Mexico Bi-weekly CPI +0.92% in 1st half of Nov.; Est. +0.75%
Today's weaker-than-expected retail sales and above-consensus CPI (both headline and core) point to/reinforces the stagflationary scenario that would complicate central banking:
Mild stagflation would be more negative Mexican equities than it is for the MXN. Banxico policy should stay tight (front-end TIIE swap rates are even pricing in some risk of a rate hike), which should keep MXN supported. MXN is in fact stronger on the day, helped by hawkish words from the Banxico Minutes (from 9 Nov MPC) as well as from the outgoing Governor Carsten who leaves next week (no permanent replacement named as yet):
- *CARSTENS: BANXICO SHOULDN'T LOWER ITS GUARD AGAINST INFLATION
- *BANXICO MAJORITY SAID MEXICO MAY FACE MORE CPI PRESSURES
In contrast, Mexican stocks (Bloomberg ticker = Mexbol; ETF = EWW) are vulnerable not only to prolonged tight monetary policy, but also from possibly intensifying downside risks to growth - not just from challenging NAFTA negotiations and a contentious presidential election (Jul-18) - but also now from evidently weaker consumption. Domestic demand and consumption had been - for some time - a resilient pillar of the Mexican economy. But that too is showing signs of weakness as retail sales decelerate sharply from earlier this year:
In asset markets, no surprise then to see strength in the MXN (green) while the Mexbol (red) has been depressed. The net is the stock ETF EWW (black) is flat over the past 1mth. Recommendation: Keep strategic short on EWW.