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Activity data still weak in Brazil

January 15, 2019

The weak result reinforces the outlook of a soft industrial production in 4Q18

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Paper cardboard dispatches (ABPO) declined 1.3% mom/sa in December, according to our seasonal adjustment. In year-over-year terms, the index decreased 3.2% (previous: 0.8%). The result extended paper cardboard dispatches’ downward trend:  the index is now 2.4% below the average of Feb-Apr (before truckers’ stoppages).

We believe that the relative weakness of the Industrial sector is a consequence of two factors: i) lagged effect of tightening financial conditions in previous quarters; and ii) slowing global growth, particularly in countries that are large buyers of Brazil’s manufactured items.

The weak result reinforces the outlook of a soft industrial production in 4Q18. Our preliminary forecast for December industrial production declined to -0.2% mom/sa from 0.6%.

Day ahead: November’s retail sales will be released at 9:00 AM (SP Time). We forecast a 0.9% mom/sa increase for core retail sales and a 0.7% gain in the broad segment (which includes vehicle sales and construction material).


Monthly gross fixed income (GFI) indicator increased 3.4% yoy in October, above our forecast (3.1%) and in line with market expectations. According to calendar adjusted figures, GFI accelerated to 1.7% yoy (from 0.4% in September), taking the three month moving average (3MMA) growth rate to -0.1% yoy in the quarter ended in October (from 0.5% in September). Looking at the breakdown - also with calendar adjusted figures - construction investment declined 0.9% in the quarter (from -0.1% in September), with both residential and non-residential construction decelerating. In turn, machinery and equipment investment decelerated to 1.1% (from 1.5% in September).

We expect economic activity to slow to 1.7% this year, from an expected 2.0% in 2018. Uncertainty over the new administration’s policy direction and remaining uncertainties over the approval of NAFTA by the U.S. Congress will continue to weight on investment. Deceleration in the U.S. economy will also curb growth. However, growth in the U.S. is at a decent pace and a still-solid labor market will likely prevent growth from slowing too much, although we acknowledge that risks are tilted to the downside.
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Day ahead: The statistics institute (INEI) will announce November’s GDP proxy, for which we estimate a 5.2% yoy acceleration, from 4.2% in October. 


Day ahead: The INDEC (the official statistical agency) will publish the December’s national CPI at 5:00 PM (SP Time). Price-tracker consulting Elypsis estimates a 2.3% mom increase in consumer prices, the lowest reading since May, as a result of a tighter monetary policy that led to some appreciation of the exchange rate. If the forecast is correct, annual inflation would have reached 47.3% in 2018.

Fixed Income LatAm Strategy

Latam rates stopped falling last week, in tandem with U.S. rates, which stabilized after a strong rally in previous months. Nominal rates widened slightly in Brazil, Mexico and Chile, and tightened slightly in Colombia.

We continue to receive the NTN-B 2050 real rate at 4.64% with a 21bps gain so far. Approval of the pension reform will be an important trigger for lower long-term rates going forward.

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