Itaú BBA - Core inflation remains well behaved in Brazil

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Core inflation remains well behaved in Brazil

May 13, 2019

Despite some monthly upward pressure in the core services component, core inflation remains in comfortable levels.

See our Week Ahead full note at the end of this report. 

Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.

Talk of the Day


April’s IPCA inflation came in at 0.57%, below our forecast (0.63%) and the market’s (0.62%). The monthly change was driven by increases in food and beverage (0.63%), transportation (0.94%), and health and personal care (1.51%), which together explained 89.5% of the IPCA change. In year-over-year terms, inflation advanced to 4.94% (below our estimate and the market’s, both at 5.0%), from 4.58% in the previous month. Compared to our forecast, the negative surprise was driven mainly by market set prices (6 bps lower than our call), especially due to the food at home component (-7 bps).

Notwithstanding the headline increase, core inflation measures remain well behaved. Despite some monthly upward pressure in the core services component, explained by a 5bps surprise in the food away from home item, core inflation remains in comfortable levels. Considering our estimates for the coming months, the yearly indicator probably peaked in April. In June 2019, when the 1.26% hike posted in the same month of 2018 (deeply impacted by the truckers' stoppages) will slip out of the calculation, inflation should stay near 4.0%.
** Full story 


On an annual basis, industrial production (IP) remained weak in 1Q19. IP fell by 0.1% yoy in March (from -1.0% in February), above our forecast of -0.6% and market expectations (-0.3%). Adjusted by calendar effects, IP decreased 2.7% yoy (from -1.0%) as March 2017 had less business days due to Easter holidays, taking the 1Q19 growth rate to -1.6% yoy (from -1.2% in 4Q18). Looking at the breakdown, also using calendar adjusted figures, mining sector kept contracting (-7.9%, from -7.3%), mainly due to a fall in oil output (-10.2%, from -8.2%). In turn, manufacturing sector decelerated to 0.4% in 1Q19 (from 1% in the 4Q18), while construction sector fell by 2.0% (from -2.1%). At the margin, industrial production improved somewhat, but momentum remained weak in 1Q19. We expect economic activity to slow to 1.4% in 2019, from 2.0% in 2018. Uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment. In this context, employment is already weakening. On the other hand, recent real wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown.
** Full story 


According to the results of the central bank’s monthly analyst survey, rates are expected to remain stable at 3% for the remainder of the year, while growth was cut for the fourth consecutive month. Last month, analysts expected one 25bp hike to 3.25% sometime in 4Q19. In the medium-term, expectations are unchanged, with the policy rate reaching 3.50% during 2H20. With gasoline prices on the rise, short-term inflation forecasts (yearend) ticked up 0.1pp to 2.8% (in line with our call), while stayed at the 3% target for 2020 (also the 23-month expectation). Hence, the market continues to see the low annual inflation as a transitory occurrence. The growth forecast for this year was lowered by 0.1pp to 3.2%, while it remains unchanged at 3.4% for 2020. We believe that weaker activity momentum at the beginning of the year and the intensifying risks to global growth put downside pressures to the growth outlook and justify a prolonged pause in the normalization process.


Day Ahead: The central bank will publish the trade balance for the month of March at 2:00 PM. We expect a trade deficit of USD 787 million (USD 363 million deficit last year; USD 581 million in February), as industrial material and capital goods imports strengthened and total exports declined (despite the recovery of oil sales). As a result, the trade balance for 1Q19 would come in at a USD 2.4 billion deficit (USD 1.2 billion deficit one year earlier).

The Week Ahead in LatAm


On Wednesday, the INDEC (the official statistical agency) will publish the National CPI for April 2019. The consulting firm Elypsis, which tracks prices, projected a 4% mom increase, down from 4.7% in March. Thus, annual inflation would hit 56.7% yoy, up from 54.8% in March.


The Copom minutes will be released on Tuesday, at 8:00 AM. In the last meeting, the Copom left the Selic rate unchanged, at 6.5% pa, in a widely anticipated decision. Changes in the policy statement suggested that the authorities are (rightly in our view) less sanguine on the state of the recovery. While still stressing the need to wait for more clarity on the reform front, the committee seems to be inclined to reassess the adequacy of the stimulus its current stance injects in the economy, in case activity fails to strengthen in the coming months.

On economic activity, March’s service sector revenues (PMS) will be the main release, on Tuesday. We forecast a 0.4% mom/sa decline, which translates into a 1.5% decrease in year-over-year terms. The release will be important for the 1Q19 GDP tracking - our forecast currently points to a 0.2% qoq/sa decline. Additionally, BCB’s monthly activity index (IBC-Br) for March will come in on Wednesday - our preliminary forecast (conditional to PMS) points to a 0.1% mom/sa decline, leading the year-over-year rate to a 2.1% decrease. Finally, paper cardboard dispatches (ABPO), an indicator related to the industrial production of April, will likely be released (without a specified date).

On the fiscal front, April’s tax collection may come in during the week, for which we expect a BRL 139 bln print.

Finally, the market will remain focused on the news flow about the pension reform and its advances in the special committee. Throughout the week, some major provisional measures may be voted in the Lower House (MP 868, 870 and 871), which can be indicative of the current situation of the government’s articulation with the Congress, with key implications for the pension reform’s outlook.


The central bank will publish the trade balance for the month of March on Monday. External imbalances continued to deteriorate in February. We expect a trade deficit of USD 787 million (USD 363 million deficit last year; USD 581 million in February), as industrial material and capital goods imports strengthened and total exports declined (despite the recovery of oil sales). As a result, the trade balance for 1Q19 would come in at a USD 2.4 billion deficit (USD 1.2 billion deficit one year earlier).

On Tuesday, activity indicators for the month of March will be published. Activity indicators for the month of February were solid, as retail sales and manufacturing grew above expectations. For March, we expect industrial production to remain in positive ground with growth of 2.6% year over year (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.  

On Wednesday, GDP for the first quarter of 2019 will be published. In 4Q18, the gradual activity recovery advanced with both investment and private consumption accelerating. So far this year, retail sales point to still robust consumption, while imports of capital hint at the investment rebound persisted. We expect growth of 3.4% for the original series (2.8% in 4Q18). Later in the day the monthly coincident activity indicator (ISE) will be published for March. 

Consumer confidence for the month of April will be published on Friday. According to think-tank Fedesarrollo, consumer confidence returned to optimistic ground in March after a semester of pessimism. The confidence recovery from March last year (+4.4pp to 1.2%; 0 = neutral) was explained by more favorable views on current conditions as well as expectations. Improving confidence bodes well for the consolidation of the consumption recovery. Low inflation and the mildly expansionary monetary policy would likely keep confidence upbeat.


The Central Bank of Mexico (Banxico) will hold a board meeting on Thursday, to decide on the reference rate. We expect Banxico to remain on hold at 8.25%. Given the recent upside surprises in inflation, we believe Banxico’s board (or at least most of its members) will continue to adopt a cautious tone (in particular, maintaining the view that the balance of risks for inflation is tilted to the upside). Looking forward, we believe that with inflation falling within the central bank’s target range, below-potential growth, and a looser monetary-policy stance by the Fed, the central bank will have room to start a gradual normalization cycle in 4Q19, as long as uncertainty abates and risks for inflation fall. 


In the middle of the week, the statistics institute (INEI) will announce March’s GDP proxy. We estimate that the GDP proxy expanded 2.9% year-over-year, from 2.1% in February. On the non-natural resources side, we expect construction output improved somewhat, as gross fixed public investment expenditure execution, in regional and local governments, contracted by less than before, while the services sector grew at a decent pace. In turn, natural resources sector is expected to be dragged by a fall in fishing output, which in turn is expected to affect primary manufacturing. Also, we expect mining sector to improve slightly. Assuming our forecast is correct, 1Q19 GDP proxy would grow 2.2% year-over-year (from 4.8% in the 4Q18).

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