Itaú BBA - Chilean consumption weakens in November

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Chilean consumption weakens in November

January 7, 2019

We expect growth of 3.5%, down from the 3.9% seen for 2018

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Consumption related activity disappointed in November, building on the weak manufacturing data published earlier this week and elevating concern for the growth outlook in 2019. Retail sales including vehicles contracted 0.8% (+7.6% in October), well below the market consensus of +1.8% and our call of +1.0%. Meanwhile, wholesale trade grew a weaker 1.7% (12.1% in October and 4.8% in 3Q18). Nevertheless, wholesale growth was still favorably led by sales of investment-linked materials. Overall, we expect the monthly GDP proxy (Imacec) to grow a weak 1.6%, moderating from the 4.2% in October (2.8% in 3Q18). Despite strong signaling for a rate hike later this month, softening activity – deteriorating private sentiment and diminishing inflationary pressures (we expect inflation to drop to 2.6% from 2.8% for the month of December; to be published January 8) – amid a more challenging external scenario, have weakened the case for a hike.

Persistent headwinds (ongoing global trade uncertainties, softening global growth and lower confidence) are hampering the growth outlook for this year. We expect growth of 3.5%, down from the 3.9% seen for 2018.
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Day ahead: The central bank will publish the GDP proxy (Imacec) for the month of November, for which we expect a 0.1% mom/sa increase, taking the yearly change to 1.6%. Also today, the central bank will publish the trade balance for the month of December, for which we expect a trade surplus of USD 675 million (USD 1.3 billion one year earlier) in December. 


According to the December Central Bank survey, market participants forecast inflation at 28.7% for 2019, up from 27.5% in November (our forecast: 30%). Inflation expectations for the next twelve months increased slightly to 28.7%, from 28.6% previously. This reading ended an incipient trend of two consecutive downward revisions of inflation expectations in the November and October surveys. Analysts now expect consumer prices to increase by 19.9% in 2020, up from 19.2% in November (our forecast: 22%).

The new monetary policy framework helped to stabilize the exchange rate, reduce inflation somewhat and put the interest rate on a downward path in 4Q18. According to the latest Copom minutes, the central bank reiterated its commitment to a tight monetary policy, with zero growth of the monetary base in 1H19 and limited potential interventions in the exchange market, particularly regarding dollar purchases. Despite the progress and positive signs, inflation remains high and the existing inertia (mostly in wage negotiations) poses a major challenge to more rapid disinflation (from 48% inflation estimated for 2018). Potential instability in the exchange market, due to uncertainties surrounding the outcome of the October presidential election, is another threat to exchange rate, inflation and a further reduction of interest rates. The December survey revealed that participants now expect the reference rate (Leliq yield) to fall to 37.98% by December 2019, from 59% at the end of 2018, up from 35% in the November survey (our forecast: 32%).
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Inflation ended 2018 within central bank’s 2-4% target range for first time in 4 years.  In December, consumer prices gained 0.33% from November, broadly in line with our 0.32% forecast and the 0.33% Bloomberg market consensus. As a result, annual inflation decelerated from 3.27% in November to 3.18%. Entertainment prices (+0.69% month-over-month) and food (+0.40% month-over-month) led the gain in the month, while communication prices were the main drag in December (-0.03%). Prices excluding food came in at +0.25% (+0.46% one year ago), while regulated prices (excluding food items), gained 0.51% (0.67% one year earlier). Meanwhile, tradable goods prices (excluding food and regulated items) increased 0.12% in the month (0.32% one year ago) and non-tradable (also excluding food and regulated prices) gained 0.22% (0.47% in December 2017). The regulated component led annual inflation as it expanded 6.37% yoy (6.53% in November), followed by non-tradable prices (excluding food and regulated prices) which ended the year within the 2-4% target at 3.79% for first time since August 2015 (4.05% in November). Meanwhile, the core measure of inflation excluding food prices came in at 3.48%, down from 3.70% in November, and tradable good prices (excluding food and regulated items) continued to drag down inflation despite the weakening of Colombian peso (1.09% yoy vs 1.29% previously). For 2019 higher inflation is likely (Itaú 3.4%) as the weaker exchange rate (on the back of lower oil prices) will lead to rising tradable inflation, while we also see food price normalization. On the other hand, the still negative output gap and controlled inflation expectations would contain the acceleration. Under this scenario, the central bank will likely leave the policy rate unchanged at 4.25% for the time being.

The Week Ahead in LatAm


This week’s highlight will be November’s industrial production, to be released on Tuesday. We forecast a 0.3% gain on a seasonally adjusted monthly basis, which translates to a 0.2% decrease in year-over-year terms. Also on Tuesday, Anfavea’s auto production for December will come out, for which we forecast a 1.5% mom/sa decline. Finally, two other indicators related to December’s industrial production will likely be released (without a specified date): paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR).

December’s IPCA inflation will be released on Friday. We forecast a 0.20% monthly increase, leading the full-2018 IPCA reading to 3.80% (from 2.95% in 2017). Food and healthcare will likely post the major upward contributions to the monthly reading. On the other hand, transport group is expected to post the main negative contribution, still reflecting the decline on fuel prices.


The central bank will publish the GDP proxy (Imacec) for the month of November today. Activity indicators for the month have disappointed with manufacturing contracting sharply and retail sales coming in weak. On the plus side, mining bounced back on the back of improved ore-grade. We expect the monthly GDP proxy (Imacec) to gain 0.1% from October and result in annual growth of 1.6% (4.2% in October).

Also today, the central bank will publish the trade balance for the month of December. A generalized slowdown in imports in November, amid still weak exports, led to the first trade surplus since July. We expect a trade surplus of USD 675 million (USD 1.3 billion one year earlier) in December, as energy import growth slows (on the back of lower prices), while the decline in copper exports moderate. 

Nominal wage growth for November will also be released today. Wage growth in October slowed, but remained broadly stable in the moving quarter. The National Institute of Statistics (INE) reported that nominal wages grew 4.1% in October, down from 4.4% in September, while growth was 4.0% in the rolling quarter, stable since August. The central bank has highlighted the impact immigration has had on employment supply, partly explaining slowing wage pressures

On Tuesday, inflation for the month of December will be released. Inflation was expectedly low in November, dragged down by lower fuel prices, but core pressures were also contained. Annual inflation dipped 0.1pp to 2.8%. The core measures were also under control in the month, with inflation excluding food and energy prices coming in at 2.2% (2.1% previously). Additionally, our diffusion index continued to show the persistence of downward inflationary pressures led by the tradable component. High frequency price tracking points to consumer prices falling 0.1% from November (+0.1% last year), with fuel, electricity, potatoes and seasonal vegetables dragging annual inflation further down to 2.6%.


In the middle of the week, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of December, which we expect to come in at 0.86% month-over-month. December’s figure is expected to be pressured by tourism related services and airfares and non-core fruits and vegetables.  Assuming our forecast is correct, headline inflation would increase from 4.71% year-over-year in November to 5.00% year-over-year in December.

Ending the week, the Statistics Institute (INEGI) will publish November’s industrial production. We estimate industrial production decreased 0.7% year-over-year (from +1.0% in October). The coincident indicator manufacturing exports decelerated (4.0% year-over-year in November, from 13.2% in October), while auto production fell by less than before (-1.3 year-over-year in November, from -4.9% in October) and oil production accelerated the decline pace (-9.2% year-over-year in November, from -7.4% in October). 


On Thursday, the Central Bank of Peru (BCRP) will publish its January decision on the reference rate, which we expect to remain unchanged at 2.75%. While the central bank seems more comfortable with 4Q18 economic activity figures, after a temporary deceleration in the 3Q18, we think it can afford to wait before removing stimulus (given well-behaved inflation) and have more clarity on the economic outlook. Moreover, BCRP president recently said that if the central bank raises rates in 2019, it would be because it’s reacting to an important demand shock affecting inflation, which they are not seeing at the moment.

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