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Predictably, last weekend's G7 meeting in Canada ended in acrimony between the U.S. and its key trading partners.
The U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
The Treasury waded in to the Brexit debate yesterday with a 200-page report concluding that U.K. GDP would be 6.2% lower in 2030 than otherwise if Britain left the E.U. and entered into a bilateral trade deal similar to the one recently agreed by Canada. All long-term economic projections should come with health warnings, and the Treasury's precise numbers should be taken with a pinch of salt.
Economic activity in Mexico during the past few months has been stronger than most observers expected. Growth has certainly moderated from the relatively strong pace recorded during the second half of last year, but data for January and February show that it is still quite strong.
Mexico's inflation has been LatAm's odd one out over the last few years. In the decade through 2014, Mexico's inflation rate was broadly in sync with those of its regional fellows, as shown in our first chart.
Mexican GDP was unchanged quarter-on-quarter in Q2, according to the final report, a tenth worse than the preliminary reading.
Data released in recent days confirm the story of a struggling economy and falling inflation pressures in Mexico, strengthening our forecast of interest rate cuts over the second half of the year.
Chile's central bank cut the country's main interest rate by 25bp to 3.25% last Thursday. The easing was expected, as the board adopted a dovish bias last month, after keeping a neutral stance for most of 2016. Last week's move, coupled with the tone of the communiqué, suggests that further easing is coming, as growth continues to disappoint and inflation pressures are easing.
High interest rates and inflation, coupled with increasing uncertainty, put Mexican consumption under strain last year.
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
The COPOM meeting was the centre of attention in Brazil this week. The committee cut the main rate by 25 basis points to a new historical low of 6.50%, in line with market expectations.
Sterling strengthened last week to its highest tradeweighted level since mid-May, amid hopes that the U.K. government will concede more ground to ensure that the European Council deems, at its December 14 meeting, that "sufficient progress" has been made in Brexit talks for trade discussions to begin
Brazil's industrial sector was off to a soft-looking start in Q1, but the fall in January output was chiefly payback for an especially strong end to 2017.
EM risk sentiment remains grim as the Trump administration dispenses protectionist trade measures. LatAm's biggest economies, Brazil and Mexico, have been hit the hardest, with their currencies falling 3.3% and 2.2% respectively in the last week, the most in the EM world.
It is still premature to make fundamental changes to our core views for the global or LatAm economy, following President Trump's plan to slap hefty tariffs on steel and aluminium imports, potentially escalating into a global trade war.
Yesterday's Brazilian industrial production data were relatively upbeat.
The Prime Minister told the public to "face up to some hard facts" about Brexit in her speech on Friday, but she still clung to an unachievable vision of what Britain can hope to achieve.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
Rising political risks and NAFTA-related threats have put the MXN under pressure last month, driving it down 4.9% against the USD, as shown in our first chart.
The headline May ISM non-manufacturing index today likely will mirror, at least in part, the increase in the manufacturing survey, reported Friday.
Mexico's risk profile and financial metrics have improved in recent days, following news of a preliminary bilateral trade deal with the U.S. on Monday.
We repeatedly have highlighted Japanese banks' foreign activities as source of rising risk for Japan and the global financial system.
Market participants and analysts have gradually softened their cautious stance towards Mexico, as concerns about the new U.S. administration's trade and immigration policies have eased, and risks of a credit rating downgrade have lessened.
Recent activity data in Mexico have been soft and leading indicators still point to challenging near-term prospects, due mainly to relatively high domestic political risk, stifling interest rates and difficult external conditions.
Outside the battered energy sector, the most consistently disconcerting economic numbers last year, in the eyes of the markets, were the monthly retail sales data. Non-auto sales undershot consensus forecasts in nine of the 12 months in 2015, with a median shortfall of 0.3%.
June's trade figures yesterday highlighted that it takes more than just a few months for exchange rate depreciations to boost GDP growth. The trade-weighted sterling index dropped by 9% between November and June as the risk of Brexit loomed large and the prospect of imminent increases in interest rates receded.
We expect Banxico to keep interest rates on hold at 7.50% at Thursday's meeting. But policymakers likely will adopt a slightly dovish tone, as inflation has fallen faster than they were expecting in their recent forecast.
We agree wholeheartedly with the consensus view that the economy would enter a recession in the event of a no-deal Brexit on October 31.
Data released on Wednesday confirmed that the Brazilian economy was relatively resilient in Q1. Leading indicators suggest that it will do well in Q2 and Q3, but downside risks are rising.
Mexican industrial activity started the fourth quarter badly. Industrial production fell 0.1% month- to-month in October, pushing the year-over-year rate slightly up to -1.1% from -1.2% in September and -0.7% in Q3.
The headline May retail sales numbers were flattered by a 2.4% leap in the wildly volatile building materials component and a price-driven 2.0% surge in gasoline sales.
Banxico left its benchmark interest rate on hold at 7.0% at last Thursday's policy meeting.
The possibility of a Corbyn-led Labour Government has been highlighted by some analysts as a major economic risk. Mr. Corbyn, however, has little practical chance of being elected soon.
We would like to be able to argue with conviction that the surge in June housing starts and building permits represents the beginning of a renewed strong upward trend, but we think that's unlikely.
Banxico's tightening cycle has totalled 400 basis points, lifting rates to 7.0%. Since late 2015, Banxico has followed the Fed closely, but other external factors also have guided many of its decisions.
The truce in trade relations between the U.S. and China, agreed at the G20, is good news for LatAm, at least for now.
The Mexican peso and spreads have recently come under severe pressure. Last week, for instance, the MXN plummeted 2% against the USD to 18.9, the weakest level since May, as our first chart shows.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
NAFTA-related news has been mixed over the last few weeks.
EU-Japan free trade: Japan and the European Union agreed on an outline for a massive trade deal this week that will rival the size of NAFTA, the free trade accord that the United States has with Canada and Mexico, currently the largest one in the world. Claus Vistesen, the chief eurozone economist with Pantheon Macroeconomics, assesses what's in the agreement and why it matters (19mins 10 secs).
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