The Market

Both Mexico and Europe are positioned to lower interest rates due to lower inflation.

Mexican bonds, CETES, yield approximately 5% more than Euro area bonds.

Lower interest rates will probably lead to lower currencies, as the yield investors get by investing in a country goes down.

When comparing investments in Mexico and the Euro area in this time of lower interest rates and possibly lower currencies, we have investigate whether the Mexican 5% yield is worth the risk and sustainable.

If the currencies do not change in value, Mexico will still provide a better yield to the investor when they bring the money home.

If the Mexican peso decline versus the US dollar is 5% greater than the Euro decline against the dollar, Euro area bonds are probably a better investment.

If the Mexican peso declines less against the US dollar than the Euro, Mexican bonds look best.

So, we have to look at the currencies.

Since January 20, the day President Trump hinted at tariffs, the Euro has gone up in value 2% versus the US dollar, and the Mexican peso is basically unchanged. Neither currency seems to have been shaken by the tariff threat yet.

If this holds, and the peso and Euro hold their present values against the the US dollar, the decision of investing in Mexico versus Europe leans to Mexico.

This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.

Due to better inflation and employment metrics, US Fed has been able to reduce their core interest rate in the last twelve months, which could be termed a success.

But the market, the entity that determines new issue bond prices and trading, doesn’t seem to agree. In the last twelve months, the US Fed rate has gone down, but the US Ten-Year bond rate has gone up from 4.2% to 4.6%, and the 30 year mortgage rate is over 7%.

Why does the market disagree with the Fed? Is there something the market fears in the future that is taking precedence over the US Fed?

Perhaps. Some potential concerns are:

* What will president Trump’s policies really be?

* Is the US Fed next interest rate move up?

* Will US government finances worsen and borrowing go up?

Of the three it seems borrowing going up is the biggest fear.

Regarding US borrowing, some very smart, savvy investors are starting to express concern about rising US borrowing and spending, the fiscal condition.

In a time when US government debt is high and looking to go higher, there is actually talk about raising or getting rid of the US debt ceiling.

Is the US headed towards a debt crisis? Too early to tell.

But, what we do know is that the market and US Fed disagree. Disagreement breeds uncertainty, and in times of uncertainty short-term bonds make sense.

This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.

When consensus was for the US Federal Reserve to cut interest rates multiple times in 2025, many advisors were telling clients to sell short-term bonds and buy longer-term maturity bonds.

It hasn’t happened, and investors seem to have stayed in short-term bonds.

Two things may explain this 1) Recency Bias and 2) Risk Aversion.

First, US short-term interest rates may be low at about 4.3%, but coming out of the Global Financial Crisis interest rates were about 0%.

The ten-year US government bond was 1.6% ten years ago. It is now 4.6%.

When today’s yields are compared to these, they don’t look so bad.

Second, bonds involve more risks than people think. As short-term bonds are normally less risky than long-term bonds, when risk is on the rise, short-term bonds normally outperform long-maturity bonds.

Bond market risks include: the US Federal Reserve not cutting rates multiple times in 2025, US inflation staying high, and US government borrowings rising excessively.

In all these scenarios, short-term bonds should do better than longer-term bonds.

The good new is that you can find variety in short-term bonds. If you don’t like US yields you can buy Mexican or Brazilian. When an investors buys Mexican or Brazilian bonds they get higher yields and the benefit of being short-term

This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.

There’s a lot of debate regarding the application of tariffs on US imports. Some say they will be severe, and some say gradual.

We comment on severe.

Severe tariffs from the US will weaken currencies versus the US dollar, and potentially stimulate inflation in the exporting country. Put simply, a lower currency versus the US dollar boosts exports, but also raises the price of imported goods.

In Latin America, Mexico seems best positioned to deal with tariffs. Mexico’s inflation rate has been coming down and is near the government target ceiling. So, there is a little room for inflation to go up. Furthermore, the currency has stabilized since the beginning of the year.

Brazil is not so fortunate. Brazil’s inflation has little room to go up and the government clings to the idea of raising interest rates this year. Higher interest rates could lead to slower economic growth, and a weaker currency could lead to higher inflation-not a good combination.

Severe tariffs could push the Euro to parity, 1:1, versus the US dollar, which would be inflationary. At the same time, europe’s economy could benefit from lower interest rates, but if inflation increases that probably won’t happen.

What to watch to gauge the impact of tariffs on exports? We will be watching the Baltic Dry Index, an index that tracks rates for ships carrying dry bulk commodities.

The rate rose from 1,400 to 1,800 right after the US Presidential election, and has now gone down to 1,023. It seems to be a good indicator of trade and tariff impact.

This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.

The US, UK, Europe, and other countries are fretting about inflation, and investors are concerned.

Those that are concerned about inflation may want to take a look at Mexico, a standout in global markets.

Mexican inflation has gone down three times in the last three months. At 4.21% as of December, inflation is close to the Bank of Mexico’s target range of 2-4%.

The Bank of Mexico meets February 6, 2025 and rate cuts could be on the table.

If Mexico were a student and this was a parent teacher conference, it would be excellent, head of the class.

Investor hesitancy regarding Mexico seems to be centered on two ideas; potential US tariffs and the value of the Mexican peso.

Based on recent murmurs out of Washington, tariffs may not be as bad as expected.

Regarding the peso, after a 20 plus percent fall versus the US dollar in 2024, the peso seems to be stabilizing. On the day of the recent US CPI release, the peso strengthened a little. Year to date it is a little up.

If more US Interest rates cuts are coming, the peso could remain stable.

A combination of a stable currency and 8 plus percent yields on CETES seems like a good proposition.

A proposition that would take any

If it was not for the threat of the incoming US tariffs, Mexico would be one of the most attractive investments in the world, both in bond and currency terms.

In mid-December Mexico cut interest rates for a fourth straight month. Inflation has not picked up, so there may be more cuts to come.

At the same time, the APY on CETES is over 9 percent.

Right now, investors are putting more weight on the impact of potential tariffs. Yes, if tariffs are introduced the currency will come under pressure, high CETES APY or not. But the issue of tariffs will disappear at some time in 2025. They will be announced, accepted, there may be a market reaction, and then things will go on as normal.

Perhaps a Dollar Cost Averaging Strategy over the next three months makes sense.

In the long term, economic fundamentals, like controlled inflation and stable monetary policies, will win out against short-term issues like tariffs.

The Euro versus the US dollar is down 8% since September 2024, to a level of 1.02, close to parity.

Some predict the Euro could reach parity by the end of January.

Drivers of the route to parity:

* Political uncertainty in Germany and France.

* Threat of US tariffs making exports more expensive.

* Severe uncertainty in bonds and the government budget in Europe’s neighbor the UK.

* Low interest rates making yields less attractive versus the UK and US.

What can reverse this path?

* US tariffs being more bark than bite.

* Positive election outcomes in Germany and France.

* Unchanged interest rates.

* An end to the Russia Ukraine conflict.

* An upturn in economic data.

Key data to watch

* Purchasing Managers Indexes (PMIs).

* Recent PMIs have been good. If they continue, perhaps some hope.

* Next PMI is January 20, 2024, the day of US Presidential inauguration.

More PMIs will come out towards the end of January and should be watched.

The US interest rate outlook for 2025 has been like a tennis match. The opponents were 2 US interest rate cuts versus 4 in 2025.

In the first ten days of January, 2 cuts routed 4 cuts.

Data on US jobs, employment and inflation changed the game. Employment numbers were good and inflation expectations are up.

Bond yields are up, and stock market outlook may be in question.

Upcoming data will be key to watch:

* January 14, 2025 Purchasing Price Index.

* January 15 Core CPI.

* January 16 US Retail Sales for December.

* January 17 Housing starts and building permits.

Stay Tuned.

Imagine you budget savings over time for a nice vacation, but before you can go you get hit with a surprise car or house repair.

The money budgeted for vacation goes to the repair. No vacation.

That’s kind of how it is in the US. The UK government budgeted money for spending on new programs in 2025.

But this money budgeted, saved, ended up paying for unforeseen interest rate increases.

To make matters worse, not only did interest rates go up ruining spending plans, but the currency went down against the US dollar.

Not a good combination.

Could this be the end of the governing party, again?

Time will tell

2024 was a bad year for Brazil’s economy and currency. The Brazilian Real fell more than 20% in value against the US dollar.

Currency weakness occurred along with higher interest rates. This is not a good thing.

Higher Brazilian interest rates mean a higher return on investments in the Brazilian Real. But if no one wants to buy the Real and get the higher rate, the currency will go down, higher rates or not.

Brazil’s real problem is government spending, and investors are not convinced the government is taking the right measures to solve the spending problem.

Brazilian sovereign bonds offer a big return. But, a weak currency can take that return down.

How will the currency do in 2025? Can’t say for sure. All we can do is follow the data.