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Quarterly Report
November 23, 2016
July - September 2016
Outline
2Quarterly Report July - September 2016
Monetary Policy1
Forecasts and Final Remarks5
External Conditions2
Inflation and its Determinants 4
Evolution of the Mexican Economy3
3
Conduction of Monetary Policy
Quarterly Report July - September 2016
The Mexican economy is one of the most integrated with the global economy, and, inparticular, with that of the U.S. Even if this has yielded considerable benefits, the domesticeconomy and financial markets have become more vulnerable to external events.
During the period covered by this Report, the Mexican economy faced a complex juncture.The outlook for the world economy became more challenging as a consequence of theelectoral process in the U.S. and its outcome, among other factors.
National financial markets were particularly hit by this events, registering a fall in assetprices and high volatility.
So far, the preemptive measures that Banco de México has adopted along this year haveprevented headline inflation and its expectations from being affected by the referred factors.
4Quarterly Report July - September 2016
It is still difficult to identify the elements that will define the economic policy stance of the U.S.regarding its bilateral relation with Mexico starting from 2017.
The Mexican authorities will continue to act cautiously and keeping a medium and longer termperspective.
In the short run, they will continue to carefully monitor the evolution of national financial markets,so as to take the necessary measures to maintain its sound functioning, in a coordinated manner.
Mexico is in a strong position to face this new environment, as a result of:
Actual and expected achievements in terms of public finance consolidation.
Implementation of preemptive monetary policy measures during the year.
A well-capitalized, solvent, and adequately liquid financial system.
An unprecedented structural reform process.
Nonetheless, it is inevitable to continue handling actual and emerging risks by furtherstrengthening the macroeconomic fundamentals of the country.
5
Banco de México continued acting with full flexibility, and at the moment and extentrequired by the prevailing conditions, in order to offset inflationary pressures and tomaintain inflation expectations anchored.
Quarterly Report July - September 2016
August 11, 2016 Rate unchanged at 4.25 percent.
50 bp increment to 4.75 percent.September 29, 2016
50 bp increment to 5.25 percent.November 17, 2016
As volatility in financial markets in Mexico spiked, negatively affecting the dynamics ofthe national currency and, thus, endangering the anchoring of inflation expectations.
As the national economy faces an environment characterized by increased uncertaintyand a possibly permanent real shock, as well as to the deterioration of the balance ofrisks for inflation.
Monetary Policies Rates%
1/ Before January 20, 2008 it refers to the observed Overnight Interbank Interest Rate.2/ The upper limit of the target range is showed.Source: Federal Reserve and Banco de México.
0
2
4
6
8
10
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
U.S.: Target Federal Funds Rate 2/
Mexico: Target for the Overnight Interbank Interest Rate 1/
November
6Quarterly Report July - September 2016
So far, in 2016 Banco de México has preemptively increased the Overnight Interbank InterestRate by 200 basis points, in view of an increasingly adverse external environment.
Outline
7Quarterly Report July - September 2016
Monetary Policy1
Forecasts and Final Remarks5
External Conditions2
Inflation and its Determinants 4
Evolution of the Mexican Economy3
8
External Conditions
Quarterly Report July - September 2016
The outlook for the world economy became more complex as a consequence of theelectoral process in the U.S. and its outcome, among other factors.
Despite some signs of a moderate recovery of the world economy in Q3 2016, the possibleimplementation of measures that could hamper foreign trade and foreign investment led toa deterioration in the balance of risks for the global growth.
This led to increased financial market volatility in all regions.
Capital inflows to emerging economies started to revert. Interest rates exhibited an upward trend, both in advanced and emerging
economies.
Quarterly Report July - September 2016 9
In Q3 2016, world economic activity recovered moderately, supported by greater growth inthe U.S. and other advanced economies, as well as by a continuous expansion of some of themain emerging economies.
0
2
4
6
8
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
GDP Growth ForecastsAnnual % change
-25
-20
-15
-10
-5
0
5
10
15
20
25
20
00
20
02
20
05
20
08
20
10
20
13
20
16
Trade of Goods 1/
Annual % change, s. a.
Source: IMF, WEO July and October, 2016. 1/ Refers to the sum of imports and exports.s. a. / Seasonally adjusted data.Source: CPB Netherlands.
World Economy
August
ForecastsWEO OctoberWEO July
Advanced
World
Emerging
Quarterly Report July - September 2016 10
Change in Non-farm Payrolls and Unemployment Rate
Thousands of jobs and % of EAP, s. a.
Personal Consumption Expenditures Price Indexand Inflation Expectations
Annual % change
EAP/ Economically Active Population.s. a. / Seasonally adjusted data.Source: Bureau of Labor Statistics (BLS).
1/ Expected inflation over the five-year period that begins five years from today. Obtained from swap contracts in whichone counterparty agrees to pay a fixed rate in exchange for receiving a referenced payment at an inflation rate over aspecified period.Source: JP Morgan.
2
3
4
5
6
7
8
9
10
11
-800
-600
-400
-200
0
200
400
600
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Change in Non-farm Payrolls
Unemployment Rate
October
United States
In the U.S., economic activity rebounded in Q3 2016. Although inflation remains low, inflationexpectations spiked, largely in response to the expectation of an expansionary fiscal policy that wouldbe, in principle, carried out by the incoming administration of the U.S.
0.0
0.3
0.6
0.9
1.2
1.5
1.8
2.1
2.4
2.7
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Inflation Expectations 1/
PCE: Headline
PCE: Core
SeptemberNovember
11
In light of a higher expected inflation in the U.S., the markets’ perspective points to relatively faster and greaterincrements in the federal funds rate. Meanwhile, interest rates in the main advanced economies went up as ofOctober.
-0.7
-0.4
-0.1
0.2
0.5
0.7
1.0
1.3
1.6
Oct
-13
Feb
-14
Jun
-14
Oct
-14
Feb
-15
Jun
-15
Oct
-15
Feb
-16
Jun
-16
Oct
-16
Feb
-17
Jun
-17
Oct
-17
Feb
-18
Jun
-18
Oct
-18
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan
-16
Feb
-16
Mar
-16
Ap
r-1
6
May
-16
Jun
-16
Jul-
16
Au
g-1
6
Sep
-16
Oct
-16
No
v-1
6
Advanced Economies: Expected Monetary Policy Rates 1/
%
Advanced Economies: 10-Year Government Bond Interest Rates
%
United States: DXY and Trade-Weighted US Dollar Index
Index 01-Jan-2015 = 100
1/ OIS: Fixed-For-Floating swap where the fixed interest rate is the reference rate.2/ Data for the observed federal funds rate corresponds to the average between thelower and upper bounds of the range (0.25% - 0.5%).Source: Banco de México with data from Bloomberg.
Source: Bloomberg. 3/ DXY index is estimated by the Intercontinental Exchange (ICE) based on theweighted geometric mean of the dollar’s value compared with a basket of 6 othermajor currencies which are: EUR: 57.6%, JPY: 13.6%, GBP: 11.9%, CAD: 9.1%, SEK:4.2% and CHF: 3.6%. Base=100. 4/ Trade-Weighted Index of the Federal Reserve;main trade partners: China (21.3%), Euro Zone (16.38%), Canada (12.7%), Mexico(11.9%), Japan (6.9%), South Korea (3.9%), United Kingdom (3.35%).Source: Bloomberg.
Quarterly Report July - September 2016
Federal Reserve 2/
ECB Deposit Facility
Bank of England
Bank of Japan
ECB Main Refinancing Operations
Dec.-16 Dec.-17
November
United States
Euro Zone
United Kingdom
Japan
Implied target rate in OIS curveNovember 7, 2016
Implied target rate in OIS curve November 22, 2016
97
100
103
106
109
112
115
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
DXY 3/
Trade-Weighted Index (TWI) 4/
November
15
25
35
45
55
65
75
85
95
105
115
125
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Mexican Oil Mix
WTI
Futures 1/
International commodity prices presented a mixed performance during the periodanalyzed in this Report.
Crude Oil PricesUSD per barrel
Commodity PricesIndex 2005=100
1/ Data up to November 22, 2016.Source: Bloomberg. Source: International Monetary Fund.
12Quarterly Report July - September 2016
40
60
80
100
120
140
160
180
200
220
240
260
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Total
Energy
IndustrialMetals
Food
October
Quarterly Report July - September 2016 13
Currency Option Implied Volatility 1/
%Accumulated Capital Flows
(Debt and Equity) 2/
Billions of dollars
Nominal Exchange Rate against USD
Index 01-Jan-2015 = 100
1/ The minimum (maximum) value represents the lowest (highest) value inthe volatility of a sample with currencies from Brazil, Chile, Colombia,Turkey, South Africa, South Korea and Indonesia.Source: Bloomberg.
2/ The sample covers funds used for the buying-selling of stocks and bondsfrom emerging countries, recorded in advanced countries. Flows excludeportfolio performance and changes in the exchange rate.Source: Emerging Portfolio Fund Research.
Source: Bloomberg.
Volatility in international financial markets rebounded in all regions, mainly as a reflection of events related tothe electoral process in the U.S. Thus, capital inflows to emerging economies started to revert as of Novemberand their currencies depreciated.
-90
-70
-50
-30
-10
10
30
50
70
90
110
1 4 71
01
31
61
92
22
52
83
13
43
74
04
34
64
95
2
Weeks
2008
2009
2012
2013
2014
2015
2011
2016 16-Nov.
90
100
110
120
130
140
150
160
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Korea
Chile
Colombia
South Africa
Brazil
Mexico
November5
10
15
20
25
30
35
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
November
Maximum
Minimum
Mexico
Average
Emerging Markets
Outline
14Quarterly Report July - September 2016
Monetary Policy1
Forecasts and Final Remarks5
External Conditions2
Inflation and its Determinants 4
Evolution of the Mexican Economy3
0.1 0
.6-0
.1-1
.9
-3.9
-1.0
2.1
1.7
1.3 1.4
0.9
0.8 1
.00
.91
.50
.80
.71
.50
.20
.90
.4-0
.81
.10
.4 0.5
1.0
0.4 0
.70
.6 0.8
0.6
0.5 0.5
0.1
1.0
-5
-4
-3
-2
-1
0
1
2
3
4
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
In Q3 2016, the Mexican economy recovered moderately.
Quarterly % change, s. a. Annual % change
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
Q3 2016
15Quarterly Report July - September 2016
2.2
3.1
1.6
-1.1
-5.2
-7.9
-4.6
-1.0
3.7
6.7
5.4
4.6
4.5
3.2
4.2 4.3 4
.94
.53
.2 3.6
1.0
1.8
1.6
1.1
2.3
1.8 2
.3 2.7 2.8
2.5 2
.82
.42
.3 2.6
2.0
-9
-6
-3
0
3
6
9
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Gross Domestic Product
Q3 2016
70
80
90
100
110
120
130
140
150
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Quarterly Report July - September 2016 16
This recovery reflected the reactivation shown by the services’ sector, while industrial production,overall, remained stagnant.
Global Indicator of Economic Activity Index 2008=100, s. a.
Industrial ActivityIndex 2008=100, s. a.
Global Indicator of Economic Activity: Services
Index 2008=100, s. a.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
s. a. / Seasonally adjusted data.Source: Monthly Indicator of Industrial Activity, Mexico’s System ofNational Accounts, INEGI.
s. a. / Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
September
Transport and Mass Media
Financial and Real Estate
Leisure and Others
Trade
80
90
100
110
120
130
140
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
Mining
Manufacturing
Construction
Electricity
September70
80
90
100
110
120
130
140
150
160
170
90
95
100
105
110
115
120
125
130
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Services
Total
Industrial
Agricultural
September
Total
Quarterly Report July - September 2016 17
In Q3 2016, manufacturing exports in Mexico recovered, after showing a negative trend throughout2015 and early 2016. Crude oil exports also increased.
Manufacturing ExportsIndex 2008=100, s. a.
Oil Exports and Crude Oil Export PlatformIndex 2008=100, s. a.
s. a. / Seasonally adjusted data based on information in nominal dollars.Source: Banco de México with data from SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG.Information of National Interest.
s. a. / Seasonally adjusted data based on information in nominal dollars.1/ 3-month moving average of daily barrels of the seasonally adjusted series.Source: SAT, SE, Banco de México, INEGI. Merchandise Trade Balance, SNIEG. Information of NationalInterest, and Banco de México with data from PMI Comercio Internacional, S.A. de C.V.
70
80
90
100
110
120
130
140
150
160
170
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
30
40
50
60
70
80
90
100
110
120
130
140
150
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Total
U.S.
Rest of the World
September
Oil Exports
Crude Oil Exports Platform 1/
September
Quarterly Report July - September 2016 18
The current account seems to have stabilized, reflecting, in part, that the non-oil trade balance has apparentlystarted to improve, after its deficit expanded from 2014 to 2015. Indeed, the accumulated deficit of thisbalance over the first three quarters of 2016, has been the lowest since 1996.
-4.0
-3.0
-2.0
-1.0
0.0
1.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
Q1
-20
16
Q2
-20
16
Q3
-20
16
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
8,000
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Total
Current Account 1/
% of GDP
Trade BalanceUSD millions
Non-oil Trade BalanceJanuary-September of each year,
USD millions
1/ Data for Q3 2016 correspond to Banco de México’s estimate.Source: Banco de México and INEGI.
Source: SAT, SE, Banco de México, INEGI. Merchandise TradeBalance, SNIEG. Information of National Interest.
Source: SAT, SE, Banco de México, INEGI. Merchandise TradeBalance, SNIEG. Information of National Interest.
Q3 2016
Oil
Non-Oil
Q3 2016-30,000
-25,000
-20,000
-15,000
-10,000
-5,000
0
5,000
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
Sep 2016
12.0
17.0
22.0
27.0
32.0
37.0
42.0
1.6
1.8
2.0
2.2
2.4
2.6
2.8
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
-10
0
10
20
30
40
50
20
12
20
13
20
14
20
15
20
16
90
95
100
105
110
115
120
125
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
19
Domestic Private Consumption 1/ and Commercial Retail Business Revenues
Index 2008=100; s. a.
Commercial Banks’ Consumer Performing Credit 2/
Real annual % change
Workers’ RemittancesUSD billions and
constant MXN billions; s. a.
s. a. / Seasonally adjusted data.1/ The Monthly Indicator of Private Consumption measures the performance ofspending by resident households in the country on consumer goods and services ofnational and external origin. It does not include net purchases in foreign markets andimported services.Source: EMEC and SCNM, INEGI.
2/ It includes Sofomes ER subsidiaries of bank institutions and financial groups.3/ It includes credit for payable leasing operations and other consumer credits.4/ From July 2011 onwards, figures are adjusted in order to avoid distortions dueto the reclassification from acquisition of consumer durables to other consumercredits by one banking institution.5/ It includes credit for movable property acquisition and auto loans.Source: Banco de México.
s. a. / Seasonally adjusted data.6/ Prices as of the second fortnight of December 2010.Source: Banco de México.
Quarterly Report July - September 2016
Retail Revenues
Private Consumption
August
Private consumption resumed its upward trajectory, consistent with the improvement in the real wage bill. Italso benefitted from the continued and rapid expansion of consumer credit, as well as from higher flows ofremittances.
Total 3/
Credit Cards
ACD 4/ 5/
Personal
Payroll
September
USD
Pesos 6/
September
20
During the reported quarter, weakness in gross fixed investment persisted.
60
70
80
90
100
110
120
130
140
150
160
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Investment and its ComponentsIndex 2008=100, s. a.
50
70
90
110
130
150
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Real Value of Production in the Construction Industry by Contracting Institutional Sector 1/
Index January 2008=100, s. a.
s. a./ Seasonally adjusted data.Source: Mexico’s System of National Accounts, INEGI.
s. a./ Seasonally adjusted data.1/ Seasonally adjusted by Banco de México, except the total.Source: Calculated by Banco de México with data from ENEC, INEGI.
Quarterly Report July - September 2016
August August
Construction
Imported Machinery and Equipment
Total
National Machinery and Equipment
Private
Total
Public
-10
-8
-6
-4
-2
0
2
4
6
8
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Quarterly Report July - September 2016 21
No significant price pressures coming from aggregate demand were observed.
Output Gap 1/
% of potential output; s. a.
s. a. / Calculated with seasonally adjusted data.1/ Estimated using the Hodrick-Prescott (HP) filter with tail correction method; see Banco de México (2009), “Inflation Report April-June 2009”, p. 69. The shaded area is the 95% confidence interval of the output gap, calculatedwith an unobserved components method.Source: Calculated by Banco de México with data from INEGI.
GDP
IGAE
SeptemberQ3 2016
85
90
95
100
105
110
115
120
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
80
85
90
95
100
105
110
115
120
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Quarterly Report July - September 2016 22
In Q3 2016, overall labor market conditions seemed to have continued gradually improving.
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
September
IMSS-Insured Jobs, Employed Population and Total IGAE
Index 2012=100, s. a.
National Unemployment Rate% of EAP, s. a.
Real Total Wage BillIndex Q1-2008 =100, s. a.
s. a. / Seasonally adjusted data.1/ Permanent and temporary workers in urban areas. Seasonally adjusted byBanco de México.Source: Calculated by Banco de México with data from IMSS and INEGI (SCNMand ENOE).
EAP/ Economically Active Population.s. a. / Seasonally adjusted data.Source: National Employment Survey (Encuesta Nacional de Ocupación yEmpleo), INEGI.
s. a. / Seasonally adjusted data.Source: Elaborated by Banco de México with data from National EmploymentSurvey (Encuesta Nacional de Ocupación y Empleo), INEGI.
Q3 2016September
October
Employed Salaried
Population
Real Average Income
Real Wage Bill
Q3 2016
IMSS-affiliated Jobs 1/
Employed Population Total IGAE
Outline
23Quarterly Report July - September 2016
Monetary Policy1
Forecasts and Final Remarks5
External Conditions2
Inflation and its Determinants 4
Evolution of the Mexican Economy3
1
2
3
4
5
6
7
8
9
10
11
12
13
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
As of September 2016, annual headline inflation registered 17 consecutive months at levelsunder 3 percent, although in October it lied slightly above this figure.
Consumer Price IndexAnnual % change
Source: Banco de México and INEGI.
Headline
CoreVariability Interval
Non-Core
24Quarterly Report July - September 2016
October
Quarterly Report July - September 2016 25
The performance of core inflation is mainly explained by the evolution of themerchandise price sub-index, which responded to the depreciation of the nationalcurrency.
Source: Banco de México and INEGI. Source: Banco de México and INEGI.
0
1
2
3
4
5
6
7
8
9
10
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Merchandise
Core Price IndexAnnual % change
Merchandise and Services
0
1
2
3
4
5
6
7
8
9
10
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
October October
Merchandise
Non-foodServices
Food
-15
-12
-9
-6
-3
0
3
6
9
12
15
18
21
24
27
30
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Agriculture
Livestock
Higher non-core inflation largely derived from increments in gasoline prices, which werepartially offset by drops in the L.P. gas prices.
Agriculture Energy and Government Approved Fares
Source: Banco de México and INEGI. Source: Banco de México and INEGI.
Non-Core IndexAnnual % change
Fruits and Vegetables
Enero
26Quarterly Report July - September 2016
-3
0
3
6
9
12
15
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Energy and GovernmentApproved Fares
Energy
Government Approved Fares
October October
Quarterly Report July - September 2016 27
Long-term inflation expectations derived from surveys and from market instruments remainaround 3 percent.
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Headline Inflation Expectations for Different Terms Median, %
1/ For a description of the estimation of log-term inflation expectations, see the Box “Decomposition of Break-even Inflation” in the Quarterly Report, October – December 2013. Forthe current Report, the estimate was updated by including data as of December 2015.Source: Banco de México.
October
Next 4 years
Variability Interval
End of 2016 End of 2017
Long-term (Market Instruments) 1/
Next 5-8 years
4
7
9
12
14
17
19
22
24
27
29
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
12.5
13.5
14.5
15.5
16.5
17.5
18.5
19.5
20.5
21.5
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Quarterly Report July - September 2016 28
Episodes of high volatility in financial markets, mainly related to the electoral process in the U.S., ledto high volatility and a considerable depreciation of the national currency.
Nominal Exchange Rate 1/
Pesos per USDCurrency Option Implied Volatility 2/
%
1/ Refers to FIX Exchange rate. The black vertical line indicates January 1, 2016 and the dotted lineindicates September 29, 2016.Source: Banco de México.
2/ Currency option implied volatility refers to one-month options. The black vertical line indicatesJanuary 1, 2016 and the dotted line indicates September 29, 2016.Source: Bloomberg.
Observed Exchange Rate(last data 22-Nov) 20.52
November November
Depreciation
Regarding the bond market performance, following the announcement of the results in the U.S.elections, the upward trend in interest rates sharply strengthened, especially along the longer endof the yield curve.
Government Bond Interest rates 1/
%Yield Curve
%
1/ Since January 21, 2008, the one-day (overnight) interest rate corresponds to the target for theOvernight Interbank Interest Rate.Source: Banco de México and Proveedor Integral de Precios (PiP) Source: Banco de México and Proveedor Integral de Precios (PiP).
2
3
4
5
6
7
8
9
10
20
11
20
12
20
13
20
14
20
15
20
16
1 day
10 years
30 years
1 year
3 months
2 years
29Quarterly Report July - September 2016
November2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
1 1 3 6 1 2 3 5 10 20 30
Months YearsDay
30-Jun-16
22-Nov-16
31-Mar-16
30-Sep-16
6 months
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan
-15
Mar
-15
May
-15
Jul-
15
Sep
-15
No
v-1
5
Jan
-16
Mar
-16
May
-16
Jul-
16
Sep
-16
No
v-1
6
Quarterly Report July - September 2016 30
Even though the operating conditions in the national bond markets deteriorated recently,government securities’ holdings by non-residents remained stable at levels close to historicmaximums.
Mexico and United States Interest Rate Spreads 1/
Percentage pointsGovernment Securities’ Holdings by Foreign Investors 2/
MXN billion
1/ The United States objective rate is the average of the interval considered by the Federal Reserve.Source: Proveedor Integral de Precios (PiP) and U.S. Treasury Department.
2/ The total includes CETES, bonds, udibonos, bondes and bondes D.Source: Banco de México.
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
0
500
1,000
1,500
2,000
2,500
Mill
ares
November
Total
Bonds
CETES
2 years6 months
3 months
1 day
1 year
November
30 years
10 years
Outline
31Quarterly Report July - September 2016
Monetary Policy1
Forecasts and Final Remarks5
External Conditions2
Inflation and its Determinants 4
Evolution of the Mexican Economy3
Quarterly Report July - September 2016 32
Fan Chart: Output Gap% of potential output, s. a.
s. a. / Seasonally adjusted data.Source: Banco de México.
Economic Activity Outlook
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
-7
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
7
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4
2016Q4
2017 Q4
2018Q4
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Current Account Deficit
(% of GDP)
Report Previous Revised
2016 3.1 3.0
2017 3.2 3.0
2018 -- 3.0
Increase in the number of IMSS-insured jobs
(Thousands)
Report Previous Revised
2016 590 - 690 640 - 710
2017 610 - 710 600 - 700
2018 -- 650 - 750
GDP Growth
(%)
Report Previous Revised
2016 1.7 - 2.5 1.8 - 2.3
2017 2.0 - 3.0 1.5 – 2.5
2018 -- 2.2 - 3.2
That the new administration of the U.S. would indeed implement policies that could hamper the functioning ofshared production chains between Mexico and the U.S.
Persisting episodes of high volatility in international financial markets, which would reduce the sources of financingor foreign investment to Mexico.
That the implementation of structural reforms would have a more positive impact on the economic growth and willbe faster than anticipated.
Risks to the Growth Outlook
Downward:
Upward:
33Quarterly Report July - September 2016
That, in view of the recent depreciation of the exchange rate, non-oil exports would exhibit a more noticeable andlasting recovery, which would further boost industrial production.
That the deterioration that had been observed in consumers’ and investors’ confidence levels would persist,affecting private consumption and investment.
Inflation Outlook
Core inflation
20
16 • It will gradually increase and will lie
slightly above 3 percent by the end ofthe year.
34Quarterly Report July - September 2016
Headline inflation
20
18
• It will be above the inflation target, although within the variability interval.
• It is forecast to close the yearmoderately above 3 percent.
20
17
• It will be close to levels around 3 percent by the end of the year.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4
Observed
Headline Inflation Target
Variability Interval
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4Q2Q4
Observed
Headline Inflation Target
Variability Interval
Annual Headline Inflation 1/
%Annual Core Inflation 2/
%
1/ Quarterly average of annual headline inflation.Source: Banco de México and INEGI.
2/ Quarterly average of annual core inflation.Source: Banco de México and INEGI.
Fan Charts
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
35Quarterly Report July - September 2016
2016 Q4
2018 Q4
2017 Q4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
2016 Q4
2018 Q4
2017 Q4
Annual inflation is forecast to lie slightly over 3 percent by the end of the year. For 2017, it is anticipated to beabove the inflation target, although below the upper limit of the variability interval, getting close to levelsaround 3 percent by the end of 2018.
Downward Upward
That the depreciation of the national currencywould persist or become accentuated, whichwould contaminate inflation expectations andgenerate second round effects, which wouldnegatively affect the price-setting process.
36
Further reduction in prices of widely used inputs,such as telecommunication services, as aconsequence of structural reforms.
Quarterly Report July - September 2016
Risks to the Inflation Outlook
That the deceleration of the national economicactivity would accentuate.
Price increments in agricultural products andgasoline, although their impact on inflation wouldbe transitory.
Quarterly Report July - September 2016 37
Monetary Policy Stance
Recent international events could impact the structural links between Mexico andits main trade partner. In this context, it is both natural and necessary to observe adepreciation of the real exchange rate, being the most efficient adjustmentmechanism and shock absorber.
The main contribution of Banco de México during this adjustment process, givenits mandate, is to ensure that changes in relative prices take place in an orderlyfashion, in order to prevent inflation expectations from being contaminated, andto avoid second round effects, which would negatively impact the price-settingprocess of the economy.
Quarterly Report July - September 2016 38
Monetary Policy Stance
The Board of Governors will closely monitor the evolution of all inflation determinants and itsmedium- and long-term expectations, especially:
→ This will be done in order to be able to continue taking the necessary measures to consolidate theefficient convergence of inflation to its 3 percent target, with full flexibility and to the extent that theprevailing conditions may demand.
The possible pass-through of exchange rate adjustments onto prices, without implying anypreset or desired level for the exchange rate.
The monetary position of Mexico relative to that of the U.S., without overlooking the evolutionof the output gap.
Quarterly Report July - September 2016 39
Strengthening Confidence in the Mexican Economy
It is indispensable to continue implementing structural reforms adequately andpromptly, as they would boost the country’s productivity and would allow a betterresource allocation.
In addition, structural reforms will allow fostering greater sustained growth in thedomestic market, which will contribute to offset the effects of the deeply adverseexternal environment faced by the Mexican economy.
Current risks to the trade relation between Mexico and the U.S. highlight theimportance of diversifying Mexican exports’ destinations.