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Confidence indicators lose momentum in Brazil

January 29, 2019

Confidence within the retail sector remained virtually unchanged (-0.2%) in January, following three months of steady gains

Talk of the day

Brazil

According to the FGV’s monthly survey, confidence within the retail sector remained virtually unchanged (-0.2%) in January, following three months of steady gains.  The breakdown shows weaker current conditions (-2.6%) partially offset by stronger expectations (1.9%). Construction  confidence also remained stable in January, following four months on the rise. Current conditions rose 0.5%, up for the 8th consecutive month, while expectations eased 0.6%.Capacity utilization rose 0.1pp to 66.7, remaining well below 2014 levels.

Meanwhile, consumer confidence rose 3.9% mom/sa in the month, improving further due to strong expectations. The advance came mainly from better expectations (up 4.8%), reaching the highest level since Jun/12. Current conditions rose 1.6% and intention to purchase durable goods rose 2.0%. The component of expected inflation fell 0.4pp to 5.0, while the percentage of people reporting that jobs are hard to get fell 2.2pp to 91.9. The index shows no material change since the latest recession.

The current account ended 2018 with a $14.5 billion deficit or 0.8% of GDP ($7.2 billion or 0.4% of GDP in 2017). The smaller trade balance was behind the widening deficit, as imports increased faster than exports. The income deficit was narrower than in 2017, while the service deficit remained virtually stable. In terms of financing, direct investment in the country remained high in 2018. For the next years, we maintain our expectation of growing deficits, but to comfortable levels that do not compromise the sustainability of Brazil’s external accounts.
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According to the Central Bank survey with market participants (Focus), the median of GDP growth expectations for 2019 fell to 2.50% (from 2.53%), to 2.50% for 2020 (from 2.60%), and remained stable at 2.50% for 2021. The median of the forecasts for the exchange rate did not change for 2019 (BRL 3.75/USD) and 2020 (BRL 3.78/USD), and increased slightly to BRL 3.81/USD for 2021 (from 3.80). The IPCA inflation expectations for 2019 declined to 4.00% (from 4.01%), and did not change for 2020 and 2021 (at 4.0% and 3.75%, respectively). The year-end Selic rate expectations also remained stable for 2019 (at 7.0%), 2020 (8.0%) and 2021 (8.0%).

Day ahead: Central government result for December will be released at 14:30 PM (SP Time), for which we expect a BRL 31.6 billion primary deficit. In addition, the Central Bank will release its credit report for the month of December.

Mexico

Trade deficit deteriorated in 2018, dragged by the energy deficit.  Monthly trade balance posted a USD 1.8 billion surplus in December, above median market expectations (USD 0.9 billion deficit) - with a 2018 trade deficit of USD 13.7 billion (from a 12-month rolling deficit of USD 15.5 billion in November and USD 11.9 billion in 2017). Looking at the breakdown, energy deficit posted a USD 23.2 billion result in 2018 (from a 12-month rolling deficit of USD 23.1 billion in November and USD 18.3 Billion in 2017), while non-energy surplus posted a USD 9.5 Billion result (from 12-month rolling surplus of USD 7.5 billion in November and USD 7.3 Billion in 2017). At the margin, the trade deficit also deteriorated, as the seasonally-adjusted 3-month annualized measure came in at USD 15. 6 billion in the 4Q18 (from USD 13.5 billion deficit in the 3Q18), with the energy deficit at USD 25.9 billion (from a deficit of USD 24.7 billion) and the non-energy surplus at USD 10.4 billion (from USD 11.2 billion).

We expect the current account deficit to remain broadly stable at a narrow level (1.5% of GDP), relative to 2018. On one hand, US economic slowdown will curb manufacturing exports, while weak oil production is a downside risk for the energy balance. However, uncertainty over domestic policies and over the USMCA approval in US Congress will likely slow internal demand.
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Chile

According to the Central Bank’s quarterly survey of credit conditions, the supply conditions of loans in Chile was broadly similar to 3Q18, while demand strengthened in the final quarter of 2018. On balance, entities saw stronger signs of higher loan demand by large companies in the fourth quarter (+60% from +31% in 3Q18; index centered at 0). Construction and real estate demand was up to 46% (from 40%), while consumer demand increased to 33% (16% previously). Meanwhile, demand for mortgages improved 0.1pp to 18%. On the supply side, credit supply to large businesses remained expansive (20% percent, similar to in 3Q18). Meanwhile, loan conditions to consumers were unchanged from the previous quarter, but became somewhat tighter for mortgages (to -9% from +17%) and SME’ s (to -9 % from -8%) compared to 3Q18. With inflation low and monetary policy still expansionary, demand for loans will likely remain buoyant, which in turn would support the growth recovery of the Chilean economy (3.5% this year after the 4.0% estimate in 2018).

Fixed Income Strategy

Most Latam rates declined last week, as the market factors in higher odds of a more benign scenario for emerging markets. This week the focus will be on US-China talks (Jan 30-31) led by Liu He and Robert Lighthizer, which may increase the likelihood of a trade deal and reduce global risks. Also, FOMC rate decision meeting will take place on Wednesday. We expect the committee to confirm the “patient and flexible” approach regarding the interest rate normalization and “adjust balance sheet policy if necessary”.

We continue to receive the NTN-B 2050 real rate (now at 4.61%) with a 19bps gain so far (see trade idea). Nominal rates tightened 15bps at the belly of the curve last week and just about 2bps at the long end.
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