Mexican stocks recovered from heavy losses, helped by a rally in Group Mexico while bond prices tumbled on Friday after the central bank surprised financial markets with a quarter-percentage-point interest rate hike.
The central bank bumped up its benchmark rate to 7.25 percent as it saw a slight increase in 12-month core inflation in May, saying uncertainty has increased over prices of tortillas, a Mexican staple food.
The benchmark IPC stock index, recently at record highs, ended up 0.10 percent at 29,372 points after trading down 2 percent. The surprise rate hike knocked down domestic bonds across the yield curve, from money market instruments to 30-year bonds.
The yield on the benchmark government 10-year peso bond surged to 7.64 percent versus 7.45 percent late Thursday. The yield on Mexico's benchmark 20-year peso bond jumped 18 basis points to bid 7.69 percent, while the yield on the three-year peso bond was up 19 basis points to 7.47 percent.
Investors had broadly expected the central bank to keep the overnight rate steady after recent soft inflation data. "It makes us think the central bank has some more information on inflation to make it act like this," said a bewildered bond trader in Mexico City.
While many economists had been expecting the central bank to cut rates at some point this year, Credit Suisse economist Alonso Cervera said the surprise hike all but ruled that out.
"Today's tightening should completely reshape the, until now, stubborn expectations that the bank would cut rates in 2007," he said. "We do not see room for a rate cut for the remainder of the year, and we think that additional hikes are likely only if unfavourable price shocks materialise."
In stock trading, Group Mexico, one of the world's largest copper miners, rallied 3.85 percent to 59 pesos a share. The company was expected to post its quarterly results after the market close.
Its Southern Copper Corp unit reported a 34 percent jump in first-quarter net profit on Thursday. Shares of America Movil, whose earnings grew 52 percent in the January-March quarter, rose 0.71 percent to 29.75 pesos, while its New York-traded shares were up 0.74 percent to $54.60. Higher interest rates make debt more attractive investors, drawing money out of the stock market, where the IPC index has gained 11 percent so far this year.
The 10-year bond had surged in price over the last two days on a surprise fall in consumer prices in the first half of April and a renewed pact between the government and retailers to cap prices for tortillas, a staple of Mexican cuisine. Mexico's fast-growing private pension funds manage about $68 billion in retirement savings, making them major players in the country's investment industry.