February 11, 2013 / 7:51 PM / 5 years ago

UPDATE 2-Mexico December industrial output slumps most since 2009

* December industrial output falls 2.1 percent vs November
    * Manufacturing dips, construction falls sharply

    MEXICO CITY, Feb 11 (Reuters) - Mexican industrial
production unexpectedly slumped in December by the most since a
deep recession four years ago as factories  and builders slowed,
bolstering bets that the central bank could cut interest rates.
    Industrial output fell 2.1 percent in December
compared to the previous month, its biggest drop since May 2009,
when Mexican factories were dragged down by a U.S. recession.
Mexico sends most of its exports to its northern neighbor.
    Mexico's central bank has said it could lower borrowing
costs if inflation continues to cool and growth slows in Latin
America's second biggest economy.
    "The central bank could use this as an incentive to lower
rates," said Alejandro Cervantes, an analyst at Banorte-IXE, who
is expecting a 50 basis point to 75 basis point cut in March to
Mexico's benchmark 4.50 percent rate.
    Yields on short term interest rate swaps edged
lower as the market increased bets on the chance of a 25 basis
point cut by March 8 to around 30 percent. The swaps market has
fully priced in a cut by April. 
    December's seasonally adjusted output data was below a 0.2
percent rate of growth seen in a Reuters poll and the upwardly
revised 1.28 percent month-on-month rate posted in November.
    Among industrial components, manufacturing contracted 1.07
percent in December from the previous month. Analysts said that
a drop in automobile production at the end of last year would
likely be compensated by a surge in January's output.
    Construction slid for its third month in a row, down 2.67
percent compared with November.
    President Enrique Pena Nieto took office in December and the
end of infrastructure projects from the previous administration
could have hit building, Marco Oviedo, an analyst at Barclays
Capital, wrote in a note to clients.
    Economists are divided about the chance of an interest rate
cut. About two out of five analysts now expect the central
bank's next move will be a cut - the same amount who think the
next move will be a hike, a survey by Banamex showed last week. 
    Solid U.S. demand has helped support Mexican factories amid
sluggish global growth. Mexico's economy is seen slowing from an
around 4 percent annual rate in 2012 to 3.5 percent in 2013.
    "The manufacturing sector will see less demand in the first
part of the year, and the appreciation of the peso could further
limit exports," Banorte-IXE's Cervantes said.
    Mexico's peso is trading more than 12 percent stronger from
a 2-1/2 year low hit in the middle of last year. The peso's
relative weakness since the 2008-2009 financial crisis has
helped boost shipments by Mexican exporters.
    Some analysts think the central bank would like to try and
curb peso strength by lowering the yield on Mexican debt.
    Starved by low interest rates in developed economies,
foreign investors have piled up record holdings of Mexican
peso-denominated debt and flows are expected to continue this
    Mexico has eschewed the types of direct market intervention
and capital controls that other emerging markets have used to
protect their exporters from strong local currencies. 
    Compared with December 2011, overall industrial
output dropped 1.1 percent, missing expectations for a 2.0
percent rise and worse than November's upwardly revised 2.9
percent expansion.
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