Itaú BBA - Copom signals a little more stimulus

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Copom signals a little more stimulus

April 2, 2018

The Central Bank lowered the benchmark Selic rate by 25bps to 6.50% and signaled that another moderate cut in the May meeting is warranted

The Brazilian economy in March 2018

The Central Bank lowered the benchmark Selic rate by 25bps to 6.50% and signaled that another moderate cut in the May meeting is warranted. The mid-month consumer price index IPCA-15 rose 0.10% in March, in line with expectations, and remaining on a path below the inflation target midpoint. Retail sales expanded in January, pointing to growth in consumer spending in 1Q18. The primary budget deficit reached 17 billion reais in February, as expected. The government will likely meet this year’ fiscal target without major difficulties.

Copom signals another 25bp-cut in the Selic in May

The Central Bank’s Monetary Policy Committee (Copom) delivered, unanimously, the expected 25-bp rate cut, taking the Selic to an unprecedented 6.5% p.a. level. The core message of the Copom decision and subsequent minutes is that a further cut in the May meeting is warranted, but the easing cycle will likely be interrupted after that, unless we have continuous (downward) inflation and/or activity surprises in Brazil. As usual, the Copom did not shut the door to an alternative stance. Thus, going forward, we need to monitor high frequency inflation and activity data, and the extent to which these figures impact expectations and the prospective scenario. Since we do not count, for now, on significant changes in the scenario, we stick to the view that 6.25% p.a. should be the resting place of the Selic at the end of this cycle – and we expect the rate to be cut to said level at the Copom meeting in May, remaining there until at least the end of the year.

The BCB also published the 1Q18 inflation report, showing inflation forecasts at 3.8% in 2018 and 4.1% in 2019 in the active scenario, with interest and exchange rates forecasts in line with market expectations (according to the Focus report), which currently assume the Selic rate will be stable at 6.50% until the end of 2018, rising to 8.0% in 2019. Inflation forecasts below their targets (4.5% for 2018 and 4.25% for 2019) reinforce the BCB’s recent communication that the base-case for now is one more 25-bp cut in May, taking the Selic to 6.25%.

IPCA-15 increased 0.10% in March, in line with expectations

The mid-month consumer price index IPCA-15 rose 0.10% in March, in line with the median of market expectations. Year-over-year inflation decelerated to 2.80% from 2.86% in February. Inflation developments have remained generally favorable, with several gauges of underlying inflation staying at low levels, including components that are more sensitive to monetary policy (i.e. service prices). Going forward, inflation tends to rise from the below-3% level seen last year, driven mostly by the end of the deflationary process in food prices. For the full year, our inflation estimate remains at 3.5%.

BCB lowers reserve requirement rates for cash and savings deposits

The BCB lowered the reserve requirement rate for cash deposits to 25% from 40%. For savings deposits, the rate was cut to 20% from 21% for the rural modality, and to 20% from 24.5% for the other modalities. New rates become effective in April. The monetary authority also changed how banks can meet their reserve requirements, so that balances in ATM machines and branches will no longer be deduced from requirement demands, hoping to encourage the use of electronic means of payment. The estimated aggregate impact of these measures, according to the BCB, is around 26 billion reais. In the view of the BCB, they have potential to contribute to the decline in credit costs in Brazil.

BCB activity index falls 0.6% in January

The Central Bank’s economic activity index, IBC-Br, fell 0.6% in January, reflecting disappointments with industrial production and real revenues from services. The indicator rose 3.0% yoy and 1.3% qoq/sa.

Unemployment rate reaches 12.6%

According to the national household survey (PNAD Contínua), Brazil’s nation-wide unemployment rate climbed to 12.6% in the quarter ended in February from 12.2% in the quarter ended in January, driven by labor market seasonality. Using our seasonal adjustment, unemployment fell 0.1 p.p. to 12.4%, influenced by a small decline in the participation rate. Importantly, informal employment receded at the margin after remaining virtually stable in the previous three reports, consolidating the end of the upward move seen in 2017. Formal employment in the private sector remained stable and should start to increase in the coming months, as the economy continues to recover.

Retail sales point to further growth in consumer spending in 1Q18

Core retail sales climbed 0.9% in January, while broad retail sales (including vehicles and construction material) declined 0.1% during the month. In our view, the Black Friday event was not yet fully incorporated into the seasonal adjustment and may distort monthly readings in November and December. Hence, quarterly changes provide a good indicator of the recent dynamics in retail sales. Using this metric, core sales picked up to 0.4% from 0.0%, and broad retail sales accelerated to 1.2% from 0.5%. Meanwhile, core revenues from services fell 1.9% mom/sa in January, disappointing the median of market expectations. Weakness was widespread, as 4 out of 5 segments in the Monthly Service Survey (PMS) declined vs. the previous month. Importantly, PMS encompasses about 34% of the service sector’s GDP, and does not represent the whole sector. With retail sales and real revenues from services, we were able to complete our estimates for our Itaú Unibanco monthly GDP proxy (PM-Itaú) for January. The indicator dropped 0.4% mom/sa, but advanced 1.1% yoy.

Confidence indicators sustain an upward trend in March

Most confidence indicators published by FGV showed positive results in March. Confidence among industrial entrepreneurs advanced 1.3% during the month, with gains in both components: current situation (1.2%) and expectations for the future (1.4%). Likewise, consumer confidence increased substantially by 5.3% and reached its highest level since September 2014. Confidence indicators in the retail and construction sectors rose 1.4% and 1.3%, respectively. On the other hand, confidence fell 1.8% in the service sector after eight consecutive increases. Nevertheless, the subcomponent addressing expectations for the future is still higher than the one monitoring the current situation, pointing to further gains in confidence in the service sector going forward.

Primary deficit of 17 billion reais in February

The consolidated public sector posted a primary budget deficit of 17.4 billion reais in February, in line with market expectations. The consolidated primary deficit accumulated over 12 months shrank to 1.4% of GDP from 1.5%. Results reinforce the perception that meeting primary targets in 2018 will be less challenging than in recent years. The general government’s gross debt reached 75.1% of GDP in February, while the public sector’s net debt hit 52.0% of GDP. Notwithstanding still-negative annual primary results, the repayment by development bank BNDES of 130 billion reais to the National Treasury, better economic growth and lower real interest rates will keep gross debt as a share of GDP virtually stable in 2018. However, without reforms (such as the pension reform), fiscal readings will resume a worsening trend from 2019 onward.

Financial assets 

In March, the Ibovespa dropped 2.4% in dollars and stood flat in local currency. Country risk measured by the 5-year CDS increased and ended the month at 156 bps. The exchange rate weakened to 3.32 reais per dollar.

What’s next

Early in the month, all eyes will be on political moves ahead of this year’s presidential election, as the deadline to join, switch parties or leave incompatible executive posts is April 7. Additionally, on April 4, the Federal Supreme Court (STF) will rule on the habeas corpus requested by former President Lula da Silva.

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