July-September November 0, 1 1
Outline 1 Monetary Policy External Conditions Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks July September
Monetary Policy Conduction After having converged to the permanent percent target, headline inflation decreased further since May and registered new historical minimum levels. To this contributed: 1. The monetary policy stance.. A negative output gap.. Effects of price reductions of widely used inputs, as well as goods and services whose prices decreased as a result of the implementation of structural reforms. July September
The favorable evolution of inflation has been achieved in a difficult economic environment. Domestic Environment: Moderate growth of economic activity. External Environment: Uncertainty with respect to the normalization process of the U.S. monetary policy continues. The relative price adjustment, associated with national currency s depreciation, has mainly been reflected in durable goods prices. Global growth remains at very low levels. Well-anchored inflation expectations. Greater concern regarding the depth of China s and other emerging economies deceleration. All this has been reflected in financial assets price drops at the global level. July September
00 00 00 006 007 008 Taking these elements into account, the Board of Governors decided to maintain the Overnight Interbank Interest Rate target at percent, by virtue of the fact that it considered the monetary policy stance to be conducive to the consolidation of the convergence of inflation to the permanent percent target. Target for the Overnight Interbank Interest Rate 1/ % November 10 9 8 7 6 1/ The Overnight Interbank Interest Rate is shown until January 0, 008. Source: Banco de México. July September
Outline 1 Monetary Policy External Conditions Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks July September 6
016 016 World economic activity continued weakening. World Economy GDP Growth Annual % change April October Forecast 9 8 Headline Annual Inflation Annual % change April October Forecast 9 8 7 7 Emerging World 6 Emerging World 6 Advanced 1 Advanced 1 0 0 Source: IMF, WEO April and October. Source: IMF, WEO April and October. July September 7
007 008 The U.S. economy grew moderately in the third quarter. To this contributed the solid domestic demand, which offset the strong disaccumulation of inventories. United States Real GDP and Components Quarterly % change at annual rate and percentage points contributions, s. a. 8.0 Industrial and Manufacturing Production Quarterly % change at annual rates, s. a. 1 Change in Non-farm Payrolls and Unemployment Rate Thousands of jobs and % of EAP, s. a. 11 600 Fixed Investment Public Expenditure Net Exports Inventories Private Consumption Total Q- 6.0.0.0 0.0 -.0 -.0 Industrial Production Manufacturing Production Q- 10 8 6 0 - - 10 9 8 7 6 Unemployment rate Change in nonfarm payrolls September 00 00 0-00 -00-600 -800 s. a. / Seasonally adjusted data. Source: Bureau of Economic Analysis (BEA). s. a. / Seasonally adjusted data. Source: Federal Reserve. July September EAP/ Economically Active Population. s. a. / Seasonally adjusted data. Source: Bureau of Labor Statistics (BLS). 8
007 008 In the Euro zone, economic recovery continued, although at a lower rate than expected, with large heterogeneity among the member countries. Economic Sentiment Indicator and Consumer Confidence Standardized data from period 000-007 Euro Zone 1. Industrial Production / Index Dec-007=100, s. a. 110 Consumer Confidence 1.0 0. Germany 10 100 0.0 Euro Zone 9 Economic Sentiment Indicator 1/ -0. -1.0-1. France Spain Italy 90 8 80 7 -.0 70 -. 6 September -.0 August 60 1/ Composite indicator, which summarizes five sectorial confidence indicators: industry, services, retail, construction and consumption Source: Haver Analytics. July September s. a. / Seasonally adjusted data. / Excluding construction industry. Source: Eurostat. 9
Economic activity in emerging economies keeps slowing down. Industrial Production Annual % change of -month moving average Emerging Economies September 0 Exports Annual % change of -month moving average September 80 60 Chile Russia India China 0 1 10 0 Russia Chile China India Mexico 0 0 0 Colombia Mexico Peru Brazil - -10-1 Colombia Peru Brazil -0-0 Source: Haver Analytics and INEGI. July September Source: Haver Analytics and INEGI. 10
008 016 017 018 019 00 Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Commodity prices decreased during most of the third quarter of, although they showed certain recovery in October. Crude Oil Prices USD per barrel Commodities Prices / Index Jan-00=100 Futures 1/ 1 10 November Agriculture 110 10 11 Total Energy 100 9 100 8 Industrial Metals 90 8 WTI 70 80 7 Mexican Oil Mix 0 70 6 60 1/ Data up to November 0,. Source: Bloomberg. July September / It refers to the Thomson Reuters CRB index composed by 19 raw materials divided in groups: energy (9%), agriculture (1%), precious metals (7%) and industrial metals (1%). Source: Bloomberg. 11
Inflation in the main advanced economies decreased during the period covered by this Report. Emerging economies presented a mixed inflationary performance. Advanced Economies Annual % change United States United Kingdom Headline Inflation 7 6 1 Emerging Economies Annual % change India Russia Brazil 0 18 16 1 1 10 8 6 Japan Euro Zone September 0-1 - - Peru China Chile Colombia Mexico September 0 - - -6 Source: Haver Analytics. Source: Haver Analytics and INEGI. July September 1
Nov-1 In international financial markets, uncertainty regarding the normalization process of the U.S. monetary policy continues. Jun-1 Dec-1 Jul-1 Jan-16 Aug-16 Mar-17 Sep-17 Feb-1 Jun-1 Oct-1 Feb-1 Jun-1 Oct-1 Feb-1 Jun-1 Oct-1 Expected Monetary Policy Rates 1/ % U.S. Dollar Index (DXY) / Index 1-Jan-=100 End of End of 016 End of 017 1.7 November 10 Implied target rate in OIS curve, Sep. 1, Implied target rate in OIS curve, Nov. 0, 1. 1.1 99 96 0.8 Depreciation 9 Bank of England Federal Reserve 0. 0. 90 87 8 European Central Bank -0.0 81-0. 78 1/ The expected rates are the trajectories implicit in OIS Curves (Overnight Index Swap). Source: Bloomberg with estimates from Banco de México. July September / DXY index is estimated by the Intercontinental Exchange (ICE) based on the weighted geometric mean of the dollar's value compared with a basket of 6 other major currencies which are: EUR: 7.6%, JPY: 1.6%, GBP: 11.9%, CAD: 9.1%, SEK:.%, and CHF:.6%. Source: Bloomberg. 1
1 7 10 1 16 19 8 1 7 0 6 9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 The aforementioned was reflected in a drop in capital flows to emerging economies, with its consequent effect on their exchange rates. Accumulated Capital Flows (Debt and Equity) 1/ Billions of dollars Oct.-8 Emerging Economies 008 10 10 100 80 60 0 0 0-0 -0-60 -80 Nominal Exchange Rate against USD Index 01-Jan- = 100 Depreciation South Africa Chile Colombia Korea November Brazil Mexico 10 00 190 180 170 160 10 10 10 10 110 100 90 Weeks 1/ The sample covers funds used for the buying-selling of stocks and bonds from emerging countries, recorded in advanced countries. Flows exclude portfolio performance and changes in the exchange rate. Source: Emerging Portfolio Fund Research. July September Source: Bloomberg. 1
Outline 1 Monetary Policy External Conditions Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks July September 1
-.9 0. 0. -1.9-1. I 008 III 008 I III I III I III I III I III I III I III 008-1.0-0.1 0.8 1. 1. 0.7 0.91. 0.6 0.7 0. 0. 0.6 1. 1.7 1..1 In the third quarter of the present year, economic activity in Mexico maintained the moderate growth pace registered since the beginning of. Gross Domestic Product Quarterly % change, s.a. 160 Global Indicator of Economic Activity Index 008=100, s.a. 1 10 Services 118 0.9 0.8 1.1 0. 0.9 0.7 0. 0.0.8 1 0-1 10 10 10 Industrial Production Total 11 110 106-110 10-100 98-90 9 Q 1/ - 80 Agricultural August 90 s.a. / Seasonally adjusted data. 1/ The GDP data for the third quarter of corresponds to preliminary estimates published by the INEGI. Source: Mexico s System of National Accounts, INEGI. July September s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. 16
008 008 As regards to economic activity from the production side, the industrial sector showed a slow growth pace. Industrial Activity Index 008=100, s.a. Mining Sector Index 008=100, s.a. Electricity 10 1 10 110 10 Mining of metal and non-metal minerals 160 10 11 100 10 Manufacturing 110 10 9 100 100 90 80 Construction Mining 9 90 8 Services related to mining Crude oil mining 60 August 8 80 August 0 s. a. / Seasonally adjusted data. Source: Monthly Indicator of Industrial Activity, Mexico s System of National Accounts, INEGI. July September s. a. / Seasonally adjusted data. Source: Monthly Indicator of Industrial Activity, Mexico s System of National Accounts, INEGI. 17
00 006 007 008 007 008 Exports kept exhibiting a relative stagnation. Total, Oil and Non-Oil Exports Index 008=100, s.a. Manufacturing Exports Index 008=100, s.a. 170 0 Non-Oil Exports 10 Automotive 10 190 Total 10 110 Total 170 10 90 10 Oil Exports 70 Non-automotive 110 90 0 70 September 0 September 0 s. a. / Seasonally adjusted data. Source: SAT, Secretaría de Economía, Banco de México, INEGI. México s Goods Trade Balance. SNIEG. National Interest Information. July September s. a. / Seasonally adjusted data. Source: SAT, Secretaría de Economía, Banco de México, INEGI. México s Goods Trade Balance. SNIEG. National Interest Information. 18
007 Gross fixed investment continued showing a moderate dynamism at the beginning of the quarter subject of this Report. 008 007 008 008 Investment and its Components Index 008=100, s.a. National machinery and equipment 10 10 10 10 Imports of Capital Goods Index 008=100, s.a. 10 11 110 10 Residential and Non-Residential Construction Investment Index 008=100, s.a. Non-residential 110 10 100 Total Construction 110 100 90 100 9 90 8 9 90 Imported machinery and equipment August 80 70 60 September 80 7 70 Residential August 8 80 s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. s. a. / Seasonally adjusted data. Source: SAT, Secretaría de Economía, Banco de México, INEGI. México s Goods Trade Balance. SNIEG. National Interest Information. July September s. a. / Seasonally adjusted data. Source: Mexico s System of National Accounts, INEGI. 19
008 007 008 007 008 Some of the private consumption indicators registered higher growth rates as compared to the previous quarter. 10 Revenues of Commercial Retail Business and Total ANTAD Sales Index 008=100, s.a. 10.8 Workers Remittances Billion, constant USD and MXN 1/, s. a..0 Consumer Confidence Index Jan-00=100, s.a. 10 1 10 1 10 ANTAD 11 110.6. Pesos 7.0.0 Consumer confidence index 110 100 90 11 10. 7.0 110 80 10 100 9 90 Revenues of Commercial Retail Business September August 100 9 90.0 1.8 1.6 USD September.0 17.0 1.0 Possibility of buying durable goods September 70 60 0 s.a./ Seasonally adjusted data. Source: INEGI and elaborated by Banco de México with data from ANTAD. s.a./ Seasonally adjusted data. 1/ At prices ofthe second fortnight of December,. Source: Banco de México. s.a./ Seasonally adjusted data. Source: INEGI and Banco de México. July September 0
007 In face of the moderate economic growth, in the third quarter of slack conditions persisted in the labor market. 008 007 008 008 IMSS-Insured Jobs, Employed Population and Total IGAE Index =100, s. a. 11 National Unemployment Rate % of EAP, s. a. 7.0 IMSS Reference Wage / Annual % change Q 8 IMSS-affiliated Jobs 1/ Total IGAE Employed Population 109 10 101 97 9 6. 6.0..0..0 7 6 September August Q 89 8 September..0 s. a. / Seasonally adjusted data. 1/ Permanent and temporary workers in urban areas. Seasonally adjusted by Banco de México. Source: Calculated by Banco de México with data from IMSS and INEGI (SCNM and ENOE). EAP/ Economically active population. s. a. / Seasonally adjusted data. Source: National Employment Survey (Encuesta Nacional deocupación y Empleo), INEGI. July September / During the third quarter of, on average 17.7 million ofcontributors were registered to IMSS. Source: Calculated by Banco de México with data from IMSS. 1
Outline 1 Monetary Policy External Conditions Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks July September
In the third quarter of, annual headline inflation exhibited further decreases in addition to those observed in the previous quarter, locating below percent and reaching new historical minimum levels. 00 00 00 006 007 008 Consumer Price Index Annual % change 1F-October 1 1 11 Non-Core General 10 9 8 7 6 Variability Interval Core 1 Source: Banco de México and INEGI. July September
008 008 The effect of the exchange rate depreciation on prices was limited, mainly affecting durable merchandise, without generating second round effects so far. Merchandise Annual % change Non-durables 1F-October Core Price Index 9 8 7 6 Services Annual % change Education (tuition) 1F-October 9 8 7 6 Merchandise Services Durables 1 Other services Housing 1 0-1 0 - Source: Banco de México and INEGI. Source: Banco de México and INEGI. July September
The average annual growth rate of the non-core price index continued slowing down. Agricultural Annual % change Agricultural 1F-October Non-Core Index Energy and Government Approved Fares Annual % change 7 Energy and Government Approved Fares 1F-October 1 1 Livestock 1 1 Energy 9 9 6 - Fruits and vegetables -9 Government Approved Fares 0-1 - Source: Banco de México and INEGI. Source: Banco de México e INEGI. July September
006 007 008 In light of the abovesaid, slack conditions are expected to persist in the economy in the coming years, although gradually declining. Output Gap 1/ % of potential output, s. a. 8 6 GDP / 0 IGAE - - -6 August Q -8-10 s.a. / Calculated with seasonally adjusted data. 1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; see Banco de México (), Inflation Report April June,p.69.The shaded area is the 9% confidence interval of the output gap, calculated with an unobserved components method. / The GDP data for the third quarter of corresponds to preliminary estimates published by the INEGI. Source: Calculated by Banco de México with data from INEGI. July September 6
00 006 007 008 007 008 Inflation expectations implicit in long-term market instruments remained stable, while survey-based ones for the end of kept decreasing. Break-even Inflation Decomposition 1/ % Break-even inflation implicit in 10-year bonds Long-term inflation expectation Inflationary risk premium.07. -0.1 8.0 7.0 6.0 Annual Headline Inflation Expectations Median, %.0..0 Next years End of 016.0.0.0 Next -8 years End of..0.0. 1.0 Variability Interval 0.0.0 September -1.0 October 1. 1/The inflation risk Premium is calculated with data from Valmer and Bloomberg, based on the methodology described in Box 1 Decomposition of the Break-even Inflation of the October-December. July September Source: Survey of private sector economic analysts expectations, Banco de México. 7
Jan-1 Apr-1 Jul-1 Oct-1 Jan-1 Apr-1 Jul-1 Oct-1 Jan-1 Apr-1 Jul-1 Oct-1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 The Mexican peso, just like other emerging economies currencies, registered an additional depreciation in the third quarter of. Part of this depreciation reverted in October. Exchange Rate 1/ Pesos per USD Exchange rate 16. 17. 16. Implied Volatility in Foreign Exchange Rate Options / % 0 18 16 1. 1 1. 1 1. 10 8 1. 6 November 11. November 1/ The latest data for the observed exchange rate is November 0,. Source: Banco de México. / Refers to implied volatility in one-month options. Source: Bloomberg. July September 8
00 006 007 008 The reduction in international reserves during the third quarter was due to the continuation of the USD auction mechanisms, determined by the Foreign Exchange Commission. International Reserves International Reserves USD billion IMF s Flexible Credit Line -October 00 80 60 0 0 00 180 160 10 10 100 80 60 0 0 0 Foreign Exchange Commission Preemptive Steps to Provide Liquidity to the FX Market: December : Daily auctions of dollars of up to USD 00 million at a minimum price. March : Daily auctions of USD millions without a minimum price. May : The extension until September 9, of the auction period of USD millions without a minimum price. July : The increment in the amount of auctions without a minimum price from USD to 00 million, and the decrease of the threshold from 1.% to 1.0%, to activate the auctions with a minimum price, both mechanisms until September 0,. September : The extension until November 0, of both mechanisms. Source: Banco de México and International Monetary Fund. July September 9
008 jun. 1 sep. 1 dic. 1 mar. 1 jun. 1 sep. 1 dic. 1 mar. 1 jun. 1 sep. 1 Interest rates in Mexico showed declines for different terms and trading conditions in the debt market have improved. Government Securities Interest Rates 1/ % 10 years 0 years 1 11 10 9 8 8 7 6 Trading Conditions Index in Debt Market Index, % Worsening of conditions Dec.- bond yield 6.8 6. 6. 7.9 years months 1 year 1 day 6 Conditions index.6. November November.0 1/ Since January 1, 008, the one-day (overnight) interest rate corresponds to the target for the Overnight Interbank Interest Rate. Source: Proveedor Integral de Precios (PiP). July September Note: The index is calculated based on the average volatility bias, kurtosis, buying and selling differential, all these intraday operation of Dec- Bond, and daily trading volume. From them, the percentiles are calculated in the period - and the average of the six percentiles for each day is taken. Source: Brokers Interbancarios with calculations of Banco de México. 0
008 Jan-1 Mar-1 Jun-1 Aug-1 Nov-1 Feb-1 Apr-1 Jul-1 Oct-1 Total government securities holdings by foreign investors remained relatively stable and spreads between Mexican and U.S. interest rates behaved differentiated. Government Securities Holdings by Foreign Investors MXN billion,00 Mexico and United States Interest Rate Spreads Percentage points. Total 1/,000 10 years 0 years.0 Bonds 1,600 1,00 1 year. CETES 800 00 years months 1 day.0 October 0 November. 1/ Includes: Bondes, Bondes D, Bonos, Cetes and Udibonos. Source: Banco de México. July September Source: PiP, Banco de México and U.S. Treasury Department. 1
Outline 1 Monetary Policy External Conditions Economic Activity in Mexico Inflation Determinants Forecasts and Balance of Risks July September
9 8 7 6 1 0-1 - - - - -6-7 -8-9 GDP Growth (%) Report Previous Current 1.7 -. 1.9 -. 016. -.. -. 017 --.0 -.0 GDP Growth Annual %, s.a. QQQQQQQQQQQQQQQQQQQQ 008 016 017 s.a. / Seasonally adjusted data.source: INEGI and Banco de México. Economic Activity Outlook Q 016 Q 017 Q Fan Charts 9 8 7 6 1 0-1 - - - - -6-7 -8-9 7 6 1 0-1 - - - - -6-7 July September Increase in the number of IMSS-insured jobs (Thousands) Report Previous Current 60-660 60-710 016 600-700 60-70 017 -- 660-760 Output Gap % of potential output, s.a. Q 016 Q QQQQQQQQQQQQQQQQQQQQ 008 016 017 s.a. / Seasonally adjusted data.source: INEGI and Banco de México. 017 Q 7 6 1 0-1 - - - - -6-7
Upward: Downward: Risks to the Growth Outlook: Further progress in the implementation of structural reforms. A faster than expected U.S. recovery. A new drop in Mexico s oil production and/or its price. A deterioration in international financial market conditions, propitiating an increase in firms financial costs. An additional deterioration in economic agents confidence in light of the persistence of a weak economy and/or the absence of progress in the strengthening of the rule of law. Less dynamism of the automotive sector, given the problems that some of the sector s participants have experienced at the global level. A delay in the recovery of the U.S. industrial sector. July September
017 016 Inflation Outlook Headline Inflation Core Inflation Below percent during the rest of the year. At levels close to percent. Moderate downward trend, locating at levels closer to percent at the end of the year. July September
Inflation is anticipated to remain below percent during the rest of, close to that level in 016 and with a slight downward trend in 017, being closer to percent by the end of that year. 7.0 6. 6.0 Annual Headline Inflation 1/ % Q 016 Q 017 Q Fan Charts 7.0 6. 6.0 7.0 6. 6.0 Annual Core Inflation / % Q 016 Q 017 Q 7.0 6. 6.0.....0.0.0.0.....0.0.0.0.....0.0.0.0.....0.0.0.0 1. 1.0 0. 0.0 Observed 1. 1. Observed Headline inflation target 1.0 1.0 Headline inflation target Variability interval 0. 0. Variability interval 0.0 0.0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 016 017 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 016 017 1. 1.0 0. 0.0 1/ Quarterly average ofannual headline inflation. Source: INEGI and Banco de México. July September / Quarterly average ofannual headline inflation. Source: INEGI and Banco de México. 6
Risks to the Inflation Forecast: Downward Upward A lower than expected dynamism of economic activity. That some goods and widely used inputs continue exhibiting price decreases, in some cases as a result of the implementation of structural reforms. That the gasoline price increases less than percent next year. That the depreciation propitiates price increases for a broad set of goods and services, and contaminates inflation expectations. As in the past, Banco de México will be alert to avoid this from happening. That the national currency reverts part of the depreciation accumulated in the previous months. July September 7
Monetary Policy Stance Considering the facts presented in this Report, Banco de México s Board of Governors will continue to monitor the performance of all inflation determinants and its medium- and long-term expectations, in particular: The monetary stance of Mexico relative to the U.S. The pass-through of exchange rate movements onto consumer prices. The evolution of the degree of slackness in the economy. All this in order to be able to take the necessary measures in a flexible manner and whenever conditions demand it in order to consolidate the convergence of inflation to the permanent percent target. July September 8
Challenges to Strengthen Confidence in the Mexican Economy Considering the complex international environment and the expectations that it will persist in the future, it is fundamental to maintain a solid macroeconomic framework in Mexico. Therefore, in addition to the timely adjustment of the monetary policy stance, it is necessary to: Concretize the recently proposed efforts in the fiscal front. Continue implementing structural reforms in an adequate and timely manner. This will contribute to preserve an environment of confidence towards the Mexican economy, distinguishing it from other emerging economies, such that the country risk component implicit in interest rates remains at low levels. Finally, as mentioned on previous occasions, it is also necessary to strengthen institutions and the rule of law, clearly implying an appropriate legal framework, but especially, its enforcement and full compliance. July September 9