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Banorte On Mexico Inflation/Banxico Policy

MEXICO
  • Although the headline decline is positive, Banorte remain cautious as pressures in core prices prevail, which in turn could lead to a new rise of the headline going into year-end. Energy has helped in the last fortnights, but the market remains fragile. Banorte reiterate their year-end forecast at 9.0% y/y, with risks that seem tilted slightly to the downside.
  • Banorte believe most Banxico Board members remain concerned about inflation dynamics, exhibiting an even more hawkish tone in the latest minutes. Moreover, the latest central bank survey showed a renewed increase in inflation expectations for this year and 2023. They reiterate their call of a 75bps hike on Nov 10, following a move of the same magnitude from the Fed on Nov 2.
  • The curve is pricing a slightly more aggressive scenario than Banorte’s terminal rate call of 11.00% at the end of 1Q23. They expect volatility to continue, mainly in short-term rates, given high uncertainty about the duration and magnitude of restrictive cycles.
    • Despite a growing attractiveness in long-term Mbonos – particularly tenors Nov’38 and Nov’42 –, they reaffirm their preference for relative value strategies and maintain their recommendation to pay TIIE-IRS (26x1) and receive 2-year SOFR.
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