The peso starts the session with an appreciation of 0.25% or 5.1 cents, trading around 20.48 pesos per dollar, with the exchange rate touching a minimum of 20.3517 and a maximum of 20.5376 units of peso.

At the same time, the appreciation of the peso occurs in parallel with most of the currencies in the wide basket of main crosses, the most appreciated currencies being the Russian ruble with 0.68%, the Chilean peso with 0.52%, the New Zealand dollar with 0.35%, the peso Mexico with 0.25% and the Brazilian real with 0.20%, mostly considered currencies of economies that produce raw materials.

The peso

For its part, the dollar weighted index shows a decline of 0.12%, falling for the fifth consecutive session in which it accumulates a weakening of 0.71 percent.

The appreciation of the peso is mainly due to two factors:

First factor

The optimism of the global financial markets has been renewed after yesterday Jerome Powell once again reiterated the support of the Federal Reserve to the economy through a highly flexible monetary policy.

It should be recalled that, since last week, caution had been observed regarding speculation that the Fed could show a less accommodative stance due to inflationary risks.

This morning the capital markets show gains in Europe, with the main indices advancing on average close to 0.50% and in the United States the futures market points to gains higher than 0.70% in companies in the technology sector, after they registered losses in sessions previous.

Second factor

The weakness of the dollar and the expectation that the support of monetary policy in the United States will continue, has boosted the price of raw materials.

This morning the price of WTI oil advanced 0.97% to 62.27 dollars per barrel, while industrial metals such as copper advanced 0.70%, aluminum 0.47% and nickel 0.40 percent.

It is important to point out that yesterday afternoon the Chamber of Deputies approved in general and in particular the opinion that reforms and adds provisions to the Electricity Industry Law.

The opinion was approved in particular with 289 votes in favor and 152 against. It should be remembered that the ruling, among other things, gives priority to the CFE as an electricity producer, with the generation of renewable energy by individuals and combined cycles by private sector companies being last.

This implies a higher cost of generating electricity and therefore increases inflationary risks and opens the door to possible pressure on public finances. The reform goes to the Senate where it will be discussed for a vote.

Economy

Several relevant economic indicators for Mexico were published in the session:

Inflation, first half of February

During the 1st fortnight of February, inflation was 3.84%, the highest rate since the second fortnight of October 2020.

The National Consumer Price Index (INPC) showed a biweekly variation of 0.23%, representing the largest increase for the same fortnight since 2017 (+0.33 percent).

Likewise, the underlying component contributed 71.9% of the biweekly variation of the INPC, while the non-core component explained 28.1% of the biweekly variation.

The underlying component, which includes products with lower volatility and defines the trajectory of inflation in the long term, stood at a biweekly rate of 0.22% and 3.84% year-on-year, exceeding the average of the last three years of 3.74 percent.

Within the core, inflationary pressures were concentrated in the merchandise subcomponent, which rose at a biweekly rate of 0.30%, reflecting the biweekly increase in food prices of 0.20% and non-food merchandise of 0.40 percent.

In particular, non-food goods were boosted by the end of the winter season sales.

For its part, the services subcomponent shows that prices remain stable, as they rose at a biweekly rate of 0.13%, given the reinforcement of sanitary restrictions in more states of the country.

The non-core component showed a fortnightly growth of 0.26% (+ 3.85% year-on-year).

Agriculture and energy

The fortnightly decline in the prices of fruits and vegetables of 2.40% helped to contain the impact of the fortnightly advance in energy prices of 1.28%, which had already registered a strong increase during January.

With this, energy inflation stood at 6.22% year-on-year, the highest since the 1st fortnight of May 2019.

Energy prices continue to be driven by the biweekly increase in the price of LP gas of 1.09%, reflecting only a limited effect of the winter storm that hit the southern United States and Mexico in the middle of the month, so the greatest impact will be during the second half of February.

Also, the price of low and high octane gasoline increased at a biweekly rate of 1.96% and 1.87%, respectively. The above, despite the fact that the Ministry of Finance resumed the subsidy to the IEPS on low-octane gasoline on February 6.

For February, inflation is expected to be close to 3.90%, pressured by the rise in international reference prices of LP gas during the second half of the month, as a result of the severe frosts that hit the state of Texas, the main supplier gas of the country.

The winter storm caused a supply shock then the production and distribution of energy in Texas halted, as well as a shock in demand as a reflection of the low temperatures.

Raw Materials

However, it is expected that April will be when inflation reaches its peak for the year due to an arithmetic effect.

As for monetary policy, the latest statement on February 11 showed a more flexible stance after the interest rate was cut 25 basis points unanimously.

However, the recent inflationary pressures related to the dynamics observed in the commodity market, particularly in the price of energy, could cause some members of the governing board to show greater caution in the next meetings.

The expectation of two additional cuts of 25 basis points to the interest rate remains, ending 2021 at 3.50 percent.

Retail commerce

INEGI released the results of the Monthly Survey of Commercial Companies (EMEC) for the month of December 2020, which shows that retail sales fell at a monthly rate of 2.4%, the strongest drop since April 2020 in adjusted figures by seasonality and the highest for a December since 2012.

At an annual rate, the fall extended to 6.2% after the annual fall of 4.7% registered in November.

The drop was mainly due to three factors:

• That the local authorities reinforced sanitary measures to contain the growth of Covid-19 cases in their respective states, especially in the State of Mexico and Mexico City, whose epidemiological traffic lights returned to «red» according to the Ministry of Health.
• The base for November was relatively high given the Good End season, evidenced by the monthly drop of 13.1% in retail sales of clothing and -3.4% in department stores, which during November had grown 5.9% and 11.9%, respectively.
• The loss of 426 thousand jobs during December, according to the National Survey of Occupation and Employment (ENOE).

Consumption

Within the indicator, 13 of the 22 subsectors showed a monthly decrease, highlighting retail sales in clothing (-13.1%), leisure articles (-4.6%), department stores (-3.4%), articles for the interior decoration (-3.2%) and cars and trucks (-2.3 percent).

On the other hand, retail sales of furniture, computer equipment and accessories (5.2%), internet sales (4.5%), parts and spare parts for cars and trucks (2.4%), and pets and personal use items had higher growth. (2.3 percent).

In annual terms, 17 of the 22 subsectors continue to register negative rates, especially in non-essential goods such as clothing (-33.9%), articles for entertainment (-32.8%), for interior decoration (-22.3%), stationery (-22.2%) and perfumery and jewelry (-22.2 percent).

Meanwhile, sales that are exclusively through the internet register an annual growth rate of 52.4%, very far from the growth in health care items, which is the second subsector with the highest annual growth (8.2 percent).

For January 2021, a drop in retail sales is anticipated, mainly caused by the entry of more states to a «red» traffic light, since at the end of January the Ministry of Health classified 11 states under this epidemiological situation, and resulted in the closure of commercial establishments for a period of time.

February will also see a fall, derived from the blackouts caused by the freezing storm that hit Texas and northern Mexico, leaving millions of people without electricity for 2 days intermittently.

Third sector and the peso

The Monthly Survey of Services (EMS) for the month of December showed a real monthly growth of 3.34% in total income from the supply of goods and services, continuing its recovery and spinning six months of consecutive advances.

As of the last month of 2020, income from services continues to be 6.12% below the pre-pandemic level (March), evidence of the difficulty that this sector has faced in achieving a recovery.

In annual terms, the total revenues of the services sector show a contraction of 10.24%, accumulating 13 consecutive setbacks and averaging an annual fall of 17.38% in 2020, the highest on record and well above the average annual decline of 7.94% observed in 2008.

The monthly advance in income from the supply of goods and services was boosted by the holiday season, continuing with the recovery that was observed in November with the “Good End” discounts.

This led to six of the nine categories showing monthly increases in their income.

Highlighting the monthly advance of 9.80% in mass media information and 3.33% in recreational services, driven by the winter holidays.

Likewise, the income of the health sector advanced 2.16%, spinning eight months of advances, derived from the health crisis, as well as the winter season in which a greater number of respiratory diseases are usually observed.

On the other hand, the three categories that showed monthly contractions were: real estate services (-3.55%), hotels and restaurants (-0.94%) and transportation (-0.82 percent).

As of the last month of 2020, only two sectors show annual growth: health services (10.77%) and mass media information services (5.11 percent).

Buen Fin

It should be noted that this is the first month in which media information services revenues show positive annual growth, after 8 consecutive months of contractions.

This sector was boosted towards the end of the year, by increases in advertising related to the Good End and the Christmas season.

On the other hand, the two sectors most lagging behind at the end of 2020 and showing the deepest annual falls are: leisure and recreation services (-46.70%) and hotels and restaurants (-34.98 percent).

This is due to the fact that, for much of the year, most of the non-essential businesses faced restrictions on their capacity.

Going forward, the service sector is expected to continue to see a slow recovery, especially in categories such as leisure, hotels and restaurants.

The peso and National Production

During the first month of 2021, a significant deterioration in total income from the supply of goods and services is expected since, in January, 11 states of the Republic remained on a red light, entities that together represent 62.40% of GDP from activities tertiary.

However, as of April, it is expected that positive annual growth rates will be observed in income from the supply of goods and services due to the low comparison rate, since it was in April 2020 when the initial impact of the pandemic was recorded, which led the index to fall 23.14% monthly and 26.27% annually.

Therefore, the comparison with the pre-pandemic level (2019) will be relevant to determine the level of recovery in the sector, since the annual comparisons will show significant growth despite the fact that there is a long road to recovery.

In 2021, the pace of recovery in the services sector will be determined mainly by:

• Advancement in the vaccination process, since it is the only way to regain consumer confidence.
• The restrictions imposed on tourism, an important source of income for the country’s tertiary sector.
• The caution of consumers in a period of uncertainty, which could result in decreases in spending on some non-essential services such as advertising, entertainment and sports activities.

During the session, the exchange rate is expected to trade between 20.33 and 20.63 units of peso per dollar.

The euro starts the session with a depreciation of 0.12%, trading at 1.2136 dollars per euro, while the pound loses 0.01% and is trading at 1.4111 dollars per pound.

Money market and debt

In the United States, the 10-year Treasury bond yield increased by 6.1 basis points, to 1.40%, while in Mexico the 10-year M bond yield increased by 1.1 basis points, at a rate of 6.02%.

Derivatives Market and the peso

To hedge against a depreciation of the peso beyond 21 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.43% and represents the right but not the obligation to buy dollars in the aforementioned level.

On the other hand, the interbank forward for sale is at 20.4393 at 1 month, 20.7763 at 6 months and 21.1846 units of peso per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE