The Day at a Glance | Sep 8 2022

The Top

*Inflation in Mexico reached 8.7% annual in August.

*ECB increased the interest rate in 75bp; it increased its inflationary estimates considerably.

*Jerome Powell will give a speech in an event this morning; it will be the last before the FED´s quiet period prior to its September 21stdecision.

*Growth in Japan was revised upwards to 3.5% annualized in the 2Q22.

*China extends quarantine in Chengdu in order to control the most recent COVID-19 outbreak.

Economic environment

Inflation on the rise. The most recent inflationary data in Mexico – made public by the INEGI – confirmed that the rise in prices continued through August. Month to month, inflation increased 0.7%, slightly above the estimated 0.66%. The largest increase was once again logged among commodities, which hiked 1.14% during the month (their slowest increase in a year) and gave signs that the rise in prices has not become more moderate. Services contributed in a more moderate manner by logging a 0.39% monthly hike. Agricultural goods increased 0.98% monthly. Energy prices decreased (-) 0.31%, although this was not enough to avoid the inflationary reading from being high. With this, annual inflation reached 8.7%. The larger part of inflationary pressures are still being seen in the underlying component, which increased 0.8% monthly (vs 0.78%e.) and reached 8.05% annual. This will keep the Central Bank of Mexico carrying out an aggressive monetary stance as no clear signs of moderation are seen in inflationary pressures despite the 400bp target rate increase in the last 12 months. Analysts have started to forecast a 9.75% interest rate by the end of the year (vs 9.5% prev.). Perhaps the only good news this morning is concerning inflation for producers, which receded (-) 0.36% during the month and set at a 9.41% annual rate, its lowest level since October of 2021. This is a sign that at least production costs have started to slow down. Onwards, this could contribute to a decrease in consumer prices.

ECB increased rates aggressively. The European Central Bank met market expectations by increasing interest rates aggressively in its monetary policy meeting this morning. The rate was hiked 75bp, which took the refinancing rate to 1.25%, the deposits rate to 0.75%, and the marginal lending facility rate to 1.5%. The ECB had never increased rates in such an aggressive manner. The rise seeks to avoid inflationary pressures from becoming widespread, prices from eroding peoples´ savings, and the rise in wages from causing an inflationary spiral. In its statement, the ECB pointed out that the decision is an important step for its monetary policy transition to reach the 2% inflationary target. The central bank assured that it will continue increasing rates in the future in order to slow demand and avoid inflationary forecasts from increasing. Additionally, the ECB increased its 2023 inflationary estimates (5.5% vs 3.5% prev.); as well as for 2024 (2.3%). This points out that inflation will remain above the target level for at least the next two years. Concerning growth, the ECB still expects growth to be logged in the EU this year and is not forecasting a recession with a 3.1% increase in the economy in 2022, and 0.9% in 2023.