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The Aftershocks of Mexico’s Political Quake

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The Aftershocks of Mexico’s Political Quake

Written by: Natalia Gurushina

The market continues to digest the unexpected resignation of Mexico’s Minister of Finance. China’s is facing producer price deflation (again), and this should keep the central bank in the accommodative mode.

The unexpected resignation of Mexico’s Minister of Finance Carlos Urzúa hit Mexican assets yesterday afternoon. According to President Andrés Manuel Lopez Obrador (AMLO), this was due to disagreements over “development plans for Mexico”.

One immediate concern is that these policy disagreements (as well as the quality of fiscal spending) might finally get noticed by rating agenciesAnother risk is that if the currency does not bounce back, the weakness can add to inflation pressures making it more difficult for the central bank to lower the policy rate. Importantly, there is a big issue about state-owned oil giant Pemex’s business plan and how Urzúa’s replacement, Arturo Herrera, would handle it.

Finally, the biggest concern is about AMLO’s true disposition—is he orthodox on economics or not? Urzúa’s resignation and criticism support the thesis that he is not. But on the other hand, new Minister of Finance Herrera has the right background and is respected by the market, which should address at least some concerns about the fiscal regime risk. We keep our eyes open…

“Food, glorious food” was the main driven of China’s inflation in June. Food prices rose by 8.3% year-on-year, compensating for the calming effect of softer domestic activity and keeping yearly headline inflation unchanged at 2.7% (see chart below). Unless there is a dramatic change in pork prices, headline inflation is likely to creep higher in the coming months, but we do not think that this will cause the central bank to tighten its policy stance. The economy—especially manufacturing—is facing major headwinds, and today’s below-consensus producer price growth (0% year-on-year) signals that the situation remains challenging.

The outlook is dim. The door for rate cuts is open. This was the gist of U.S. Federal Reserve (Fed) Chairman Powell’s congressional testimony this morning. The markets squealed in delight, sending the U.S. Dollar weaker and many risky assets stronger—except for the Mexican peso which is going through another apoplectic episode (see first paragraph). The consensus looks very comfortable pricing in two consecutive rate cuts in the US—one in July and another in September.

Related: China Drip Stimulus Softens Trade War Impact

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