-end and to 3.65% (from 3.61%) for 2026 year-end. Meanwhile, Selic rate expectations remain stable at 11.75% and 11.50% for 2024 and 2025 year-ends but increase to 10.0% for 2026 year-end.
   
• BRL: The BCB also highlights Brazil’s net public debt, showing the public sector posting a -BRL7.3bn primary fiscal result in September 2024, roughly in line with expectations. Meanwhile the 12-month result shows a modest improvement at BRL-246bn in September 2024 from BRL-256bn in August 24 (-2.2% of GDP from -2.3% of GDP). Brazil’s net public debt stands at 62.4% of GDP in September 2024 from 62.0% of GDP last month (59.2% of GDP in September 2023), while gross public debt posts 78.3% of GDP from 78.5% of GDP last month (73.4% of GDP in September 2023).

Week Ahead:

US – S&P (flash) PMIs for November

• USD: S&P US November (flash) Manufacturing PMI November forecast– Citi: 49.4, median: 48.0, prior: 48.5, S&P US Services PMI – Citi forecast: 55.6, median: 55.0, prior: 55.0 - Manufacturing PMIs have remained sub-50 pointing to a general contraction in the manufacturing sector. Key sub-indices such as production and new orders have also been in contraction. The employment details have remained weak and have aligned with falling manufacturing payrolls. Citi Research expect S&P Manufacturing PMI to increase to 49.4 from 48.5 in the November preliminary release, which would point to a more modest pace of contraction overall in manufacturing activity. Meanwhile, the services diffusion indices have remained in expansionary territory, contrary to manufacturing PMIs. Services consumption has also continued to grow and so have services payrolls, although the pace of employment growth has slowed. Citi Research expect S&P Services PMI to increase modestly to 55.6 from 55.0 in the November preliminary release.

Europe and UK – Euro area and UK (flash) PMI , euro area consumer confidence, ECB speakers and wage growth, UK CPI and retail sales

• EUR: Euro Area: PMIs and consumer confidence — In 2016, the first election of Donald Trump as US President triggered a positive market, investor and business confidence reaction, while consumer confidence was relatively muted initially. This time, the ZEW survey suggests a negative impact, especially on export-oriented manufacturing, which Citi Research expect to be replicated in the PMIs (Friday). For Germany, a snap election in February could be a positive offset, as the ZEW highlighted that late responses to the survey had improved. Euro area PMI - Citi forecast 44.8, consensus 46.1, prior 46.0; PMI services - Citi forecast 52.0, consensus 51.5, prior 51.6; PMI composite output - Citi forecast 49.5, consensus 50.0, prior 50.0; Consumer confidence - Citi forecast -12.7, consensus -12.4, prior -12.5.
   
• EUR: ECB speakers: reversed burden of proof – A plethora of ECB speakers could help gauge the chances of a 50bps rate cut in December. Key will be whether speakers see a restrictive stance still justified or not. President Lagarde’s speech (Friday) at the EBC will be followed by Joachim Nagel and Francois Villeroy.
   
• EUR: Euro Area wage growth — Negotiated wage (Wednesday) likely accelerated sharply to a new cyclical peak of 5 ½% YY in 3Q on the back of erratic one-off payments in Germany. Overall though, wages growth continues to soften, if slightly, elsewhere and the 3Q peak is set to reverse in 4Q, probably to just 3 ¾%, implying a 2024 average close to 4.5%. Compensation per employee growth (out on 6 Dec) may have flat-lined at 4.5% YY in 3Q. Negotiated wages - Citi forecast 5.6% YoY, prior 3.5%YoY.
   
• GBP: UK October headline CPI MoM – Consensus 0.5%, Prior 0.0%;  October headline CPI YoY – Consensus 2.2%, prior 1.7%; Core CPI YoY – Consensus 3.1%, Prior 3.2%.
   
• GBP: UK headline October retail sales MoM – Consensus -0.3%, Prior +0.3%; UK headline October retail sales YoY – Consensus 3.4%, prior 3.9%; Retail sales (ex-autos and fuel) MoM – Consensus -0.4%, Prior +0.3%, Retail sales (ex-autos and fuel) YoY – Consensus 3.3%, prior 4.0%.
   
• GBP: UK November (flash) PMIs: UK manufacturing PMI – Consensus 50.0, Prior 49.9; Services PMI – 52.0, Prior 52.0; Composite PMI – Consensus 51.8, Prior 51.8.

Japan – Trade balance and nationwide CPI

• JPY: Customs-clearance trade balance (Oct); Citi Forecast: -¥414.1 bn NSA; -¥142.9 bn SA, Previous: -¥294.1 bn NSA; -¥187.2 bn SA – The customs-clearance trade balance likely came to a ¥414.1bn deficit before seasonal adjustment and a ¥142.9bn deficit after it in October (-¥294.1bn and -¥187.2bn, respectively in September). The deficit after seasonal adjustment likely decreased somewhat. Specifically, Citi Research pencil in a 0.5% YoY increase for exports (-1.7% YoY in September) and a 2.5% YoY decrease for imports (+1.8% YoY). Citi Research’s projections suggest both real exports and real imports decreased on a MoM basis. Regarding exports, tech-related goods may well show some moderation (imports may have dropped due to induced benefits) while exports to the US and Europe centering on autos likely remained weak.
   
• JPY: Nationwide CPI (Oct); headline Citi Forecast: 2.2%, Previous: 2.5%, Excluding fresh food Citi Forecast: 2.2%, Previous: 2.4%, Excluding fresh food and energy Citi Forecast: 2.2%, Previous: 2.1%, – Citi Research expect nationwide core CPI (excluding only fresh food) to increase 2.2% YoY in October, down from a 2.4% YoY rise in September. Energy’s contribution probably decreased from +0.46ppt in September to +0.17ppt in October, reflecting the base effect from reduced government subsidies for electricity and gas bills pushing up these prices a year ago. Core CPI inflation excluding special factors (i.e., energy, mobile phone charges and hotel charges) probably increased 2.16% YoY in October, up from a 2.02% YoY rise in September and driven by earlier yen depreciation and higher food inflation amid a longer-than-expected rice price increase. Regarding services, Citi Research pencil in a pickup in public services but largely steady inflation for others. The projection suggests inflation has been on track for the BoJ scenario. Overall CPI probably increased 2.2% YoY in October, moderating from a 2.5% YoY rise in September. The economic package draft includes the resumption of government subsidies for energy bills in the new year. This increases the likelihood that core inflation will pick up in November-December and then slow again in January 2025.

Commodity Bloc – Canada CPI and retail sales

• CAD: Canada CPI October, CPI NSA MoM (Oct) – Citi: 0.4%, median: 0.3%, prior: -0.4%, CPI YoY – Citi: 2.0%, median: 1.9%, prior: 1.6%, Consumer Price Index – Citi: 161.8, median: NA, prior: 161.1. After a weaker-than-expected 0.4%MoM decline in headline CPI in September, Citi Research expect a similarly sided bounce-back in October. Prices typically rise on a non-seasonally adjusted basis in October, but a particularly subdued increase this time last year imply that base effects should push headline CPI back to 2.0%YoY. The recent faster-than-expected slowing in CPI back to 2% has been partly due to falling energy prices, which will modestly reverse in October with a slight increase in retail gas prices. There could also be some continued strength in shelter inflation, which BoC officials continue to cite as the clearest remaining upside risk to inflation. But importantly, Citi Research would not necessarily expect stronger shelter inflation in October to be a concerning sign, with important components like homeowners’ replacement costs still subdued.
   
• CAD: Canada Retail Sales (Sep) – Citi: 0.1%, median: 0.3%, prior: 0.4%, Retail Sales ex Auto – Citi: 0.3%, median: NA, prior: -0.7%. Citi Research expect a 0.1%MoM increase in retail sales in September, slightly more modest than Statistics Canada’s estimate for a 0.4% increase again this month following a similar increase in August. A weaker reading in the forecast is partly due to a pullback in auto sales which have been particularly strong recently, in both real and nominal terms. Overall, given goods prices that have moved largely sideways in recent months, real retail sales should also rise modestly to end the quarter and could rise 3-4% annualized in Q3 as a whole. This should imply that real goods consumption rebounds in Q3 GDP (released in a few weeks). BoC officials expect a pick-up in consumption as falling rates reduce consumers’ mortgage costs, encourage spending over saving, and help boost demand for financed goods. However, Citi Research expect consumption will remain sluggish into 2025 with a weakening labor market.

Asia EM – China loan prime rate decision

• CNH: 1 year and 5 year loan prime rates– 1-yr rate - Citi Forecast 3.10%, Consensus 3.10%, Prior 3.10%, 5-yr rate - Citi Forecast 3.60%, Consensus 3.60%, Prior 3.60% - Chances of an imminent rate cut could be lower with earlier easing efforts still passing through. The PBoC’s forward guidance on another 25-50bps RRR cut within the year is still valid especially with government bond issuance now. The next window for a rate cut could be in 25Q1.