• Emerging financial markets remained optimistic as in previous weeks. In particular, in Mexico country risk and the stock market improved, while the exchange rate appreciated (graph 1), as interest rates fell. Therefore, as we commented last week, in the emerging markets we find a surprisingly positive performance given the rises in long-term interest rates in the leading economic zones.

• There were mixed data for productive activity. In industrial production the 1% annual advance in September was disappointing. Nonetheless, its strong monthly growth dynamic, as well as other data, linked to the investment in August, exports in September and auto production in September and October suggest stronger growth for the coming months in its weakest component, the manufacturing sector. Construction, meanwhile, continues to show relatively weak growth, as in previous months. With the figure for September, the panorama for the industrial sector in the third quarter is completed: an advance of 0.6% for industry, 0.2% for manufacturing and 2.1% for construction, all of them lower than in the first half.

• For the overall economy, we are sticking to our 3.4% GDP estimate for the third quarter, which will be released on Wednesday (compatible with an advance of 2.9% for the year).

In August, productive investment registered its fastest annual growth rate in four months, i.e. up 10.2% (table 1), exceeding our expectation (9.2%). Seasonally-adjusted, it grew by 2.6% vs. July. Its advance was driven by machinery and equipment purchases, mainly imported goods, while construction maintained meager growth.

Results for the industry in October were mixed (table 2). Light vehicles improved substantially: exports grew (by 24.3%) and so did production (16.7%) –thus its accumulated advances in 2005 will return to positive rates. However, heavy motorized vehicle performance was not altogether favorable: foreign sales fell and production slowed significantly with respect to the two-digit rates registered throughout the greater part of the year.

The inflation result for October was good (table 3), in line with our estimate and below the consensus. Annual inflation again reached a historic low, and was practically in line with Banxico’s target of 3.0%. Nonetheless, we consider that the convergence of the result in October towards the official target is only temporary as inflationary pressures exist that will affect the performance of inflation during the last two months of the year.

In September, total manufacturing exports from Mexico registered a good annual growth-rate. Nevertheless, the U.S. foreign trade figures showed that Mexico’s products continued to lose their market share in the United States during the month (graph 2).

There were mixed data during the week. The economy maintains a good rate of growth, and the fall in energy prices in the past few weeks will help strengthen consumer spending in the next few months and to temper the inflationary pressures. A first reflection of this was the improvement in consumer confidence (graph 3) and the reduction in import prices. The growth of the trade deficit in September registered the effects of Hurricane Katrina on petroleum prices and production, and is expected to decline in October. The figures do not modify the expectation of at least two more increases in the FED’s reference rate.

The yield curve shows declines along its long section in parallel with the movement of external rates, and along the short section the decline of the 28-day to levels of 8.78% confirms market expectations that in November less monetary restriction will continue, an expectation that is strengthened by the good results for inflation in October and by the continuous downward adjustment in its expectations.

Figures for industrial production in September were mixed. Although in annual terms growth was deceptive, seasonally-adjusted it registered an acceleration in its monthly rate, this being the third consecutive positive monthly figure.

In terms of annual growth, which was lower than we were anticipating, the weakness of non-maquiladora manufacturing was surprising, given the good performance of its exports during the month and the production of one of its key branches, motorized vehicles. This suggests a contraction in production together with the other branches of the non-maquiladora segment. Meanwhile, construction, the second segment in terms of its weighting, continued to register a low annual growth rate.

Outlook and Forecast

On Wednesday, the figures for GDP in the third quarter will be released. We estimate an annual advance in the economy of 3.4% (the quarter annualized at around 10%), for the service sector 4.4%, industry 0.6% (now known) and farming 10%.

On Friday, the open unemployment rate for October will be released. We are expecting it to be 3.65% of the work force, after 3.7% in September.

Banamex Mexico

November 7, 2005