• The Fed’s policy decision next Wednesday will take centre stage, with a hawkish 75bps hike overshadowing a (likely) unchanged Selic rate in Brazil on the same day and projected policy rate reductions in Latam next year.
  • Mexican H1-Sept CPI data is unlikely to change Banxico’s mind ahead of its late-month meeting, where we forecast a 75bps hike, but it may challenge its expectation that inflation peaked in Q3.

Latam assets took a hit this week amid the sharp risk-off reaction in markets after surprisingly strong US inflation data (core, in particular). The data have prompted some economists to project a giant 100bps hike from the Federal Reserve at its policy decision next Wednesday, while our call remains a (still sizable) 75bps increase accompanied by hawkish guidance.

In the Pacific Alliance, domestic developments could not compete to drive attention away from the data-motivated sell-off, and next week’s regional calendar may again not offer enough to take the spotlight away from the Fed.

The parallel shift upwards in expectations for Fed rates pulled regional yield curves higher, but nowhere is this clearer than in the case of Mexico, where Banxico has tied its rates policy to moves north of the border. Year-ahead Banxico policy rate expectations have climbed by around 40bps since Friday’s close, roughly equivalent to the increase seen in Fed rate expectations.

Next week’s release of bi-weekly Mexican CPI for H1-Sept is unlikely to result in Banxico deviating from a 75bps increase, our expectation for the September 29 policy announcement. A surprise 100bps increase from the Fed could certainly open the door for renewed hawkishness in Banxico’s stance, more than a stronger than expected bi-weekly inflation print could. Having said that, September’s CPI data will challenge Banxico’s latest inflation projections where it sees headline and underlying inflation peaking in Q3-22. With merchandise and food prices soaring, core inflation shows no signs of receding soon.

The US’s economic resilience with stubbornly tight labour markets and no obvious signs of cresting core inflation will keep the Fed at the forefront of hawkish monetary policy among the G10 that Latin American officials may be unable to match—risking downside for the regional currencies, or at least limiting upside.

In our latest forecast update published this week, we foresee cuts by all the Pacific Alliance plus Brazil central banks through 2023 compared to steady rates in the US (and perhaps early-year hikes, see chart of the week). Continued Fed hawkishness could see officials in the Americas postpone the rate cuts leg of their policy cycles to insulate their economies from exchange-rate-related inflation and limit investor outflows towards the appeal of higher US rates.

Chart of the Week:  xxx

Brazil’s central bank is expected to hold its Selic policy rate unchanged at 13.75% next Wednesday, bringing its 1,175bps hiking cycle since March 2021 to an end. Petrobras’s cuts to fuel prices, coupled with the government’s country-wide cap on state taxes on fuel, has resulted in a slowdown in year-on-year headline inflation, with inflation expectations following it lower. Beneath declines in headline CPI, however, core price pressures remain well entrenched, which may see the BCB roll out “a residual adjustment” (as indicated in its August decision) of 25bps.

Mexican retail sales and Colombian economic activity figures for July round out the week on the data front while we continue to monitor discussions in Chile on the process of rewriting the constitution after Chileans firmly rejected the constitutional assembly’s proposal in early-September. In Colombia, Congress will begin debate on tax reform that is projected to boost public coffers by COP 25 tn according to the 2023 budget approved earlier this week (see our Bogota team’s first impressions here). 

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Market Events & Indicators for September 16 - 30
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