The Day at a Glance | October 6 2022

• Gross fixed investment in Mexico surprisingly receded during July (-1.4% m/m; 2.1% y/y); consumption only increased 0.1% m/m (6.3% y/y). 

• OPEC+ will cut production in 2 million daily barrels starting in November. 

• US national debt reached a new record – 31 trillion dollars. 

• In August, PEMEX logged its lowest crude oil exports volume in a decade (957 mdb). 

• Fitch downgraded the UK´s sovereign debt rating. 

• Janet Yellen will propose a reform in the World Bank to increase its lending capacities at a global level. 

• Swedish police confirmed that explosions caused the damages to the Nord Stream infrastructure, reinforcing suspicions of sabotage. 

Economic environment 

Rate cuts in 2023 are being taken into account. Futures markets in the United States expect the Federal Reserve to start cutting interest rates halfway through 2023. These expectations have helped support appetite for risk in markets this week. Financial stability is the main argument that suggests the FED´s interest rates cycle is close to reaching its peak. According to a study published by the New York FED last week, the economy´s neutral interest rate could be slightly higher than the rate at which the financial system could start showing instability given the financial system´s current levels of indebtedness. In other words, it´s possible that the FED will see signs of financial instability – such as less liquidity in credit and corporate debt markets or even less liquidity in the sovereign bonds market – before seeing a rise in unemployment and less inflationary pressures due to increased rates. This would increase risks of volatility in markets and financial accidents. All in all, the study suggests that the FED should pay special attention to the level of rates that could bring financial instability, and ultimately, it could mean that the FED could be forced to pause its movements to avoid financial instability before reaching stability in prices. With this, markets expect the interest rate to reach its peak at 4.5%-4.75% halfway through 2023, and starting in June of said year, rates could start decreasing. Nevertheless, the FED´s messages don’t suggest that this will occur as members like Bostic and Daly have assured that they cannot stop increasing rates until inflation shows clear signs of being under control. The last time that markets moved forward expectations of interest rate cuts and there was a rally (July), investors were surprised by concerning inflationary data and a more aggressive message by the FED, which reversed all optimism. Markets will pay close attention to the FED´s next monetary policy press releases in order to know how much the central bank is taking financial stability into account, or if it will keep reducing inflation a priority.