Mexico is in a prime spot for multinationals looking to move operations closer to their main markets. But the expected wave of nearshoring firms is yet to materialise due to rising costs, creaking infrastructure and political uncertainty, and so is the promised economic boom.

The notion of nearshoring came to the fore during the pandemic. As the healthcare emergency brought East-West supply chains to a near-standstill, CEOs started talking about investing in manufacturing sites closer to their customers. The pandemic-era disruptions compounded companies' concerns over global trade that had been sparked by the United States' imposition of sanctions against China in 2018. More recently, Russia's invasion of Ukraine in 2022 and growing tensions between Washington and Beijing have made near-shoring even more of a priority in boardrooms around the world.

Eric Martel, CEO of jet-maker Bombardier, talked up the benefits of nearshoring in 2022 when he announced plans to expand the company's manufacturing capacity in Mexico. Meanwhile, Citi CEO Jane Fraser said last November that the corporate world was reaching “a tipping point” in the reversal of decades-old efforts by companies to reduce costs by sourcing and moving manufactured goods as cheaply as possible.

On the face of it, Mexico has many of the ingredients international companies are looking for. To start, it shares a land border with the United States and benefits from the tariff exemptions granted by the United States-Mexico-Canada Agreement (USMCA) – the free trade zone it established in 2020 with the United States and Canada. It's also accessible by sea from both Europe and Asia. Those routes are less vulnerable to the geopolitical issues and climate-related disasters that are currently haunting two other key trade corridors, Egypt's Suez Canal and the Panama Canal.

Over the past few years, Mexico has certainly become more central to global trade. U.S. imports from Mexico totaled $455 billion in 2022, up nearly 19% from the previous year and up 64% from 2012. At the same time, the share of Mexico's imports from China went from 1% in 1994 to 20% in 2022 according to a recent study by academics Laura Alfaro and Davin Chor - a sign of Beijing's desire to bypass trade tensions.

If that continues, the economic benefits of nearshoring could transform Mexico. A flurry of new manufacturing plants could add an additional 3% to the country's GDP over the next five years as well as over 1 million jobs, according to a recent study by Deloitte. President Andres Manuel Lopez Obrador has tried to ride the nearshoring wave. Last October, for example, he announced that international electric vehicle manufacturers could claim an 86% tax deduction on investments in the country. With such generous breaks on offer in other industries too, more companies may be tempted to join Tesla, Unilever, Bombardier and Dell Technologies in announcing plans to set up in Mexico. Ironically, Chinese companies are also arriving in droves - including construction equipment maker Lingong Heavy Machinery and Tesla rival BYD.

But Mexico is not reaping the benefits yet. Although foreign direct investment has remained steady at around 3% of GDP for much of the last decade, only a minority of Mexican-based companies report seeing an increase in demand for their products due to near-shoring, Deloitte found.

That's concerning because Mexico's perceived advantages are fading fast. The scramble for industrial space is driving up costs which were already rising. According to the Mexican Chamber of the Construction Industry, the price of cement and reinforced steel surged by up to 25% since the end of 2021 to mid-2022. Meanwhile, land prices are ballooning. In Santa Catarina in the northeastern state of Nuevo Leon, the cost of land has increased by 25% since Tesla announced it will be building a factory there in March 2023. It's also becoming more expensive to employ staff. In January, the minimum wage increased 20% to nearly $22 for the free zone near the northern border and $14.50 for the rest of the country. And the surge in the Mexican peso, which was the best-performing currency in the world last year, according to Trading View, is also driving up local costs. The danger for the Mexican government is that these factors could soon start to deter companies.

Mexico's creaking infrastructure is also a problem. Last October shipping giant Hapag Lloyd warned customers about delays in the key Mexican port of Lazaro Cardenas, which had already suffered three months of delays. The mounting challenges make it harder for Mexico to compete with rivals. That's a problem given the country has yet to experience a sizeable economic windfall despite all the near-shoring talk. For example, manufacturing as a percentage of GDP only increased to 21% in the first half of last year, a tiny bump from pre-pandemic levels of 20%. Mexican drug cartels also pose a security risk to workforces and ramp up insurance costs.

Meanwhile, companies have been quick to announce plans for new manufacturing but are much slower to take action. Tesla has yet to begin construction on its Nuevo Leon factory. Last October Elon Musk said he was not ready to go “full tilt” on Mexico as he is worried about high interest rates and the health of the global economy. Four other companies have also announced plans but have yet to establish new manufacturing sites in Mexico, according to a well-placed source.

Other near-shoring destinations face similar challenges. Vietnam, Canada, Germany and India are all expected to experience dramatic surges in manufacturing thanks to companies reconfiguring their supply chains. That may take some time to materialise. Companies like to talk about “de-risking” their supply chains to reassure shareholders but are often slow to break ground on new plants because of cost and logistical issues.

And if Donald Trump wins the U.S. presidential election in November, he might take action against foreign imports. He recently vowed to slap a 100% import tariff on Chinese cars made in Mexico if he moves back to the White House.

To be sure, things could also change for the better, at least in Mexico. Despite the tax breaks, the left-wing administration of López Obrador is not universally loved by business. The election in June could yield a more business friendly candidate. Claudia Sheinbaum, who is running with Obrador's support as he cannot seek re-election, is the current front-runner from the ruling Movimiento Regeneración Nacional (MORENA). She is expected to be more pragmatic about tapping private capital once in power than her mentor.

But unless Mexico can assure international companies it's a reliable partner, its near-shoring boom will die out at sea.

For all its ailments and splits, the world economy at large appears to have found a post-pandemic growth plateau - perhaps arguing against hyper-active monetary policy from here, but pulling investors into the mix nonetheless.

Two years of endless 'recession or soft landing?' debates are morphing into a 'no landing' global scenario - one that would have scared the horses only a year ago given its potential interest rate implications but which investors are now starting to embrace.

Bank of America's closely-watched monthly survey of global asset managers underlined the point this week.

Although ill-defined, a 'soft landing' for the world economy remains the majority view - involving cooling growth rates from here that drag inflation back below targets and see interest rates ease steadily again.

But almost a quarter of the BofA survey respondents now favour 'no landing' over the next 12 months at least - up from last month's 19% and almost four times the share who expected it at the end of last year.

Run for the hills?

Well, 'no landing' basically sees growth hold up and maybe even accelerate a bit, inflation running slightly hot and interest rates staying restrictive with maybe just modest cuts. A 'higher for longer' tack in other parlance - and kind of where we are at the moment and have been all year.

Skeptics argue that the rates fallout from a 'no landing' outcome merely leads to a harder hit further down the line - as debt stress eventually builds, defaults rise, jobless rates climb and spending slows.

But it's not being read that way in markets - not yet at least.

Reflecting pricing behaviour this year that's seen stock markets surge another 5-10% even as 10-year U.S. and European borrowing rates have climbed half a percentage point, the BofA survey suggests few fear this evolving 'no landing' view.

With one third fewer now expecting bond yields to decline at all over the coming year - 40% compared to 62% late last year - the survey simultaneously shows corporate earnings optimism and stock allocations rising to 2-year highs, with big rotations into Europe and emerging markets to boot.

Individual asset managers echo that take.

Willem Sels, Global Chief Investment Officer at HSBC Global Private Banking and Wealth, reckons the shift toward a potentially 'no landing' scenario means he has zero cash in tactical asset allocations and has been taking an overweight positions in both global equities and bonds.

"Of course risks remain in our complex world but, as we have seen, markets are happy to take some uncertainty in their stride as long as the earnings and rate fundamentals remain constructive."

It doesn't take much forensic work to list the risks.

Geopolitics has rarely been more belligerent, trade flows have been disrupted by political curbs and polarizing blocs, elections in the United States and elsewhere loom later in 2024, many fret about bubbles in technology and artificial intelligence stocks, inflation seems sticky and interest rates have yet to fall.

Yet most of these risks have been in plain sight for months and appear to have neither upended the economy nor the growth outlook - and have certainly not pushed global investors back into their bunkers yet.

China's property bust and political stand-offs did see a parallel universe develop in its markets for the past 12 months - but industrial output there appears to be revving up again this year too, regardless of the doubts and stocks have made a tentative recovery.

Even the Bank of Japan ending its negative interest rate stance after 8 years failed to provide the outsize jolt to world investment flows many suspected - at least in the early hours after that decision this week. The Nikkei stock index strengthened, largely on the back of a surprisingly weaker yen.

And for all the other potential leftfield hits and valuation concerns, the global growth horizon has been lifting since the start of the year.

The International Monetary Fund and other multilateral bodies have been nudging up world forecasts again this year.

Even though still slightly below average for the century so far, the IMF in January upped its global growth call to 3.1% for this year, two-tenths of a point higher than in October, and it expects it to tick even higher to 3.2% in 2025.

And the outlook through 2028 is for sustained annual world growth above 3%. That would bring nominal global output at market exchange rates to about $134 trillion in three years time - more than twice the average of the 10 years between 2005 and 2014.

Can central banks afford to just tweak interest rates from here and let the tighter borrowing climate in markets more generally keep inflation in check and growth afloat?

'Real' inflation-adjusted long-term borrowing rates have clearly bounced back from the wild swoons of the pandemic. And they too now hover just under 1% - their average of the past 25 years when measured via global debt indexes and inflation.

Strip out the post-COVID collapse in real rates and that new century average re-sets to about 1.5% for the first 20 years, making prevailing real borrowing rates still relatively modest.

And left as such, it suggests a relatively stress-free environment that may just keep the whole show on the road.

Seasoned watchers of Iraq’s oil and gas sector have come to regard its perennial calls for new measures to increase its gas production with the fondness of the familiar – a old record still often played, perhaps, or the call of the first cuckoo of Spring. This year’s pledge by the latest in its fast-revolving-door of governments certainly has the same basic melody, but there is a new phrasing there too – this time, it is looking to develop its liquefied natural gas (LNG) capabilities as well. So, with the stakes even higher now that LNG has become the world’s emergency energy source, will Iraq actually make some serious progress this time around?

In theory, there is no real reason why the country cannot become a major global gas producer. Official estimates are that Iraq’s proven reserves of conventional natural gas amount to 3.5 trillion cubic metres (tcm) or about 1.5% of the world total, placing Iraq 12th among global reserve-holders. By comparison, total proven gas reserves for Russia stand at nearly 48 tcm, for Iran at nearly 34 tcm, and for Qatar at nearly 24 tcm. This said, around three-quarters of Iraq’s proven reserves consist of ‘associated gas’ – a by-product of oilfield development. However, Iraq did not revise its figure for proven gas reserves in 2010 at the time of the upwards revision of proven oil reserves. Logical figures for non-associated gas were not provided at the time – or since – from the Iraqi oil and gas authorities either. The International Energy Agency (IEA), though, estimates that ultimately recoverable resources will be much larger than the official estimates of 3.5 tcm – its estimate is 8.0 tcm, of which around 30 percent is thought to be non-associated gas.

Moreover, there are five very good reasons why it is in Iraq’s best interests to develop as much of this gas as it can, as quickly as possible. First, it signed up to the ‘Zero Routine Flaring initiative’ back in 2017 to stop burning associated gas off while drilling oil. At the time – and still – Iraq was second only to Russia in the amount of gas it wasted in this way, and last year it burned off 16 billion cubic metres. Second, not using its own gas for power generation or to monetise by exporting it means it ends up paying Iran for gas imports. Third, this reliance on Iran has caused the U.S. to withhold direct financial flows to the country and has caused several U.S. companies to cancel planned projects there. Fourth, shortfalls in its own resources to generate power has meant frequent power outages across the country through the years, which have been the spark for popular protests and violence. And fifth, a major increase in gas supplies in Iraq would enable it to finally roll-out long-delayed petrochemicals plans that would generate it tens of billions of dollars in revenue from these value-added products.

Various announcements in recent years have provided some reason for vague optimism that this deleterious situation may change at some point, as also analysed in full in my new book on the new global oil market order. One notable example was in 2020 when Iraq’s Oil Ministry signed a natural gas capture deal with oil services provider Baker Hughes to harness 200 million cubic feet per day (mmcf/d) from the Gharraf oil field (and neighbouring ThiQar site, Nassiriya), plus other oil fields north of Basra. According to the Oil Ministry at the time, the first stage would involve the advanced modular gas processing solution being deployed at the Integrated Natural Gas Complex in Nassiriya to dehydrate and compress flare gas to generate over 100 mmcf/d of gas. The second stage would involve the Nassiriya plant being expanded to become a complete natural gas liquid (NGL) facility that would recover 200 million standard cubic feet per day of dry gas, liquefied gas and condensate. All this output would go to the domestic power generation sector, with Baker Hughes stating that addressing the flared gas from these two fields would allow for the provision of 400 megawatts of power to the Iraqi grid. According to an accompanying statement from then-Oil Minister, Jabbar Al-Luaibi, Iraq was also negotiating a similar gas capture deal for the state-run Nahr Bin Umar field with Houston-based Orion Gas Processors. Additionally, according to later comments from Iraq’s South Oil Company, gas-processing facilities were to be constructed in the Missan and Halfaya fields that would have a combined capacity of 600 mmcf/d of gas when completed, and the construction of gas-processing facilities in the West Qurna, Majnoon and Badra fields would also move ahead, with respective overall capacities 1,650 mmcf/d, 725 mmcf/d and 85 mmcf/d. The same announcements have been made twice since then, with little progress being made overall.

Perhaps some grounds for greater optimism this time comes from two developments. The first is the ongoing US$27 billion four-pronged deal involving France’s TotalEnergies. One of these four prongs is the collection and refining of associated natural gas that is being burned off at the five southern Iraq oilfields of West Qurna 2, Majnoon, Tuba, Luhais, and Artawi. With this deal still in place, it is conceivable that other Western firms might be persuaded to strike similar deals involving the utilisation of Iraq’s gas supplies, rather than its being flared. They may also be persuaded to explore and develop non-associated gas fields as well, particularly if there is government support for a roll-out of a genuine LNG capability across the country. According to recent comments from Iraq’s President, Abdul Latif Rashid, new gas projects will be supported by a new LNG platform to be built in Al-Faw Port near Basra and will be part of an extended fifth and sixth round of licensing. Chinese and Russian companies have dominated recent oil and gas awards in Iraq, as covered by OilPrice.com, but Qatar – the U.S.’s “key non-NATO ally”, according to President Joe Biden – has also expressed an interest in these new licensing rounds. Given the importance of Qatar for the ongoing energy security of the European part of the NATO security alliance, as detailed in my new book on the new global oil market order, Iraq will be under intense pressure from Iran, China, and Russia, to keep the new awards away from Doha and with firms from the Global South instead.

Australia's vast iron ore mining sector is facing stark choices as its biggest customer China has likely hit a peak in its steel production and global pressures mount to decarbonise one the world's most polluting industries.

The scale of these challenges are massive, but they are far from insurmountable, and there are an array of options that Australia's iron ore miners can pursue.

The trick is choosing a path that maximises profits, or at least minimises costs, while ensuring that the industry continues to prosper.

Australia is the world's largest exporter of iron ore, the key raw material used to make steel, and it shipped out about 930 million metric tons last year, which at current prices would be worth about $93 billion.

Australia is also the world's largest exporter of metallurgical coal, used to make steel, ranks second in thermal coal and in liquefied natural gas, while also being the biggest exporter of lithium and the largest net exporter of gold.

But the exports of all these commodities together barely exceed the value of iron ore shipments, underscoring the outsized role of the ore, which is mainly produced in the state of Western Australia.

Just over 80% of iron ore exports head to China, which buys about 70% of the total global seaborne volumes and produces about half of the world's total steel.

Putting these numbers together gives a picture of a dominant producer and a dominant buyer in the iron ore market.

The rise of China since the late nineties allowed Australia's iron ore miners to massively ramp up output, reap economies of scale and become hugely profitable.

But the nature of both China's demand and the process of making steel are likely to change in the next few years, threatening the current model whereby Australia produces vast quantities of iron ore that is turned into steel in blast furnaces and basic oxygen furnaces, processes that require the use of coking coal.

China's steel output has flatlined for the past five years around the 1 billion ton per annum level, and most analysts presenting at this week's Global Iron Ore and Steel Outlook Conference in Perth predicted that production will gradually decline in the next few years.

This is partly because China's infrastructure and housing construction will ease, but also because China will increasingly use scrap steel in electric arc furnaces to produce new steel products.

While Australia's iron ore miners may be able to offset the loss of some of China's demand by selling to newer steel producers in Southeast Asia, it's likely that the overall market for iron ore will soon decline.

It's also likely to change in composition, with higher grades of iron ore preferred as these can be more easily used as a feedstock along with scrap in electric arc furnaces.

Higher grades of iron ore can also more easily be upgraded into direct reduction iron (DRI), which in turn can be turned into steel without using coal as a fuel.

Making steel using DRI produced with green hydrogen and renewable energy is one of the ways the industry is thinking of reducing carbon emissions.

Even using natural gas to make DRI can reduce emissions by up to 75%.

The problem is that DRI is tricky to export given it can be volatile, so it tends to be made at the same location as the steel furnaces.

So, if Australia's iron ore miners are thinking of moving up the steel value chain, they would have to find ways of producing DRI and turning it into steel in Australia, using renewable energy.

Another path is upgrading the iron ore into hot briquetted iron (HBI), which is an upgraded form of DRI, whereby the DRI is converted into a compact form using heat.

HBI can be shipped, and can be used in either an electric arc furnace or a basic oxygen unit.

Should Australia's iron ore miners move to upgrade their product, they will need significant investment, and there is no certainty that the upgraded products will deliver sufficiently higher margins.

For example, if an iron ore miner agreed with its customers in China, Japan and South Korea to supply HBI instead of iron ore fines, this would require significant investment in a clean energy system.

The iron ore miners have been successful in running complex operations at low costs, but setting up a wind/solar power plants, a green hydrogen electrolyser and possibly battery storage as well would be a totally different challenge.

There is also the possibility of exporting iron ore to a third country for processing into HBI, with Gulf countries such as Saudi Arabia a potential destination.

These countries have large quantities of natural gas which could be used to turn iron ore into HBI in a process that would still be more environmentally friendly than using coking coal.

The HBI could then be shipped from the Middle East to customers in Asia.

However, there are several other factors that would come into play, such as steel nationalism.

Many countries see steel as a key commodity and want to retain their own industries. It's unlikely Japan would want to buy green steel from Australia, but it might be prepared to buy HBI and keep the final process of making steel inside its borders.

The problem for Australia's iron ore sector is that it has a plethora of options in adjusting to decarbonisation and peak steel in China.

But all involve risks and costs, and this is trouble for an industry that has spent the last decade de-risking itself and concentrating on improving shareholder returns.

On March 20, local time, the Fed will announce a new round of interest rate decisions, so the outlook for the meeting is as follows:

At present, the market expectation that the Fed will cut interest rates at this meeting is almost zero. It is almost a fact that interest rates will remain unchanged at this meeting. However, the Fed will update the SEP at this meeting. Among them, the dot plot may change, which is where the market focuses on it.

In the recent data, the CPI has exceeded expectations twice in a row, and the PPI has also performed strongly. The two major inflation data points to a rebound in price pressures.

However, the "bad news" does not stop there. During the "silence" of Fed officials:

The number of initial claims for unemployment benefits in the week of March 9 was 209,000, compared with the expected 218,000 and a previous value of 217,000. The number of continuing jobless claims was 1.811 million, significantly lower than the expected 1.905 million and the previous value of 1.906 million. These data highlight that the labor market remains resilient.

The New York Fed Inflation Expectations Survey showed a rebound in both three- and five-year inflation expectations, which will exacerbate inflationary pressures.

The labor market, inflation, and the economy are "in a rout" across the board.

This series of data repeatedly reminds the market that inflation will not disappear soon and that inflationary pressures are stronger than expected. At the same time, the labor market is more resilient than expected. The market's expectations for a rate cut in June have shifted from "certain" to "nearly half likely". Even the market has completely failed to rule out the possibility of postponing the first rate cut to the second half of the year.

This is the main reason why the market's expectations of interest rate cuts have been suppressed in recent times. Also, that’s why the market expects the dot plot to change.

In its December dot plot, the Fed predicted three rate cuts in 2024, four in 2025, three more in 2026, and then two more at some point, ultimately bringing the long-term federal funds target rate down to around 2.5%. In addition, the median interest rate is 4.6% in 2024 and 3.4% in 2025. This figure is also the most high-profile data in this interest rate decision and will play a key role in the subsequent path of interest rates.

However, there are still a few points to note. One of them is that a disagreement over the issue of interest rate cuts seems to have been created among officials within the Fed recently. In addition, Wall Street Journal correspondent Nick Timiraos also said that Fed officials are likely to focus the debate on how to start cutting rates by the middle of the year.

Some of these officials see no need to cut interest rates because the economy is strong, and they want to see more evidence of a slowdown. While other officials are more worried about signs of weakness in demand and hiring: the unemployment rate rose in February. As soon as the inflation data gives them a chance, they will cut rates so as not to squander a significant opportunity to achieve a "soft landing for the economy".

Specifically, Rafael Bostic said on March 4 that "there is no urgency to cut rates, and two 25bps rate cuts before the end of the year are appropriate." The first-rate cut is expected in the third quarter of this year, and then a pause may be held at a later meeting." In addition, Neel Kashkari took a similar stance in his speech on March 6 - "based on the economic data released so far, the Fed is expected to cut interest rates only twice or only once this year".

However, recent retail sales data showed a slight weakness in the economy. US retail and food service sales rebounded by 0.6% MoM in February, below market expectations of 0.8%. The MoM growth rate in December and January was sharply revised down to 0.11% and -1.05% from 0.55% and -0.8%, respectively, indicating a slowdown in consumption.

With slowing consumption and rising upside risks to inflation, the US economy can be said to be slowing overall. Therefore, the possibility that the dot plot will remain unchanged cannot be ruled out. It is important to be wary that a small number of officials will drive the median interest rate upward due to strong employment.

Generally speaking, if the dot plot shows three or more rate cuts, the market could interpret this as a major tailwind, given the recent backdrop to a major "hit" to rate cut expectations. If it shows that two or fewer rate cuts are expected, it will be considered (significantly) bearish.

In addition, Powell's speech is also worth paying attention to. In his previous testimony before Congress, Powell had said that "we are not far from getting the confidence we need to start cutting interest rates." After the CPI and PPI highlight the resilience of inflation, will Powell say that "there will be no rate cuts anytime soon" or "more confidence in rate cuts is not far off"? This will also be the focus of the market.

The theme of this interest rate decision will most likely still revolve around the sustainability of deflation progress. Returning to the specific aspect of inflation, energy prices are the main driver of this headline CPI increase. Rising geopolitical risks, extended OPEC+ production cut expectations, and reduced gasoline production and inventories are the main reasons for higher energy prices. Looking ahead, it is still necessary to focus on whether US dollar crude oil production can recover and whether geopolitical risks are alleviated. The recovery of the supply side plays an important role in supporting market prices. If risks continue to ferment, inflation will remain "stubborn" in the future.

Another big issue is housing inflation. However, according to February's inflation data, the anomalous increase in OER's equivalent rent for owners in January did not carry over in February, suggesting that past readings are likely to be a fortuitous event. Housing inflation is not as sticky as imagined, and it is still on the right track to fall. In addition, in the process of the decline in US home prices, the high point of the MoM growth rate of US home prices is about 9 months ahead of the MoM growth rate of US rents. The MoM growth rate of US home prices hit a stage high in August 2023 and then gradually declined, indicating that the US rent peak is expected to occur in May 2024. In subsequent inflation reports, housing inflation is expected to gradually ease and peak.

Looking ahead, June, which is currently considered by the market to be the most likely rate-cutting time, still has 3 employment and 2 inflation reports. The Fed's decision to cut interest rates will still depend on the performance of the data. If inflation returns to its downward trend in March and April, it will help the Fed start the interest rate cut cycle ahead of schedule.

In addition to inflation risks, unnecessary damage to the economy from a late rate cut will also be a key topic for the Fed. Timiraos recently said, "While whether too strong inflation will lead to fewer rate cuts is still the most concerned issue, the Fed may have turned its attention to the fear that cutting rates too late could cause a recession." "While this will not be the focus of this meeting, it is expected that this topic will continue throughout the second half of the year and influence the Fed's policy direction.

All in all, the current economic data is mixed. The labor market has improved but remains tight. The path to disinflation is still bumpy. Consumer spending has already slowed in February, which will affect economic activity in a consumer-oriented country like the US. Restrictive monetary policies have begun to affect economic activity in the country. However, what is clear is that the current rate is already the peak of the rate hike cycle.

However, the economic outlook remains highly uncertain. As Powell testified before Congress, "a rate cut later this year may be appropriate." "If there is no "reversal" in the subsequent inflation and non-farm payrolls reports, June is still the most likely and appropriate time to cut rates.