The peso starts the session with an appreciation of 0.90% or 18.1 cents, with the exchange rate trading close to 19.94 pesos per dollar, touching a minimum of 19.8932 and a maximum of 20.1287 pesos.

The main factors that favor the appreciation of the peso are the following:

First factor

In the United States, the non-farm payroll showed that 266 thousand job positions were created during April, well below market expectations of 1 million jobs.

Likewise, the increase in March was revised down to 770 thousand from 916 thousand. By sector, the greatest job creation was observed in leisure and hospitality with 330 thousand, offset by losses in sectors such as temporary help and courier services.

In April, the unemployment rate increased slightly from 6.0% to 6.1%, although if underemployed people are taken into account, that is, those who are working part-time and are willing to work longer hours, the unemployment rate decreased from 10.7 % to 10.4 percent.

The data represents an argument in favor of the Federal Reserve continuing to apply monetary stimulus, since the slowdown in job creation implies that the labor market could take longer to reach levels consistent with full employment.

Second factor

Inflation in April was at a monthly rate of 0.33% and an annual rate of 6.08%, slightly exceeding market expectations.

Monthly inflation was the highest for the same month since April 2009, when it stood at 0.35 percent.

Likewise, it was the highest annual inflation for the same month since April 2009 when it stood at 6.17 percent.

Taking into account any month, it was the highest annual inflation since December 2017, when it stood at 6.77 percent.

Headline inflation was driven mainly by the underlying component, which stood at 0.37% per month, explaining 84% of headline inflation in the month.

It should be remembered that the core component is core inflation, so inflationary pressures within it imply a greater upward risk for expectations.

At an annual rate, core inflation was 4.13%. Within core inflation, two different behaviors are observed in the sub components:

Raw materials and the peso

The merchandise component is responsible for a large part of the inflationary pressures of the month, rising at a monthly rate of 0.44% and an annual rate of 5.59%, with food, beverages and tobacco being the products with the highest monthly increase with 0.53% ( + 5.88% annually).

Among the 10 products with the highest monthly variation within merchandise, products related to grains and agricultural commodities stand out, including: vegetable oils and fats (+ 2.51% monthly), wheat flour (+ 2.23%) and corn tortilla (+1.83 %). These products show accumulated increases in the year of 6.80%, 5.07% and 6.09%, respectively.

For their part, the prices of services remain stable, rising at a monthly rate of 0.28% and an annual rate of 2.53%, although in the interior there is a monthly increase of 4.20% in the prices of air transport rates, which has up 4.52% in the year and 20.8% compared to the same month in 2020.

This is due to a gradual recovery in demand for this service in recent months.

Farm products

On the non-core component side, although it shows a significant annual inflation of 12.34%, during the month it showed a moderate inflation of 0.21 percent.

Significant monthly increases were observed in the prices of various products such as serrano pepper (+ 41.75% monthly), avocado (+ 29.46%) and tomato (+26.09 percent).

In the accumulated of the year, the greatest increase is observed in the green tomato with 39.67%, followed by the avocado with 39.49 percent.

In the rest of the agricultural products, the monthly increase in the prices of eggs (+ 2.95% per month), pork (+ 2.49%) and shrimp (+ 2.42%) stands out, with eggs showing the highest increase accumulated in the year with 8.75 percent.

The peso and gasoline

Finally, the energy component showed a monthly decrease of 2.15% due to a monthly decrease of 12.03% in electricity rates, given the entry into force of summer rates in some cities during the month.

However, monthly increases were observed in the prices of natural domestic gas (+ 1.78% per month), as well as in high-octane gasoline (+ 1.53%) and low octane (+0.43 percent).

The accumulated increases in the year of these three products amounted to 3.75%, 19.10% and 13.72%, respectively.

In summary, during the month inflationary pressures continued to be observed in the prices of merchandise, mainly food, as well as in some fruits and vegetables and mainly in livestock products, such as eggs.

Likewise, within the energy sector, the prices of natural domestic gas and high- and low-octane gasoline continued to rise at a monthly rate, although at a lower rate than in previous months.

Perspective

In the second half of April, biweekly inflation was 0.25% and 6.12 percent annually.

It is estimated that 1.31 percentage points of annual inflation in the second fortnight are explained by the comparison base effect, that is, by the decrease in prices that was observed in the same fortnights last year.

If this effect is eliminated, annual inflation would be at 4.81% in the second half of April and at 4.71% in the month (vs. the observation of 6.08 percent).

Because the inflation data for April was close to what was expected, the inflation expectation towards the end of the year is not modified, which is estimated at 5 percent.

Automotive section

Regarding economic indicators in Mexico, the administrative registry of the automotive industry corresponding to the month of April, showed that the production of cars was located in 269,180 units, observing an annual growth of 7.132% due to the low comparison base of the previous year .

In monthly terms, production showed a contraction of 11.32%, as a result of the shortage of semiconductors, which continues to threaten the automotive sector.

Among the companies affected by this problem are: General Motors, Volkswagen and Nissan, which will face technical stoppages during the month of May.

Automotive exports registered a total of 234,584 vehicles, growing at an annual rate of 653.3%, again due to the low comparison base, while at a monthly rate they decreased 8.41%, after last month’s growth.

Consumption in Mexico and the peso

Additionally, the Consumer Confidence Indicator corresponding to the April 2021 survey stood at 42.4 points, reaching its highest level since March 2020.

The recovery in consumer confidence is mainly due to the perception that households have of their own economic situation.

The component that exhibits the highest level of confidence is that corresponding to the expected economic situation of the household members within 12 months, with respect to the current one, while the second with the greatest advance is that of the current economic situation of the household compared to the one from 12 months ago.

During the session, the exchange rate is expected to trade between 19.90 and 20.12 pesos per dollar.

The euro starts the session with an appreciation of 0.53%, trading at 1.2129 dollars per euro, while the pound advances 0.43% and trading at 1.3949 dollars per pound.

Money market and debt

In the United States, the yield on 10-year Treasury bonds decreased by 6.3 basis points, to 1.51%, while in Mexico the yield on 10-year M bonds decreased by 3.9 basis points, at a rate of 6.75 percent .

Derivatives market and the peso

To hedge against a depreciation of the peso beyond 20.50 pesos per dollar, a purchase option (call), with an exercise date within 1 month has a premium of 1.39% 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 20.1436 at 1 month, 20.4972 at 6 months and 20.9457 pesos per dollar at one year.

 

Gabriela Siller; PhD

Director of Economic-Financial Analysis.

Banco BASE