Mexico's Inflation outlook does not support a September hike

Mexico CPI increased 0.21% m/m in August as a result of a very soft inflation print in the second half of the month (0.11% 2w/2w) surprising markets on the downside (Consensus: 0.18%), particularly driven by a relative small non-core inflation. Annual inflation fell to 2.5% in the second half of August from 2.6% in the previous fortnight and 2.7% in July.

Core inflation has stabilized at 2.30% for almost five months now, with durable inflation goods stable at 2.7% y/y. The trend of the core component has also stabilized and it is right on target (3.0% 3m/3m saar).

"The lower than expected print pushes our year-end forecast to 2.5% y/y from 2.6% previously. Downward pressures to inflation might continue as we estimate that core inflation would be printing 0.30% m/m on average per month in the next four months, incorporating an important FX pass-through and implying acceleration. However, weaker-than-expected demand might curb this effect", notes Barclays.

Consensus is expecting a first hike by Banxico in the next September 21 meeting. It is believed that, Banxico will not hike at that time since inflation continues to be on a downward trend, growth might be facing headwinds and inflation expectations have not changed dramatically, even with the FX depreciation. On top of that, the government will be liberalizing gasoline prices next year, an event that definitely will have a positive impact on inflation dynamics in 2016 as retail prices in Mexico are around 20% higher than in the US.

Under these circumstances, we continue to expect a first hike in December, when there is more clarity about the effect of the FX depreciation on inflation expectations, any US Fed action and the potential magnitude of the rebound in inflation during January 2016.

"In an environment where the probability of a Fed September liftoff has decreased, the outlook for global growth has deteriorated, inflation continues to be stubbornly low and MXN keeps moving in tandem with its EM peers, we do not foresee a scenario in which Banxico needs to hike as much as currently priced in the TIIE curve. On top of that, we think that the recent announcement by the government to liberalize earlier gasoline prices will make difficult the Central Bank's task of reaching its price stability target, implying a very low probability of cumulative 118bp hikes during next year.These reinforce our case for receiving the short end of the TIIE curve (up to two years) particularly the six-month tenor, which offers an attractive carry/roll down", says Barclays.