Itaú BBA - Worrisome Inflation, Government’s approval rating continues to decline

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Worrisome Inflation, Government’s approval rating continues to decline

May 2, 2014

The Brazilian Central Bank increased the Selic rate once again in April

The Brazilian economy in April 2014

The Brazilian Central Bank increased the Selic rate once again in April, and signaled the end of the monetary tightening cycle. Inflation remains elevate, and the outlook is worrisome, as there is upward pressure from food prices and government-managed prices. Fiscal results remain weak. Economic activity slowed during the first quarter, and business and consumer confidence both fell again in April. The current account deficit stabilized, while capital inflows accelerated. On the political front, the government’s approval rate continued to decline.  The voting intention distance between President Rousseff and other candidates has narrowed. 

Copom signals the end of the tightening cycle...

The Monetary Policy Committee of the Brazilian Central Bank (Copom) hiked the basic interest rate (Selic) by 0.25 pp, to 11.00% per year, in April. The decision was unanimous and in line with our forecast and the market’s expectations. More importantly, the Copom changed the post-meeting statement to signal that the end of the tightening cycle is near. The meeting minutes, released a week later, reinforced this signal.

.... but inflation remains high ...

The IPCA posted a variation of 0.92% in March (compared with 0.69% in February), above market expectations. The deviation from our forecast was mainly explained by the increase of food-at-home prices. The pressure from food prices reflects the agricultural price shock caused by the hot and dry summer in Brazil. With the April figures, the 12-month rolling IPCA rose again, reaching 6.15%. Going forward, rising food prices and government-managed prices (such as electricity tariffs, bus fares and gasoline prices) will likely keep inflation under upward pressure.

... and unemployment continues to retreat

The unemployment rate stood at 5.0% in April. In seasonally adjusted terms, unemployment reached 4.8%, the lowest level of the historical series, which started in 2002. Once again, the lower unemployment rate was due to the decline of the labor force (-0.6% yoy), as the level of employment remained constant. Average income and the real wage bill continue to grow, albeit at more moderate rates than in recent years.

March result confirms weaker fiscal performance in the first quarter

The public sector posted a primary surplus of BRL 3.6 billion in March, slightly above market estimates. With the result, the primary surplus reached 2.1% of GDP in 1Q14, below the average of the past five years (3.2%) and the 1Q13 figure (2.8%). Thus, the March figures confirmed the weaker fiscal performance observed at the beginning of this year.

Activity slowed during the first quarter ...

The rate of industrial production growth decelerated to 0.4% in February, following the strong 3.8% reported in January. However, the growth seen over the first two months of the year does not constitute a trend, as it only brought production growth back to the level observed before the sharp decline of December. Retail sales also decelerated in February. The indicators already available for March point to a decline in industrial production and retail sales in the month.

... and business and consumer confidence continues to fall

The business confidence indicator for the services sector published by Fundação Getúlio Vargas (FGV) fell by 3% in April. Business confidence in the services sector had been relatively stable until this month, in contrast with business confidence in the industrial sector, which has been on a downward trend since mid-2013. Consumer confidence also fell in April, according to FGV. Industrial, services and consumer confidence indicators are at their lowest levels since the first half of 2009, when the economy was still recovering from the global financial crisis.

Current account deficit stabilizes, while capital inflows to fixed income accelerate

The current account posted a USD 6.2 billion deficit in March, in line with our forecast and market expectations. Over the last 12 months, the deficit stood at USD 81.6 billion. These results suggest that the deficit has stabilized in recent months, after showing significant increases throughout 2013. In the capital account, foreign direct investment (FDI) came in better than expected, reaching USD 5.0 billion for the month (we forecasted USD 3.2 billion). Inflows to fixed income accelerated to USD 6.4 billion in March. Inflows to equities were also positive.

The government’s approval rating retreats again, and the gap between President Rousseff and other candidates narrows

According to the CNT/MDA poll released at the end of April, President Dilma Rousseff’s approval rating  has fallen to 32.9%, down from 36.4% in February. The Ibope poll, released in early April, had already captured a decline of the approval rating to 34%. In terms of voting intentions, Dilma continues to lead, but the distance between her and the other candidates has narrowed. According to the CNT/MDA poll, Dilma received 37% of voting intentions (39% in the Ibope poll), followed by Aécio Neves with 22% (16% in Ibope) and Eduardo Campos with 12% (8% in Ibope).

Higher transfers in the “Bolsa Família”, and minimum wage increases beyond 2016

In the last day of the month, President Rousseff announced she will increase by 10% the value of cash transfers in the Bolsa Familia welfare program and stated that she has signed a decree to alter the income tax table to raise take-home pay. She also pledged to maintain the policy of real increases in the minimum wage beyond 2016.

STF approves exclusive Congressional hearings for Petrobras

Minister Rosa Weber of Brazil’s Supreme Court ruled that the Senate must carry out a congressional inquiry to investigate possible irregularities at Petrobras, including allegations related to the acquisition of the Pasadena refinery in the U.S. in 2006.

Brazilian Assets Appreciate Again

April was another positive month for Brazilian Assets. The exchange rate appreciated 1.2%, with most of the movement occurring in the beginning of the month. The Ibovespa rose 2.4% in BRL and 3.6% in USD. Brazilian risk ended the month at 146.7 bps, 23 bps below the end of the previous month.

What’s next?

Markets should continue to monitor closely the electoral polls and the monthly fiscal figures. The next COPOM meeting to set the monetary rate will be held on May 27-28. We expect the Copom to keep the interest rate unchanged at 11.00%.

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