Bloomberg News

Steak Prices Drive Inflation Bets as Peso Slumps: Mexico Credit

October 27, 2011

Oct. 27 (Bloomberg) -- Rising beef prices and a slumping peso are prompting bond investors to boost their inflation forecasts for Mexico by the most in four months.

The yield gap between inflation-linked debt due in 2013 and similar-maturity fixed-rate bonds, a gauge of investor expectations for price increases, swelled 16 basis points, or 0.16 percentage point, this week through yesterday, the biggest three-day increase since June. The so-called breakeven rate in Brazil fell 14 basis points during the same period while rising 11 in Colombia.

Inflation in Latin America’s second-biggest economy is quickening from an almost five-year low after the global sell- off in higher-yielding assets sparked a plunge in the peso, driving up the cost of imports, and cattle prices soared to a record. The peso sank 11 percent against the dollar in the past three months, the worst performance among major currencies after South Africa’s rand, as Europe’s debt crisis curbed demand for emerging-market assets.

The peso’s decline “is going to have a substantial impact on inflation,” Benito Berber, a strategist at Nomura Securities Inc. in New York, said in a telephone interview. “We should see price-setters in Mexico start to increase their prices.”

Yields on fixed-rate peso bonds maturing in 2013 climbed two basis points yesterday since the government said on Oct. 24 that consumer prices rose at the fastest pace in 11 months, to 4.53 percent, according to data compiled by Bloomberg. Yields on inflation-linked bonds due in 2013 fell 15 basis points during the same period to 0.70 percent.

Beef Prices

Consumer prices rose 0.61 percent in the first half of October, the national statistics institute, known as Inegi, said. The median estimate from analysts surveyed by Bloomberg was for prices to rise 0.45 percent. Annual inflation accelerated to 3.24 percent in the first half of the month from 3.14 percent at the end of September. Last month’s reading was within 0.1 percentage point of a five-year low reached in March.

Beef prices jumped 1.63 percent in the first half of October, while livestock rose 1.11 percent. Cattle futures in Chicago reached a record $1.24475 a pound on Oct. 17, in part because corn-feed costs surged in the first half of 2011 and a drought led to depleted herds in Texas.

Ricardo Munoz Zurita, owner and chef of Azul y Oro restaurants in Mexico City and author of the Encyclopedia of Mexican Gastronomy, said he’s paying 133 pesos for one kilo of beef fillets today, compared with 115 pesos a year earlier.

‘Absorbing’

“We’re absorbing that cost,” Zurita said in a telephone interview from Mexico City. “It means we should change our prices. We’re not doing it because it’s very hard to explain to the public why a dish that they were buying for 100 pesos today will cost 105 pesos tomorrow.”

Energy costs climbed 4.81 percent in the first half of October after a seasonal withdrawal of subsidies.

“We all knew this was going to happen, but we didn’t know it would be this much,” Sergio Martin, a Mexico City-based economist at HSBC Holdings Plc., said in a telephone interview. “That was the driver for a report well above what the market expected.”

While the central bank needs to be “more vigilant” about the so-called pass-through effect from a weaker peso, the Oct. 24 report doesn’t change the inflation outlook, said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit.

‘Favorable Inflation’

“One swallow does not make a summer, as we say here,” Luna said in a telephone interview from Mexico City. “For the purposes of the central bank’s evaluation of inflation and the outlook for monetary policy, it doesn’t alter the relatively favorable inflation scenario.”

A press official in the central bank didn’t respond to e- mail and voice messages seeking comment.

The central bank said on Oct. 14 that it is watching for signs of any “adverse” exchange-rate dynamics and that inflation expectations haven’t changed after a weakening of emerging-market currencies.

Yields on Mexican futures contracts for the 28-day TIIE interbank rate due in December rose one basis point today to 4.69 percent, indicating traders expect the central bank to cut borrowing costs that month by 25 basis points from a record low 4.5 percent to shore up growth.

The economic expansion will slow to 3.7 percent this year from 5.4 percent in 2010, according to the median prediction of 21 analysts in an Oct. 19 survey by Banamex. The U.S. economy, the destination for 80 percent of Mexican exports, will grow 1.7 percent this year, compared with 3 percent in 2010, according to the median estimate of 81 analysts surveyed by Bloomberg.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries fell 29 basis points to 191 at 4:15 p.m. Mexico City time, according to JPMorgan’s EMBI Global index.

Bearish Bets

The cost to protect Mexican debt against non-payment for five years dropped 21 basis points today to 130, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

The peso strengthened 2 percent to 13.1343 per U.S. dollar today, paring its decline this year to 3.5 percent.

The losses in the peso may worsen after investors placed bearish bets on the currency for the sixth straight week, the longest stretch since April 2009, according to the Commodity Futures Trading Commission. The difference in the number of wagers by investors on a decline in the peso compared with those on a gain was 24,129 on Oct. 18.

“As more people perhaps gather that there’s more of a permanent move in the foreign exchange going on, that can only shift higher inflationary expectations,” Bret Rosen, Latin America strategist at Standard Chartered Bank, said in a telephone interview from New York.

--Editors: Lester Pimentel, David Papadopoulos

To contact the reporters on this story: Jonathan J. Levin at jlevin20@bloomberg.net; Benjamin Bain in New York at bbain2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net


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