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Game of Weaknesses: The Weight in the Middle

October 08, 2019

US economic indicators have shown less dynamism, both in manufacturing and services.

The September employment report was just 136,000 new jobs, below the average for the last 12 months, but enough to further reduce the unemployment rate from 3.7% to 3.5%.

This performance shows the limits to growth of an economy that operates at full employment, and that also faces high levels of uncertainty due to the economic war with China. The two superpowers move away from symbiosis and enter the fight for supremacy, with damaging effects on both sides.

In Mexico, investment remains depressed, while employment slows down significantly, and consumption (2/3 of GDP) shows a further weakening judging by WalMart's same-store sales, which increased by 3.1% nominal annually in September.

The only engine running is the export sector.

In this external and internal context, the markets expect the FED to further relax its monetary policy and for Banxico to continue decisively with the reduction of the 1-day TIIE rate, to cut the differential between peso and dollar rates at the end of the year to 5.3 percentage points, half a point below current levels.

If the reading of the rate futures markets is correct, the peso would be left with a downward bias (upward for the exchange rate) although a still high differential in yields in favor of instruments in pesos should moderate volatility.

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