The overnight/early-Europe session was marked by developments out of Japan. A miserable JGB 30s auction combined with some (perhaps overplayed) comments by BoJ Gov Ueda to congress on if/when/how a negative rates exit would come. It was otherwise quiet aside from mixed Chinese international trade data and a weak German industrial production print (also below). The G-10 day ahead has weekly jobless claims in the US at 8.30ET and BoC Dep Gov Gravelle’s economic progress report at 12.50ET.
Global curves are steepening, with higher yields across the maturity spectrum in the US, UK, and Japan while core EGBs outperform global peers with 2/3bps declines in German and French 10s vs a 4bps rise in US 10s. BoJ/JGB action has triggered a massive bid for the JPY that is tracking a 1.7% gain to break through the 145 level as it trades at its best levels since early August. The JPY strength seems to be driving the currency market more broadly against the USD as the EUR and GBP resist higher US yields and the so-so risk tone to pick up small gains. That is not the case of the MXN, that is the worst performing major FX this morning (after the KRW), on the weight of higher US yields, on pace for a 0.2/3% drop which only undoes some of the Americas session’s gains on Wednesday.
European equities are being dragged by higher yields, but also a weak post-Europe mood in US markets that had SPX close lower 0.4%. Asian bourses all closed in the red, especially in Japan and HK (NK down 1.3% and HSI down 0.7%). SPX and Nasdaq futures are little changed in +/-0.1% ranges. Crude oil is licking its wounds, adding 1% on the day in WTI and Brent as they challenge their respective $70/bbl and $75/bbl marks. Iron ore is well higher again, rising 1.7%, followed by copper +0.8% that is recovering from a very weak performance yesterday evening. Stronger-than-expected Chinese exports data seems to be helping iron ore prices but I’m skeptical of the reaction as imports unexpectedly contracted which shows continued domestic weakness.
We have a huge day on the Latam data front today, with each of Chile, Mexico, and Colombia publishing November CPI figures. Today’s key releases come right before the long weekend in Chile, Colombia, and Peru. We’ll also be watching reactions to yesterday’s approval of the government’s health reform in Colombia in the lower house. The bill will now go to the senate with two debate processes in store by end-June.
First up with data is Chile at 6ET, where our team and the Bloomberg median project that Chilean inflation slowed 4.2% from 5.0%, which would represent practically a full 10 percentage points decline from the cycle peak of 14.10% in August 2022. We project a large drop in core inflation as well, to 5.6% y/y from 6.50% in October, for its lowest year-on-year increase in ex-volatile prices since late-2021. There’s clear inflation progress being made in Chile and the economy is in a slump—essentially flat-lining since mid-2022. The BCCh chose a smaller 50bps rate cut in October, but the less dovish decision was driven by an adverse international environment (higher commodity prices, global yields, and a weak CLP) that has since clearly improved.
Combined with another nice decline in inflation, we think the BCCh is more likely to roll out a 75bps cut at their next meeting, but we’ll wait for confirmation today. BCCh Gov Costa struck a more cautious tone about inflation yesterday, saying that there is still work to do in bringing it towards target and her comments regarding a review of the level of neutral rates at their next meeting may tee up a higher terminal rate after cuts end.
In Mexican data out at 7ET, we project headline and core inflation prints to be roughly in line with that seen in the H1-Nov data. That is, headline holding at 4.4% y/y and core going from 5.5% to 5.3% y/y; the 0.3% m/m rise that we forecast in core inflation is slightly above the pre-pandemic average for November months but shows progress from 0.4% and 0.5% m/m increases in November 2021 and 2022, respectively. Recent Banxico dovishness that started with the guidance change at the November 9th decision (still well in hawkish territory, however) has clearly shifted the timing of the first cut to one of the February or March meetings; today’s CPI data could add to that view, especially on a core inflation miss. We’ll also see what comes out of AMLO’s and Fin Min Ramirez de la O’s meeting with UST Sec Yellen today which will likely mostly concern drug trafficking.
Colombian inflation is out much later at 18ET, so markets won’t be able to react to it until Monday given tomorrow’s market closure. Again, inflation will not fall to single digits in November, with our forecast of 10.1% (roughly in line with the economist median of 10.2%) showing only a modest decline from the 10.5% recorded in October. The slowdown from 10.5% to 10.4% y/y that we project for core inflation (as the median) is even smaller and clearly highlights the stickiness in Colombian inflation that owes to a multitude of factors, namely indexation practices. And these pressures are here to stay, as the November print is the base of negotiation for next year’s minimum wage increase, so here comes another double-digit min-wage increase that raises firm’s costs and that will be passed on (at least partly) to higher consumer prices. Nevertheless, economic activity remains relatively depressed, with GDP less than 2% larger than end-2021 as of September 2023, so there’s a case to be made for BanRep reductions to begin in December which is our call with 25bps—but it’s close against a pause, and certainly deviates from some economists that think a 50bps cut is on the horizon (about 20% in the latest Citi survey).
—Juan Manuel Herrera
This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.
These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.
Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.
Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.
This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.
™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.
Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.
Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.
Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.