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JPMorgan: Banxico Debate Around Tightening Pace Very Much Alive

MEXICO
  • The debate about Banxico maintaining its tightening pace (50bp) or accelerating it (75bp) is very much alive, following the latest CPI data. JPMorgan’s call remains for 50bp ahead of this week’s minutes.
  • Banxico’s June 1st inflation expectations survey will also be important amid this debate; continued increases in medium-term inflation expectations—which have been trending higher and were acknowledged as cause of concern in last week’s statement—would be another reason to tilt the balance in favour of 75bp, in their view. Lastly, JPM continue to expect year-end inflation well above Banxico’s forecast (6.9% vs. 6.4%).
  • A few details were noteworthy in the data, even if they did not affect meaningfully the underlying trend in prices. First, while core prices firmed very much in line with expectations, these were aided by discounts in a handful of non-food goods; appliances in many cases declined on discounts that should extend throughout the month. At any rate, these should be transitory and could be just related to Mother’s Day.
  • Meanwhile, processed food prices continued to rise steeply, and preliminary data point to a near-1%m/m, sa increase in May, the sixth such gain. Services were somewhat on the soft side and point to moderation in monthly sequential inflation. That said, Apr/May can be affected by Easter seasonality, and averaging out the two would keep monthly inflation at about 0.4%m/m, sa, above the long-term norm.
  • The same is true for services ex. housing and education, which seems likely to average a 0.7%m/m, sa gain in Apr/May, well above their mean monthly increase. Restaurant prices continue to represent one of the key sources of upside, driven, in JPM’s view, by second round effects from rising food and energy prices.
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