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Confidence indicators remain in pessimistic ground in Brazil

April 26, 2019

Confidence in the retail and construction sectors moved sideways in April.

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Confidence in the retail and construction sectors moved sideways in April. The retail index remained stable at 96.8 points, the lowest reading since October 2018. The current situation component grew 3.3 p.p., almost fully offset by a decline of 3.2 p.p. in the expectations index. In the construction sector, confidence remained at 82.5 points in the month, with a 1 p.p. increase in the current situation component, neutralized by a 1.1 p.p. drop in the expectations index. All in all, the result reinforces our view of weak growth in early 2019.  

April’s IPCA-15 inflation came in at 0.72%, above our call (0.69%) and the market’s (0.67%). The monthly change was mainly driven by an increase in food (1.28%) and oil prices (3.22%) components. In year-over-year terms, inflation advanced to 4.72% (our call: 4.68%; mkt: 4.65%), from 4.18% in the previous month, influenced by base effects that are expected to persist for the next month. Compared to our call, the services component printed as expected, especially the core measure, which is still suggesting comfortable levels for inflation.
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On external accounts, the current account posted a deficit of $ 494 million in March, below our estimate (USD 500 million surplus) and market expectations ($ 100 million deficit). Compared to our forecast, the surprise was concentrated in the income account, with higher than expected expenses related to profits and dividends. The current account deficit remains at a low level. For the coming years, we maintain our vision of a gradual increase in the current account deficit, but without compromising the sustainability of external accounts. In the financial account, direct investment in the country (DIC) added up to $ 6.8 billion, below our expectations ($ 7.5 billion) and the market consensus ($ 7.9 billion). However, DIC accumulated over 12 months remains at a historically high level: $ 89 billion, or 4.7% of GDP. Direct investment in the country continues to be the main source of financing for the current account deficit.
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Day Ahead: The Central Bank’s credit report regarding March’s data is expected to be released today.


Industrial and retail confidence increased in March, accumulating gains over the twelve-month period. According to think-tank Fedesarrollo, industrial confidence was 3.0% in March (0 = neutral), up from 0.2% one year earlier (5.1% in February). Compared to March 2018, there was an improvement in the expectations for production in the upcoming quarter (up 3.2pp to 35.7%), while actual volume of orders was viewed less unfavorable (moving from -27.8% to -22.0%). According to our seasonal adjustment, industrial confidence was broadly stable from February. Meanwhile, retail confidence came in at 27.5% (24.6% in March 2018; 31.8% in February), with the annual gain evenly explained by all three sub-indexes: a reduction in inventory levels, better expectations of the economic situation in the coming semester and the evaluation of the current situation. Overall, upbeat business sentiment levels, low inflation (aiding real wage growth) and low and stable interest rates will likely support the activity recovery to 3.3% this year (2.7% for 2018).


Retail sales surprised to the upside, but grew at a below trend pace. Retails sales increased 1.8% yoy in February (from 0.9% in January); the figure was above our forecast and market expectations (0.6%). Although retail sales accelerated in February (compared to last month), it grew at a below trend pace (from an average growth of 2.4% in 2018). At the margin, retail sales momentum remained weak. Using seasonally-adjusted figures, retail sales increased 1.2% mom in February (from 2.7% in January). Still, the quarter-over-quarter annualized growth rate was -6.1% (from -6.7% in January). We expect private consumption to moderate its pace in 2019 (relative to 2018), as the U.S. deceleration and uncertainties facing the economy curb GDP growth. In this context, employment is weakening. However, recent real wage increases are a buffer for activity. Lower inflation and minimum wage increases, amid a still-tight output gap, are the factors boosting real wages.
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Day Ahead: At 10:00 AM, INEGI will publish February’s monthly GDP proxy (IGAE), which we forecast at 0.9% yoy (after growing 1.3% in January). At the same time, INEGI will announce March’s trade balance. Manufacturing exports likely slowed down, reflecting weaker external demand. In turn, we expect non-oil imports also deteriorated, reflecting some deceleration of internal demand.


The University of Chile’s quarterly employment survey of greater Santiago shows a stable unemployment rate from last year. The unemployment rate came in at 7.6%, while INE’s greater Santiago survey for the quarter ending in February registered a rise of 0.2pp to 7.0%.

The stable unemployment reading was due to unfavorable dynamics as both employment and labor force contracted by around 0.5% yoy (1.2% drop in employment according to INE). This was the first employment drop since 1Q17 (+3.2% yoy in 4Q18) as salaried employment shrunk 1.5% (+1.9% previously), while partly opffset by still growing self-employment (3.4% yoy). Construction and manufacturing sectors were key job destructors in the quarter. Meanwhile, labor market participation was down 0.8pp over twelve months to 61.8% (compared to a 1.4pp drop in participation, to 60.6%, according to INE’s figures).

With the labor market still loose, wage pressures would likely remain contained, aiding the retention of monetary stimulus for an extended period. We expect one further 25-bp rate hike near the end of this year, taking the policy rate to 3.25%.

Day Ahead: The Central Bank will hold its third monetary policy meeting of 2019. With sluggish activity, subdued inflation pressures and a looser global monetary policy, we expect no change of the status-quo, keeping rates on hold at 4.25%.

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