U.S. subdued March inflation and interest rate differentials with Mexico

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1 mar.-14 jun.-14 sep.-14 dic.-14 mar.-15 jun.-15 sep.-15 dic.-15 mar.-16 jun.-16 sep.-16 dic.-16 mar.-17 jun.-17 sep.-17 dic.-17 mar.-18 jun.-18 sep.-18 dic.-18 mar.-19 Contacts Felix Boni Chief Credit Officer Jordy Juvera Economics Sr. Associate Cynthia Pérez Economics Analyst HR Ratings comments on U.S. March inflation and the differences in monetary policy with Mexico, with resulting substantial spreads in nominal and real rates U.S. inflation remains subdued despite still relatively strong growth including important gains in wages as was seen in the recent employment report. However, volatile headline inflation advanced a strong 0.41% vs. February with the annual rate rising to 1.86% vs. 1.50% the previous month. Core inflation was up 0.15% bringing the annual inflation rate down to 2.04% from 2.08% the previous month, but still below last December s 2.21%. US Inflation evolution Feb-19 YoY QoQ YoY YoY MoM QoQ YoY CPI Headline 2.36% 1.49% 1.95% 1.50% 0.41% 0.88% 1.86% CPI Core 2.10% 2.20% 2.21% 2.08% 0.15% 2.27% 2.04% PCE Headline 2.07% 1.49% 1.76% n.a % 1.00% 1.37% PCE Core 1.96% 1.75% 1.95% n.a. 0.06% 1.91% 1.79% Source: HR Ratings w ith data from the U.S. Bureau of Labor Statistics and the Bureau of Economic Analysis. Retrieved from FRED, Federal Reserve Bank of St. Louis. Data are seasonally adjusted. PCE data in italics are through January. All Quarter over Quarter inflation is annualized. Graph 1 below shows the trends of the major inflation indices over the last five years. Headline inflation is considerably down vs. strong levels reached last summer. Core inflation continues to moderate as it heads towards Graph 1. Inflation in U.S. Last Twelve Months CPI Headiine PCE Headline CPI Core PCE Core 2.5% 1.5% 0.5% -0.5% Source: HR Ratings with data from FRED. CPI data are adjusted. Graph 2 provides a less volatile view of inflation showing annualized three-month moving inflation vs. the immediately prior quarter. The graph suggests that headline inflation might Hoja 1 de 6

2 Mar-13 Jun-13 Sep-13 Dec-13 be on the rise after the prolonged downward trend, while core inflation appears headed down to a relatively stable. Graph 2. Annualized U.S. Inflation (3MMA) 4.0% CPI Headiine CPI Core PCE Headline PCE Core -4.0% Source: Retrieved from FRED, Federal Reserve Bank of St. Louis. Data are seasonally adjusted and calculated on a 3 months moving average basis. In terms of international comparisons, and in light of the restraint that the Fed is signaling it will likely be showing in its interest rate policies, it is instructive to analyze the evolution of interest rates in Mexico and the substantial spreads that currently exist with U.S. rates. Graph 3 shows the level of central bank reference rates for the two countries and how the differential began to dramatically increase beginning in Graph 3. Central Bank Reference Rates: Mexico and the U.S. 9.0% 8.0% 7.0% 6.0% Mexico United States 5.0% 4.0% Source: HR Ratings with data from Mexico's Central Bank and FRED. Hoja 2 de 6

3 Mar-13 Jun-13 Sep-13 Dec-13 Of course, Mexico has substantially higher inflation. The recent report on inflation through March showed annual headline and core consumer inflation at 4.0% and 3.55%, respectively. These levels return inflation spreads of 210 and 148 basis points respectively. In Graph 4 below we show the inflation adjusted spread between the two central bank reference rates based on headline inflation. Graph 4. Real Term Spreads on Central Bank Reference Rates: Mexico and U.S (10) (60) Source: HR Ratings with data from Banxico, FRED and the INEGI. Based on headline CPI inflation. Given high inflation in Mexico, now combined with rising policy uncertainty Mexico s central bank has felt the necessity to continue implementing an aggressive monetary policy in order to maintain the attractiveness of financial investments in Mexico. The recent rise in U.S. real rates, which now appears to have paused, has also been a factor helping to keep Mexican monetary policy extremely tight. Hoja 3 de 6

4 Mar-13 Jun-13 Sep-13 Dec-13 Graph 5. Central Bank Reference Rates in Real Terms: Mexico and the U.S. 5.0% 4.0% Mexico United States () () () Source: HR Ratings with data from Mexico's Central Bank, the INEGI and FRED. Based on headline inflation. Mexican monetary policy now faces the challenge of responding to the possibility of rapidly slowing economic growth. However, whether it can afford to do this will depend on whether economic policy will present less uncertainty in future months. Hoja 4 de 6

5 HR Ratings Management Contacts Management Chairman of the Board Vice President Alberto I. Ramos Aníbal Habeica Chief Executive Officer Fernando Montes de Oca Analysis Chief Credit Officer Deputy Chief Credit Officer Felix Boni Pedro Latapí Public Finance / Infrastructure Corporates / ABS Ricardo Gallegos Hatsutaro Takahashi ricardo.gallegos@hrratings.com hatsutaro.takahashi@hrratings.com Roberto Ballinez José Luis Cano roberto.ballinez@hrratings.com joseluis.cano@hrratings.com Financial Institutions / ABS Methodologies Fernando Sandoval Alfonso Sales fernando.sandoval@hrratings.com alfonso.sales@hrratings.com Regulation Chief Risk Officer Head Compliance Officer Rogelio Argüelles Rafael Colado rogelio.arguelles@hrratings.com rafael.colado@hrratings.com Business Development Business Development Francisco Valle francisco.valle@hrratings.com Hoja 5 de 6

6 Mexico: Avenida Prolongación Paseo de la Reforma #1015 torre A, piso 3, Col. Santa Fe, México, D.F., CP 01210, Tel 52 (55) United States: One World Trade Center, Suite 8500, New York, New York, ZIP Code 10007, Tel +1 (212) *HR Ratings, LLC (HR Ratings), is a Credit Rating Agency registered by the Securities and Exchange Commission (SEC) as a Nationally Recognized Statistical Rating Organization (NRSRO) for the assets of public finance, corporates and financial institutions as described in section 3 (a) (62) (A) and (B) subsection (i), (iii) and (v) of the US Securities Exchange Act of The rating was solicited by the entity or issuer, or on its behalf, and therefore, HR Ratings has received the corresponding fees for the rating services provided. The following information can be found on our website at (i) The internal procedures for the monitoring and surveillance of our ratings and the periodicity with which they are formally updated, (ii) the criteria used by HR Ratings for the withdrawal or suspension of the maintenance of a rating, (iii) the procedure and process of voting on our Analysis Committee, and (iv) the rating scales and their definitions. HR Ratings ratings and/or opinions are opinions of credit quality and/or regarding the ability of management to administer assets; or opinions regarding the efficacy of activities to meet the nature or purpose of the business on the part of issuers, other entities or sectors, and are based exclusively on the characteristics of the entity, issuer or operation, independent of any activity or business that exists between HR Ratings and the entity or issuer. The ratings and/or opinions assigned are issued on behalf of HR Ratings, not of its management or technical staff, and do not constitute an investment recommendation to buy, sell, or hold any instrument nor to perform any business, investment or other operation. The assigned ratings and/or opinions issued may be subject to updates at any time, in accordance with HR Ratings methodologies. HR Ratings bases its ratings and/or opinions on information obtained from sources that are believed to be accurate and reliable. HR Ratings, however, does not validate, guarantee or certify the accuracy, correctness or completeness of any information and is not responsible for any errors or omissions or for results obtained from the use of such information. Most issuers of debt securities rated by HR Ratings have paid a fee for the credit rating based on the amount and type of debt issued. The degree of creditworthiness of an issue or issuer, opinions regarding asset manager quality or ratings related to an entity s performance of its business purpose are subject to change, which can produce a rating upgrade or downgrade, without implying any responsibility for HR Ratings. The ratings issued by HR Ratings are assigned in an ethical manner, in accordance with healthy market practices and in compliance with applicable regulations found on the rating agency webpage. There Code of Conduct, HR Ratings rating methodologies, rating criteria and current ratings can also be found on the website. Ratings and/or opinions assigned by HR Ratings are based on an analysis of the creditworthiness of an entity, issue or issuer, and do not necessarily imply a statistical likelihood of default, HR Ratings defines as the inability or unwillingness to satisfy the contractually stipulated payment terms of an obligation, such that creditors and/or bondholders are forced to take action in order to recover their investment or to restructure the debt due to a situation of stress faced by the debtor. Without disregard to the aforementioned point, in order to validate our ratings, our methodologies consider stress scenarios as a complement to the analysis derived from a base case scenario. The rating fee that HR Ratings receives from issuers generally ranges from US$1,000 to US$1,000,000 (or the foreign currency equivalent) per issue. In some instances, HR Ratings will rate all or some of the issues of a particular issuer for an annual fee. It is estimated that the annual fees range from US$5,000 to US$2,000,00 (or the foreign currency equivalent). Hoja 6 de 6