Mexico Retail Sales Unexpectedly Declined 2.2% in August

Mexican retail sales unexpectedly fell in August from the year earlier, missing analysts’ estimates for the third time in four months and reinforcing calls for the central bank to cut interest rates this week.

Retail sales dropped 2.2 percent, the nation’s statistics agency, known as Inegi, reported today on its website. The contraction was deeper than forecast by all 19 analysts surveyed by Bloomberg, whose median estimate was for a 1.2 percent increase.

Today’s report, combined with declines in auto sales and production in September, help boost the odds of a half-point rate cut this week, according to Goldman Sachs Group Inc.’s Alberto Ramos. All 24 economists in a survey released Oct. 7 by Citigroup Inc.’s Banamex unit expect the bank to reduce borrowing costs again by year-end after economic weakness from the first half of the year continued and hurricanes last month decimated crops, disrupted deliveries and emptied hotels.

Recent data “increase the probability that the central bank may elect to front-load the monetary easing cycle with a more decisive 50 basis-point cut-and-hold,” Ramos, the chief Latin America economist at Goldman Sachs in New York, said today in an e-mailed research note. He still forecasts a quarter-point cut on Oct. 25.

The peso extended its decline after the report, falling 0.6 percent to 12.9306 per U.S. dollar at 10:02 a.m. in Mexico City. Yields on fixed-rate government peso bonds due in December fell two basis points, or 0.02 percentage point, to 3.37 percent.

Swap Rates

Traders this month have stepped up their interest-rate wagers for Mexico as speculation builds that the U.S. government shutdown that ended last week curbed demand from the Latin American country’s top export market.

Swaps prices show that traders expect a quarter-point cut in the next six months, with a 32 percent chance of a half-point reduction to 3.25 percent. On Sept. 30, a day before the 16-day partial U.S. closure began, traders predicted that there was no chance rates would reach 3.25 percent by April.

Six-month swaps were unchanged today at 3.75 percent.

Banco de Mexico cut interest rates 0.25 percentage point to 3.75 percent on Sept. 6, surprising 19 of 20 economists in a Bloomberg survey who predicted no change. It was the most contested decision since the central bank began publishing minutes in February 2011, with two dissenters on the five-member board preferring to wait until the Federal Reserve clarified its strategy before changing the monetary stance.

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