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Macroeconomic Stability is Banxico’s Ultimate Goal, Heath Says

The Mexican central bank focuses on inflation first to maintain macroeconomic stability over the long term, said economist Jonathan Heath in an opinion piece in Mexican daily Reforma.

  • Heath is expected to be appointed as new deputy governor at Banxic.
  • In an environment with no inflationary pressures, Banxico can carry out looser monetary policy to stimulate economic growth
  • There are limits to the scope of monetary policy
    Federal Reserve has always given priority to price stability even in cases of stagnation or low economic growth
  • Mexico balances risks both to inflation and economic growth
  • Though Banxico always chases the 3% inflation target, it has never been “obsessive” and has maintained expansionist policies in years when inflation is above the target

Look Back (10/03/18)

  • The Mexican peso advanced on Wednesday, halting two straight days of losses, as the successful resolution to the Nafta talks makes it more likely that Banxico will hold rates on Thursday, analysts say.
  • MXN +0.4% to 18.7190/USD, stays range bound between 18.50 level and 200-day moving average, currently at 19.0327; trading zone has been in place since middle of September

  • As Nafta worries fade, markets may start to pay more attention to policy proposal of President-elect Lopez Obrador, who is due to take office Dec. 1
  • A key risk that could lead to peso under-performance is lingering uncertainty about AMLO administration’s ability to achieve medium-term budget balance, Nomura analysts Mario Castro and David Wagner wrote in a note : Recommends going short 3-month MXN forwards vs 3-month BRL NDF
  • TIIE swap rates fell on Wednesday amid peso strength; market now prices~9bps rate hike in three months and ~25bps cuts in one year

  • Lower uncertainty for Mexico’s trade outlook will tip the balance in favor of no more rate hikes this month, according to ING; a “hawkish hold” is much more likely.
  • Banxico seen holding rate after new trade accord, Santander says; risks were tilted to a hike before the agreement announcement

NOTE: Banxico policy rate decision on Thursday at 2pm ET; 24 of 26 analysts surveyed by Bloomberg expect a hold at 7.75%, the rest see a 25bps hike to 8%

Market Wrap

Stocks Slide Deepens on Treasury Yield Worries: 

(Bloomberg) — Rates touch multiyear highs, dollar gains versus major peers
Gold advances, oil slumps; euro rises with yen, pound. The selloff in U.S. stocks deepened, with technology shares plunging the most in almost six months and volatility spiking higher as the rout in Treasuries that took yields to multiyear highs fueled a repricing of risk assets.

All major American equity benchmarks fell at least 1 percent, with the S&P 500sliding to a three-week low and the Nasdaq 100 Index on track for its worst rout since April. Real-estate and consumer shares had outsized losses as high-dividend-yielding stocks retreated after the 10-year yield poked above 3.2 percent for the first time in seven years. Financial firms were the only gainers in the broader index. The Cboe Volatility Index jumped above 15.

“This withdrawal of liquidity and gradual tightening of monetary policy” is
reverberating across financial markets, Bob Baur, chief global economist at
Principal Global Investors, said in an interview with Bloomberg Television. “We
look for 10-year Treasury yields to hit 3.5 at some point — later this year,
early next year — and I think that’s going to be a real problem for stock

Data underscoring the strength of the American economy sparked the Treasury
selloff, sending yields higher fast enough to spook equity investors who had
pushed stocks toward records on the heels of the new Nafta agreement. Fed
Chairman Jerome Powell stoked rate worries when he said the central bank
could eventually boost its benchmark past the neutral level.

Adding to the rising risk sentiment were growing signs of strain in U.S.-China
relations that could exacerbate the trade war. Bloomberg’s report that China inserted
tiny chips in computer hardware to to infiltrate American companies pressured
the technology sector. Vice President Mike Pence laid out allegations of
Chinese election interference in a harshly worded speech, and Alibaba co-
founder Jack Ma warned the tariff dispute will destroy commerce.

The bond slump likely also reflects the growing impact of the world’s major central banks stepping back from stimulus. The ECB this month cut monthly asset
purchases in half, while the Fed balance sheet unwind continues.

Meanwhile, resurgent commodity prices are raising the prospect of a fresh
tailwind to inflation.

In credit, borrowing costs have been advancing amid the Treasury slump. Global investment-grade corporate bond yields rose to the highest since July 2012, Bloomberg index data show. The instability may have affected Europe’s primary market as two borrowers pulled bond sales.


  • The S&P 500 Index fell 1.2 percent as of 2:36 p.m. in New York.
  • The Nasdaq 100 Index slid 2.1 percent, the most since mid-June.
  • Super Micro Computer sank almost 50 percent after the Bloomberg’s report that China implanted tiny chips on motherboards supplied by the company.
  • The Stoxx Europe 600 Index lost 1.1 percent, the most since August.
  • The MSCI Asia Pacific Index sank 1 percent to the lowest in three weeks on the largest tumble in more than four weeks.
  • The MSCI Emerging Market Index sank 2.5 percent to the lowest in more than three weeks on the biggest tumble in more than six months.


  • The Bloomberg Dollar Spot Index rose 0.2 percent after hitting the highest in seven weeks with its sixth straight advance.
  • The euro increased 0.3 percent to $1.1508, the first advance in more than a week and the biggest climb in two weeks.
  • The Japanese yen jumped 0.6 percent to 113.869 per dollar, the biggest increase in four weeks.


  • The yield on 10-year Treasuries rose two basis points to 3.20 percent, the highest in more than seven years.
  • The two-year rate added one basis point to 2.88 percent.

  • Germany’s 10-year yield increased six basis points to 0.53 percent, the highest in a week.
  • The spread of Italy’s 10-year bonds over Germany’s decreased one basis point to 2.828 percentage points.


-By Jeremy Herron and Sarah Ponczek


US 2s10s spread.

This morning, Germany Sept. Construction PMI 50.2 vs 51.5 in Aug.


U.S. Aug. Factory Goods Orders Rise 2.3%; Est. Up 2.1%






-R.W.N II, yours in 322.

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