- Chile: CPI rises 0.4% m/m (3.2% y/y) in March amid limited exchange rate pass-through and weak demand
It’s been a relatively dull overnight session in Asia and Europe with no major data of note and only a couple of BoJ and ECB developments of interest. BoJ Gov Ueda sounded less dovish than usual in an appearance in Parliament today, and Bloomberg reported that the bank is looking at lifting its inflation forecasts. In the Eurozone, the ECB’s Bank Lending Survey showed a somewhat surprising worsening of business loan demand, which may support the doves’ stance at the bank’s meeting this week.
Tomorrow’s US CPI print could not come sooner with little on the data and events calendar to keep global markets busy until then. In Latam, we have Mexican CPI data at 8ET to watch (see below), as well as monitoring news in Peru around a possible vote on pension withdrawals (as well as the usual political noise).
USTs are 2/3bps bid across the curve, with the belly/10s space outperforming slightly, while EGBs and gilts bull flatten. The global front-end remains cautious ahead of tomorrow’s US CPI release after the massive NFP surprise on Friday. The UST 3yr auction at 13ET is the only item worth highlighting in the G10 day ahead.
Currency markets are relatively sleepy with no truly outsized movers across the majors, but the MXN’s 0.3% rise on the day to the ~16.25 zone is worth highlighting as we head into this morning’s local CPI release. Crude oil and copper are about half a ppt higher, while iron ore is adding 3% to Monday’s 6% rally on some Chinese demand optimism. but copper is off 0.3%. US equity futures are little changed, as is FTSE, in contrast to a 0.5% drop in SX5E.
Mexican full-month March inflation data out at 8ET is not seen all that different to the bi-weekly print, as is generally the case, so there is limited room for surprise. The data are expected to show headline inflation at 4.5% y/y, marginally up from 4.4% in February, in contrast to practically unchanged core inflation at 4.6%. The sequential prints may be a bit more worrying, as core CPI is expected to print a large 0.5% m/m rise for the second consecutive month with progress in core prices growth stalling at the start of 2024, supporting Banxico’s cautious start to its rate cutting cycle.
It’s a high bar for today’s data to shake up local markets, however, but persistently-high inflation could act as a reminder to markets that Mexico’s central bank will likely pause at its May decision (our expectation). Note that a few minutes after the release, we have Mbono and UDI auctions.
—Juan Manuel Herrera
CHILE: CPI RISES 0.4% M/M (3.2% Y/Y) IN MARCH AMID LIMITED EXCHANGE RATE PASS-THROUGH AND WEAK DEMAND
- We reiterate that annual inflation will return to 3% before the end of the year
The “summer inflation” is over and normal inflation records are back. The March CPI of 0.4% m/m surprised us and the market’s expectations, but also those of the central bank’s baseline scenario (0.5%). Although the increases in services prices were in line with our projection (1% m/m), the increase in goods was lower than we anticipated, reflecting evidently lower demand pressures despite an exchange rate pass-through that was mainly observed in durable goods. Ex-volatile inflation stood at 0.6% m/m, with no major differences with respect to our scenario and that of the central bank. The recent appreciation of the peso and the concentration of services readjustments in the first quarter of the year confirm lower price pressures for the next months of the year. We maintain our 2024 year-end inflation projection at 3%.
Goods inflationary pressures remain contained, while services readjustments are very close to conclude. CPI inflationary diffusion remains at the low end of its historical range (51.9%), where low goods pressures are observed in a low diffusion for the month (50%), while services continue with a diffusion above its average (78.3%), although mainly due to seasonal readjustments in services (chart 1 and chart 2). Similar to last year, in the coming months we should see a sharp drop in the inflationary diffusion of services.
There were no surprises in services, with second-round effects very close to their end. March inflation is explained by the increase in services (ex-volatile), mainly due to price adjustments in education, housing, healthcare and restaurants. We estimate that most of the price adjustments linked to past inflation are concentrated in the first quarter of each year, so their impact in the coming months should be very limited.
Goods inflation amid exchange rate pass-through and weak demand. The key to the lower inflation in March would have been the lower inflation of goods, where two phenomena occurred in opposite directions: (i) the expected exchange rate pass-through that was observed mainly in durable goods (refrigerators, washing machines, furniture, among others) and; (ii) the fall in prices of non-durable and some semi-durable goods, where the high level of imports in March and the adequate level of inventories (especially in clothing and footwear) seem to have dragged prices down, in view of the still weak demand pressures.
—Aníbal Alarcón
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