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Commerce and construction confidences rise further in December

December 26, 2018

The confidence indicators’ performance in December solidifies the strong gains shown in the previous two months.

Talk of the Day

Brazil

According to FGV’s monthly commerce survey, business confidence in the sector reached 105.1 points in December (from 99.4 in November), the highest level since April 2013. The breakdown shows increases in both current conditions (+4.4%) and in expectations (+6.6%). Construction confidence was also released, and reached 85.5 points in December (from 84.7 in November), driven by a rise in current conditions and in expectations (both up 0.8%). For the consumer, confidence rose 0.6% mom/sa in December, solidifying the strong gains shown in the previous two months. The advance came from better current conditions (up 3.2%), while expectations decreased slightly (-0.8%), after rising 10.1% in November.

The mid-month consumer price index IPCA-15 declined 0.16% in December, printing somewhat below our estimate and market expectations (both at -0.12%). According to census bureau IBGE, it was the lowest reading for December since the implementation of the Real Plan, in 1994. The index ended 2018 with a 3.86% increase, from 2.94% in 2017. Transportation (-0.18 p.p.), housing (-0.08 p.p.) and healthcare (-0.07 p.p.) posted negative contributions during the month, with falling prices for fuels, electricity and personal care items. In the opposite direction, most of the upward contribution came from food and beverages (0.08 p.p.), followed by personal expenses (0.05 p.p.). Our preliminary forecast for the headline IPCA in December is a 0.18% hike, ending the year at 3.78% (from 2.95% in 2017).
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The current account posted $795 million deficit in November, below our estimate (-$3.0 billion) and market consensus (-$1.9 billion). Interest payments and, on a lesser extent, the profit and dividends account, were the main surprises, as their deficits receded later in the month. The latest result kept the current account deficit at a historically-low level. For the next years, we maintain our expectation of a gradual increase in the current account deficit, driven by somewhat of a rebound in economic activity (reducing the trade surplus), but not to the point of compromising the sustainability of Brazil’s external accounts. Direct investment in the country is still the main source of financing for the current account deficit.
** Full story
here.

Week ahead: November’s national unemployment rate will be released on Friday. We forecast a decrease of 0.1 p.p, to 11.6% (stable in seasonally adjusted terms). In addition, FGV’s business confidence surveys for December on industry (the preview was released last week) and services, as well as the December’s economic uncertainty indicator, will be released throughout the week. On fiscal accounts relative to November, we expect the central government (Thursday) to post a BRL 12.6 bn primary deficit, and the consolidated public sector (Friday) to post a BRL 14.1 bn primary deficit.

Colombia

The board of the central bank unanimously decided to keep the monetary policy rate at 4.25%, as widely expected. It was the sixth consecutive unanimous decision. The press release announcing the decision offered no bias, rather continuing to reflect a board that is balancing external uncertainty and an inflation somewhat above target with a still widening output gap. General Manager Echavarria noted in the press conference that he could not rule out a prolonged period of stable rates. He added that the real neutral rate in Colombia is seen closer to 1.4% than 2% (which means the current level of policy rate does not imply a lot of stimulus).

We believe that the central bank will remain on hold for the time being. Inflation near the 3% target, fragile activity and diminishing short-term upside risks for inflation from fiscal policy (VAT hikes) and El Niño all point to stable rates in the near term. Later in 2019, we are expecting two 25-bp rate hikes, taking the policy rate to 4.75%, as the activity recovery consolidates The next monetary policy decision will take place on January 31.
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The coincident activity indicator (ISE) in October came in below expectations and moderated at the margin. The original series grew 2.3% yoy, the same rate recorded in September, and below our 3.6% expectation and the market consensus of 3.1%. Growth in the quarter ending in October was 2.7% yoy (2.7% in 3Q18 and 2.8% in 2Q18). Once adjusted for seasonal and calendar effects, activity grew a higher 2.6%, and 2.7% in the quarter (2.6% in 3Q18 and 2.1% in 2Q18). The rolling 12-month growth rate is 2.6% (2.1% as of June). At the margin, activity decelerated to -0.9% qoq/saar (+0.9% in 3Q18 and +0.8% in 2Q18) as the tax change proposal/discussion affected private sentiment. We forecast 3.3% growth for 2019 (2.6% in 2018). However, a slow recovery of the labor market, and lower oil prices could hamper growth next year.

According to think-tank Fedesarrollo, industrial confidence in November came in at -4.3% (0 = neutral), less pessimistic than the -10.1% recorded one year earlier, but a deterioration from the previous month (a 5.6pp drop). Overall, the improvement from November 2017 was explained by more favorable expectations for production in the next quarter (improving 6.4 points to neutral), demand not falling as much (from -20.1% to -11.2%), and improved levels of inventories. Meanwhile, retail confidence moved further into optimistic territory, coming in at 28.0% from 18.6% in November 2017 (26.8% in the prior month). Compared to November last year, all components showed improvement. Lower inventories, greater expectations of the economic situation in the coming semester (48.0% vs. 29.5% in November 2017) and higher sentiment over the current situation (43.3% from 36.3% twelve months before) explained the gain. After the passing of tax reform uncertainty, confidence may show some recovery ahead and aid the consolidation of the activity improvement. Low inflation and a slightly expansionary monetary policy also support improved confidence. We forecast 3.3% growth for 2019 (2.6% in 2018). However, a slow recovery of the labor market, and lower oil prices could hamper growth next year. 

Week ahead: On Thursday, the institute of statistics will release the unemployment rate for November. We expect the urban unemployment rate in November to come in at 9.7% (9.6% one year before), leading to 10.1% unemployment in the quarter (9.9% as one year before). On Friday, the minutes of last week monetary policy meeting - at which the board of the central bank decided to keep the monetary policy unchanged - will be published. The minutes will likely add further insight into the board’s approach at balancing opposing risks: some inflation measures remaining high, the current account adjustment proceeding slower than expected, while there is uncertainty on the speed of the recovery and global risks have increased.

Mexico

Mexico’s monthly GDP proxy (IGAE) came in above expectations, but weakened once considering calendar adjusted figures. The economic activity index expanded 2.9% yoy in October (from 2.1% in September), above our forecast (2.5%) and median market expectations (2.2%). However, October’s figure was boosted by a positive calendar effect (October last year had a business day less). As a result, according to calendar adjusted figures, IGAE grew 1.9% yoy in October (from 3.1% in September), taking the three-month moving average (3mma) growth rate to 2.3% yoy in the quarter ending in October (from 2.6% in September).
Full story
here.

Inflation came in above market expectations, pressured by non-core food and aero transportation tariffs. Mexico’s CPI posted a bi-weekly rate of 0.56% in the first half of December, significantly above our forecast (0.30%) and median market expectations (0.33%). We note that the bi-weekly inflation print for the first half of December was 15 bps above its 5-year median variation. On an annual basis, headline annual inflation accelerated, but core inflation continues well behavedHeadline inflation accelerated to 5.0% yoy in the first half of December (from 4.87% in the 2H of November). Core inflation remained practically unchanged at 3.64%, with both core goods (3.95%) and core services (3.36%) without a significant change compared to the 2H of November. In turn, non-c ore CPI accelerated to 9.23% yoy (from 8.68%).
Full story
here.

Week ahead: Today (12:00 PM), INEGI will announce November’s unemployment rate (our call: 3.2%) and November’s trade balance, on Friday. We expect US economic activity continued supporting manufacturing exports. However, this support is expected to fade away as the US economy decelerates. Moreover, a decreasing trend in oil output is a downside risk to the energy balance.

Argentina

The treasury ran a primary deficit of ARS 33.8 billion in November, compared with a deficit of ARS 29.7 billion registered in the same month in 2017. Including some investment expenditures that were part of the agreement with the IMF, the total rolling primary deficit as of November totaled 2.5% of GDP, below the target of 2.7% for the year. The nominal deficit was 4.8% of GDP. We estimate the 12-month rolling federal primary deficit of November in line with the fiscal target for the year.
Full story
here.

The Argentine central bank reduced the peso reserve requirements on time deposits. The monetary authority decreased the compulsory reserve ratio on 30-day time deposits to 35% from 38%, and to 25% from 34% in the case of deposits with longer maturities. Reserve requirements can be integrated with cash and short-term central bank papers (Leliqs) within certain limits. In order to standardize the reserve requirements for banks, the authorization to integrate reserve requirements for new time deposits only with Leliqs was eliminated. The central bank expects no change in the monetary base because it has introduced other offsetting changes. In our view, the central bank aims to incentivize time deposits with longer maturities to stabilize the demand for deposits and eventually to encourage credit to the private sector, which has been weak in recent months.

Week ahead: On Thursday, the INDEC will publish the EMAE (official monthly GDP proxy) for October – which we expect activity to post a drop of 0.9% on sequential basis from September, leading to a 5.9% yoy contraction – and will also release the current account balance for 3Q18. We expect to see a decrease in the current account deficit in 3Q18 to USD 6.0 billion (USD 8.3 billion in the same quarter one year before) as a consequence of a weaker peso and lower internal demand.

The Week Ahead in LatAm

Argentina

The INDEC will publish the EMAE (official monthly GDP proxy) for October on Thursday. We expect activity to post a drop of 0.9% on sequential basis from September, leading to a 5.9% year-over-year contraction. 

The INDEC will also release the current account balance for 3Q18 on Thursday. The current account deficit increased to USD 8.3 billion in 2Q18 from USD 6.6 billion in 2Q17. We expect to see a decrease in the current account deficit in 3Q18 to USD 6.0 billion (USD 8.3 billion in the same quarter one year before) as a consequence of a weaker peso and lower internal demand. 

Brazil

In a relatively empty week due to Christmas Holiday, the highlight will be November’s national unemployment rate, to be released on Friday. We forecast a decrease of 0.1 p.p, to 11.6% (stable in seasonally adjusted terms). In addition, FGV’s business confidence surveys for December on industry (the preview was released last week) and services, as well as the economic uncertainty indicator, also for December, will be released throughout the week.

On fiscal accounts relative to November, we expect the central government (Thu.) to post a BRL 12.6 bn primary deficit, and the consolidated public sector (Fri.) to post a BRL 14.1 bn primary deficit.

Colombia

On Thursday, the institute of statistics will release the unemployment rate for November. Labor market indicators came in worse than expected in October. The national unemployment rate picked up to 9.1%, from 8.6% one year earlier. The deterioration of the indicator came from the urban unemployment rate spiking to 10.2%, above the 9.5% print last year. Meanwhile, falling participation is curbing the unemployment rate increase and job creation is of low quality. We expect the urban unemployment rate in November to come in at 9.7% (9.6% one year before), leading to 10.1% unemployment in the quarter (9.9% as one year before).

On Friday, the minutes of last week monetary policy meeting - at which we expect rates to be kept stable - will be published. The minutes will likely add further insight into the board’s approach at balancing opposing risks: some inflation measures remaining high, the current account adjustment proceeding slower than expected, while there is uncertainty on the speed of the recovery and global risks have increased. 

Mexico

Today (12:00 PM), INEGI will announce November’s unemployment rate. We expect the unemployment rate to post 3.2%. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment increased 3.6% yoy in November.

Ending the week, INEGI will announce November’s trade balance. We expect US economic activity continued supporting manufacturing exports. However, this support is expected to fade away as the US economy decelerates. Moreover, a decreasing trend in oil output is a downside risk to the energy balance.



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