Itaú BBA - A ceasefire, not a peace deal

Global Scenario Review

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A ceasefire, not a peace deal

July 12, 2019

Trade truce brings some relief, but central banks are still set to cut rates. In Brazil, we expect the BCB to cut 50 bps at the end of July.

Please open the attached pdf to read the full report and forecasts.

Global Economy
Trade truce attenuates slowdown, but global risks linger
Despite the trade truce, uncertainty will endure for longer, hampering global trade and investment, and prompting central banks all across the board into easing stances.

Pension reform advances, giving green light to interest rate cuts
The base text of the reform was approved by the Lower House in the first round of voting, with just the appreciation of some amendments still pending. In this context, we expect the easing cycle to resume with a 50-bp cut in July.

All eyes on the presidential race
Recent surveys show a statistical tie between Macri and Fernández in the runoff. The primaries, to be held next month, will be a good indicator of the outcome of the presidential election’s first round, in October.

Monetary easing in turbulent times
Despite still-high inflation, Banxico adopted a softer monetary stance in response to the wider-than-expected output gap and looser financial conditions abroad.

Outlook for the economy still weak
Prolonged periods of global uncertainty may result in a sharper slowdown of Chile’s open economy, justifying rate cuts ahead.

Solid fundamentals shield the economy
Robust macroeconomic fundamentals, as reflected by the recent sovereign rating action by Moody’s, are a buffer against shocks, but the global slowdown may prompt local easing ahead.

Central bank in evaluation mode
Subtle signs in central bank’s communication hint at a changing assessment of the current economic scenario that could justify easing ahead.



A ceasefire, not a peace deal

A trade truce has been achieved and talks between the U.S. and China are slowly resuming, but we don’t expect material improvements anytime soon and, therefore, uncertainty is set to linger for long. Growth figures will be better than in a full-fledged trade war scenario, but global trade and investment are still under enough of a threat for central banks to respond with further monetary stimuli, all across the board. 

We expect the Fed to cut 75bps in 2019 to balance risks, creating (or increasing) the room for emerging market interest rates to fall as well. In Europe, weak growth and the recent ECB’s signaling are also clearly pointing towards rate cuts.

The easier monetary policy is very welcome news in Latin America, where growth has failed to accelerate so far. As the most dramatic chapters of the pension reform in Brazil are close to being overcome, all eyes looking at the region now turn to the presidential race in Argentina, which will hold primaries in August amid retreating inflation – something that favors the government’s popularity readings and may help tip the balance in their favor.

In Brazil, the way for resumed interest rate cuts is open. With the most crucial steps of pension reform already behind us, the context is one of slow economic growth, large economic slack and low inflation readings, likely prompting the monetary authority to resume easing at the end of July with a 50-bp cut, stronger than we initially expected, ultimately taking the Selic rate to 5%. Other than that, our scenario for the country has changed very little since last month: we still expect 0.8% GDP growth in 2019 and 1.7% and 2020, inflation at 3.6% for both years and an exchange rate at BRL 3.80 by the end of this year and BRL 4.00 by the end of the next, with the BRL depreciating on the back of a challenging global landscape.



Global Economy
Trade truce attenuates slowdown, but global risks linger

• Despite a trade truce, lingering uncertainty slows global trade and investment, so central banks must respond.

• U.S. growth revised up to 1.5% (prior 1.3%) in 2020, but Fed still cuts 75 bps in 2019 to mitigate downside risks.

• China growth up to 6.2% (prior 6.0%) in 2019 and 5.9% (prior 5.5%) in 2020.

• Europe weak growth (1.0% in 2019 and 2020) leads ECB to cut rates (15 bps in both 2019 and 2020).

• LatAm: Easing monetary policy to support growth in several countries.

• Higher iron ore prices due to supply shock.


Please open the attached pdf to read the full report and forecasts.

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