The Day at a Glance | Jun 9 2022

The Top

*Inflation in Mexico slowed down less than expected during May (7.65% annual vs 7.63%e.).

*ECB announced the start of an increasing rates cycle.

*China´s exports logged recovery (16.9% annual), imports increased less than expected in May (4.1% annual).

*Japan´s Yen continues to depreciate strongly – close to its lowest levels in 24 years.

*Europe proposes plan to import natural gas to Egypt and Israel.

*Expectations grow of more aggressive interest rate increases on behalf of the Bank of England.

*Shanghai considers resuming quarantines after a rebound in COVID-19 cases.

Economic environment

Inflation in Mexico exceeded estimates. The Consumer Price Index logged a slightly larger than expected increase during May by increasing 0.18% monthly (0.15% e.) and recorded a more moderate slowdown than estimated at an annual rate (7.65% vs 7.63%e.). Underlying inflation also increased slightly more than expected and logged a 0.59% monthly hike (0.55%e.) and continued slowing down to 7.28% annual. Energy prices were the only ones to log a decrease in prices due to the seasonal implementation of electric bill subsidies (-3.49% monthly), while agricultural goods continued to log a slowdown with respect to previous months (0.81%), even though they still record high growth rates – boosted by food, beverage and tobacco prices (1.16% monthly). Services also logged slight moderation in monthly growth during the period (0.33%). Nevertheless, underlying inflation maintains an increasing trend, which started in November of 2020; it´s only recently started showing signs of stabilization. For producers, inflation increased 0.93% monthly in May and set at 10.53%, which confirms that production costs are still increasing and have set at historically high levels. The data reaffirms that the Central Bank of Mexico will maintain an aggressive increasing rates cycle in order to have inflation converge to its target level.  

ECB decision. In its monetary policy decision, the European Central Bank decided it will halt the asset purchasing program in the next 3 weeks and committed itself to start increasing the interest rate in 25bp in July. With this, the ECB will start the increasing rates cycle. Moreover, the ECB opened the possibility of carrying out more aggressive hikes (50bp) in the fall (especially in September´s meeting) if the current inflationary situation persists or deteriorates; and it pointed out that, after this, it will continue to carry out gradual interest rate increases in order to fight inflation. The statement had a more aggressive tone than markets expected – markets estimated the interest rate would increase to 0% in September and expected the ECB to show more caution after that. The ECB´s actions respond to inflation, which has continued increasing in recent months and marks the end of an accommodative monetary policy on behalf of the central bank. The bank´s new inflationary forecasts were revised upwards considerably and will remain above its target until 2024 (6.8% in 2022; 3.5% in 2023; and 2.1% in 2024). Growth was revised downwards; estimates now expect a 2.8% rate of growth in 2022 and 2.1% in 2023 and 2024. The Euro strengthened against the dollar during today’s session after the news. European sovereign bonds logged important increases and markets receded. In a press conference, President of the ECB Christine Lagarde confirmed the start of the monetary normalization process and considered that interest rate increases carried out after September will depend on inflation.