Mexico seems 'Ahead of the Curve'

Over the past couple of months, yield curves in the US have inverted. This also occurred earlier this year, but this time it is more pronounced and has lasted longer. Historically this points to a looming recession, which we believe the US economy is heading into, though it should be shallow. We looked at yield curves of EM countries to see where they have also inverted. Unsurprisingly, yield curves of the CE3 (Poland, Hungary, and the Czech Republic) have all inverted; this is consistent with our view that Europe faces one of the most challenging macro environments in the coming 6-12 months. We also found that Mexico, Brazil, and Chile all have inverted yield curves. Does this imply recessions in Latam’s largest economies? We don’t believe so. Both Mexico and Brazil have experienced high levels of inflation and their central banks have been ahead of the curve in combating this. Short term rates are high in both countries, but real rates are also positive now; monetary policy heavy lifting has already been done. For Mexico, it’s manufacturing exports are tied to the US, which will likely be a drag, but consumer spending should remain strong as real wages have been positive, and unemployment remains low. In addition, tourism is just returning, remittance flows are sound, and the government was one of the stingiest during Covid, so there is no need for fiscal belt tightening. And then there is the potential support of near shoring over the longer-term. In a low growth world, Mexico’s economy seems reasonably stable.