Itaú BBA - Copom minutes: On sufficient conditions

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Copom minutes: On sufficient conditions

May 14, 2019

The committee indicates that, while 1Q19's GDP may well have a negative print, activity is likely to rebound after the pension reform.

Talk of the Day

Our LatAm Macro Monthly report was published yesterday, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.
** Full story
here.

Brazil

The just released Copom minutes suggest that, despite the disappointing recovery pace, the Copom is still quite comfortable with the current level of the Selic. The committee indicates that, while 1Q19's GDP may well have a negative print, activity is likely to rebound hereafter, and adds that it will need to see signs that the aftereffects of the 2018 shocks have passed before any reassessment. Moreover, the text hints that the Copom will also need to gauge to what extent uncertainty about fiscal sustainability may be hindering activity. The authorities appear to believe, in summary, that approval of the pension reform will be a sufficient condition to strongly accelerate growth – we think it is a necessary one, but not sufficient. We still expect the BCB to resume rate cuts in its September meeting. The second half of June, with a Copom meeting, publication of the QIR, and definition of the inflation target for 2022, will see the next steps of Brazil's monetary policy. 

Macro Scenario: We lowered our growth forecasts for 2019 (to 1.0% from 1.3%) and 2020 (to 2.0% from 2.5%), but improved our estimate for the primary budget deficit in 2019 to 0.8% of GDP (from 1.5%), after accounting for the expected extraordinary revenues from the transfer-of-rights oil auction (cessão onerosa). For 2020, our deficit forecast worsened slightly, to 1.1% of GDP (from 1.0%), but this outlook is strictly dependent on the approval of the pension reform, whose fiscal impact will likely represent 50% to 75% of the impact outlined in the government’s proposal. Our year-end exchange rate forecasts are unchanged at BRL/USD 3.80 in 2019 and 3.90 in 2020. Our inflation forecasts are also stable, at 3.6% for 2019 and 2020.
** Full story
here.

Day Ahead: March’s service sector revenues (PMS) will be released at 9:00 AM. We forecast a 0.4% mom/sa decline, which translates into a 1.5% decrease in year-over-year terms. Additionally, the minister of the Economy, Paulo Guedes, is expected to speak at Congress about the Budgetary Law for 2020 at 2:00 PM.

Colombia

The trade deficit in 1Q19 nearly doubled that registered one year earlier. In the final month of the quarter, a trade deficit of USD 762 million was recorded, broadly in line with our call and market consensus, but larger than the USD 363 million deficit in March last year. As a result, the trade deficit in 1Q19 widened from USD 1.2 billion in 1Q18 to USD 2.4 billion. Slowing oil exports and falling coal exports, along with dynamic import demand, led the result. Overall, the 12-month rolling trade deficit rose to USD 8.2 billion from USD 7.1bn in 2018 (USD 6.1 billion in 2017). However, at the margin, the trade deficit was stable at USD 10 billion (annualized) in the quarter. We see a wide current account deficit of 4.1% of GDP in 2019 (3.8% last year). The weakening global economy and some internal demand recovery would prevent a correction of external accounts.
** Full story
here.

Day Ahead: March’s activity indicators will be published. We expect industrial production to remain in positive ground with growth of 2.6% yoy (2.8% in February), as confidence stayed upbeat. Meanwhile, retail sales growth is likely to be 5.5% in twelve months (5.7% in February), as auto sales continued to recover and confidence improved.

Chile

Macro Scenario: Activity weakness at the start of the year is partially due to transitory factors, but a moderation of confidence amid raised uncertainty and lower global growth outlook have led us to downgrade our growth forecast to 3.0% for this year (3.2% previously; 4% last year) and to 3.5% for 2020 (3.7% previously). Our view that activity this year would be driven by investment in tradable sectors (keeping capital goods imports strong), the risks for the exchange rate linked to the wider current-account deficit are mitigated. Nevertheless, a deteriorated global outlook (lower copper prices) mean we now see the CLP ending the year at 670 per dollar (655 previously; 694 in 2018). As domestic demand consolidates and tradable inflation normalizes, we expect inflation to pick up as the year unfolds. However, a higher-than-expected adjustment to electricity tariffs leads us to revise our year-end call to 2.8% (2.6% previously). Low inflation, weakening activity, the Fed’s looser policy stance and lower global economic growth suggest that there is no need to remove stimulus rapidly in the near term. We now expect stable rates at 3% for the remainder of 2019 (one hike was previously expected). Two hikes during 2020 are expected, assuming the economic recovery consolidates.
** Full story
here.

Mexico

Macro Scenario: Given the Democrats’ continued concerns about the USMCA’s enforceability (in particular labor standards) and the current divisive environment between Democrats and the White House, ratification of the agreement is still at risk, which constitutes an important source of uncertainty for Mexico’s economy. Meanwhile, Mexico’s first-quarter public finance results were consistent with AMLO’s commitment to fiscal responsibility, but execution of the coming targets remains a risk given the high number of expenditure promises. The 1Q19 GDP flash estimate confirms weak economic activity. However, inflation accelerated more than expected in April. In a context of still-high inflation and elevated uncertainty, we expect the policy rate to remain on hold in the short term. An easing cycle will likely s tart in 4Q19, as inflation stabilizes within the range around the target and assuming a dissipation of the risks for the exchange rate and, consequently, inflation.
** Full story
here.


 



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