Itaú BBA - Evening Edition – Activity remains weak in Mexico

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Evening Edition – Activity remains weak in Mexico

June 24, 2019

We expect economic activity to decelerate to 1.0% in 2019, from 2.0% in 2018.

Talk of the Day

Mexico

The monthly GDP proxy (IGAE) contracted 1.4% yoy in April (from +1.3% in March), slightly better than our forecast (-1.5%) and below market expectations (-0.4%). The figure was dragged by a negative calendar effect (Easter Holidays). Still, according to calendar adjusted figures published by Mexico’s statistics institute (INEGI), monthly GDP grew a weak 0.2% yoy in April (from -0.5% in March), taking the quarterly growth rate to 0.2% in April (from 0.5% in March). The breakdown shows, according to calendar adjusted figures, that the industrial sector declined by 1.3% in the quarter ended in April (from -1.5% in March), with mining and construction outputs contracting 7.2% and 2.7%, respectively, while the manufacturing sector improved somewhat (1.1%). In turn, the service sector decelerated to 0.7% in the quarter, from 1.3% in March. The monthly GDP excluding primary sector and mining output decelerated to 0.2% in the quarter (from 0.5% in March), also adjusted by calendar effects. At the margin, IGAE fell by 0.5% qoq/saar in April (from -0.2% in March) dragged by the service sector, while manufacturing output improved somewhat. We expect economic activity to decelerate to 1.0% in 2019, from 2.0% in 2018. Uncertainty over the direction of domestic policy, trade relations with the U.S. and weaker U.S. economic growth will likely keep growth below potential. In the short term, lower public spending is also playing against activity. ** Full story here
 

On the inflation side, CPI posted a bi-weekly rate of 0.01% in the first half of June (from 0.13% a year ago), below our forecast (0.14%) and the median market expectations (0.04%). The CPI was pulled down by a fall in non-core energy prices (-0.76%, from 1.32% a year ago), while non-core agro prices declined by 0.44% (from -0.70% a year ago). In turn, the core CPI measure increased 0.16% (from 0.08% a year ago). On an annual basis, headline inflation decelerated to 4.00% in the 1H of June (from 4.13% in the 2H of May). However, core CPI accelerated to 3.87% (from 3.78%), pressured by both core services (3.76%, from 3.68%) and core goods (3.94%, from 3.83%). At the margin, headline inflation slowed down, but core inflation accelerated. For 2019, we expect inflation to end the year at 3.7%. Although headline inflation slowed down, the acceleration in core inflation will add pressure on Banxico’s board members to keep a hawkish stance. Moreover, the uncertainties over Mexico’s economy continue to constitute upside risks for inflation, through a weaker currency. In this context, rate cuts are unlikely to happen soon. ** Full story here.
 

Tomorrow’s Agenda: At 10:00 AM, the statistics institute (INEGI) will announce April’s retail sales, for which we forecast a 0.1% yoy decline, from 1.6% in March.

Brazil

The current account posted a surplus of USD 664 million in May, printing close to our forecast (USD 850 million) and the median of market's estimates (USD 700 million). The deficit accumulated over 12 months remains at a historically low level: 0.7% of GDP. For the next years, we maintain our expectation of a gradual increase in the current account deficit, but not to the point of compromising the sustainability of Brazil’s external accounts. In the financial account, direct investment in the country (DIC) added up to USD 7.1 billion, missing our estimate (USD 8.5 billion) and the market consensus (USD 7.8 billion). However, the volume brought in by this investment modality remains robust, as DIC accumulated over 12 months remains historically high: USD 97 billion or 5.19% of GDP. DIC continues to be the main source of financing for the current account deficit. ** Full story here

On the fiscal side, tax collection came in at BRL 113.3 billion in May, in line with our call (BRL 113 bn) and market expectations (BRL 114.4 bn). Tax collection increased 1.9% y/y in real terms in the month. Revenues related to corporate profits increased 5.8% y/y in May and those related to consumption increased 2.5% y/y. On the other hand, revenues related to wage bill stayed roughly stable, increasing 0.1% y/y in the period. Excluding revenues from the REFIS/PRT, tax collection increased 2.7% y/y in real terms, with the 3mma rate decelerating to 1.6% (from 2.7%), representing some weakening when compared to recent months. The central government primary result for May will be released on Wednesday, for which we expect a BRL 17.9 bn primary deficit.

The median of GDP growth forecasts for 2019 declined for the 17th consecutive week. According to the BCB’s weekly survey with market participants (Focus), the forecast for 2019 dropped 6 bps, to 0.87%. For 2020 and 2021, the median of GDP growth forecasts remained stable at 2.20% and 2.50%, respectively. The median of IPCA inflation expectations oscillated to 3.82% for 2019 (from 3.84%) and declined 5 bps for 2020, to 3.95%. For 2021, inflation expectations remained unchanged at 3.75%. Additionally, the National Monetary Council (CMN) will set the inflation target for 2022 on Thursday (June 27), which we expect at 3.5% (the median of the Focus survey on inflation for 2022 is currently at 3.75%). If confirmed, the target path will be 4% in 2020, 3.75% in 2021, and 3.5% in 2022, moving towards the regional 3% norm. The year-end Selic rate remained stable for the three years horizon (2019-2021): at 5.75% for 2019; at 6.50% for 2020; and 7.50% for 2021. Similarly, the median of exchange rate did not change for 2019 and 2020, at BRL 3.80/USD, and remained broadly stable at BRL 3.84/USD for 2021 (from 3.85).

Tomorrow’s Agenda: The Copom minutes will be released at 8:00 AM. In the last meeting, the committee kept the base rate at 6.5% pa, as widely expected. Importantly, its statement opens the way for a resumption of monetary easing, as early as the July 31st policy meeting, provided there is “concrete progress” in the reform agenda. At the same time, FGV’s consumer confidence index for June will be released. On the inflation side, June’s IPCA-15 will be released at 9:00 AM. We forecast a 0.06% monthly increase, which would lead the 12-month reading to 3.84% (from 4.93% in April).

Chile

The minutes of the June decision to cut the policy rate by 50bps to 2.5% show the board debated on whether to implement the cut in one move or in two 25bps steps. Given the macroeconomic effects of the two strategies were deemed practically identical, the decision was a tactical one. The minutes reiterated the view that no for further easing is needed, justifying the communication of a neutral bias, and the signaling that the next rate movement would depend on the certainty regarding inflation converging to the target. This month’s minutes are shorter than usual given it follows the flagship 2Q Inflation Report and an atypically longer press release. An upward revision to potential growth and a lower neutral rate, convinced all board members to increase monetary stimulus. Additionally, low activity dynamism in 1Q19 meant a wider and more persistent-than-expected output gap. Meanwhile, the worsening of global conditions and a lower neutral policy rate, compounded the need to cut rates. Given we hold a less optimistic outlook on growth (and hence subdued inflation ahead), we expect further easing. We see the policy rate at 2% by year-end. ** Full story here.



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