Itaú BBA - Evening Edition – Activity surprise solidifies case for a rate hike this month in Chile

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Evening Edition – Activity surprise solidifies case for a rate hike this month in Chile

January 7, 2019

We expect a deceleration to a still-solid 3.5% pace this year

Talk of the Day


Despite both manufacturing and retail sales posting notable declines in November, according to the National Institute of Statistics, the central bank’s monthly GDP proxy (Imacec) surprised significantly to the upside. The monthly GDP proxy (Imacec) grew 3.1% in November, far above the market consensus of 2.0% and our 1.6% call. Activity in the month was boosted by a mining bounce back (as the base of comparison normalizes and ore-grade improved) and services (reflecting domestic demand remains robust). With activity still dynamic at the close of 2018, the central bank will likely feel comfortable, bar a significant downside surprise in inflation, to continue with its normalization cycle later this month (given their view that the output gap is narrowing). Stable nominal wage growth of 4.1% in November could also support the central bank’s favorable view of labor market developments. Going forward, the board will likely revaluate whether ongoing global trade uncertainties, softening global growth and lower confidence are hampering the growth outlook enough to alter its trajectory for the policy rate (reaching 4.0%-4.5% in 1H20).

The Imacec data for November puts an upside bias to our 3.9% growth forecast for 2018 (1.5% in 2017). We expect a deceleration to a still-solid 3.5% pace this year, but persistent headwinds are downside risks. Concluding 2018, Icare’s business confidence moved further into pessimistic territory (to 48.8 points) after dropping below the neutral 50 points to 49 points in November for the first time in the year. Meanwhile, Adimark’s consumer confidence indicator ended 2018 at 44.6 points (44.9 in November and 55.1 at the close of 2017).
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Plummeting global oil prices in 4Q18 aided a large trade surplus last year, albeit still a moderation from 2017. Additionally, consumption related imports weakened in the final quarter of the year, offsetting falling mining exports. Overall, a trade surplus of USD 596 million was posted in December (Itaú: USD 675 million), leading to a surplus of USD 713 million in 4Q18 and a USD 5.4 billion surplus in 2018 (Itaú: USD 5.5 billion; USD 7.9 billion in 2017). Our seasonally adjusted series shows a smaller USD 3.8 billion (annualized) trade surplus in 4Q18, moderating from USD 5.0 billion in 3Q18, as non-energy and capital imports accelerated at the margin.

As global demand softens – negatively affecting copper prices – we expect the current account deficit to keep widening this year, albeit contained given low oil prices.  We expect a deficit of 2.6% of GDP for 2018, compared with the 1.5% deficit for 2017, with some widening to 2.7% this year.
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In line with still suppressed business confidence, consumers remained pessimistic at the close of 2018. Adimark’s consumer confidence index moved from 44.9 points in November to 44.6 points (50 = neutral), the lowest confidence reading since August in 2017. The headline reading represents a 8.5 point drop over a 12-month period, the largest decline since August 2015 and only the second decline since February 2017. The sub-index keeping confidence in pessimistic ground is the 5-year outlook that fell to 25.5 (25.7 in November and 51.4 one year earlier). The other sub-indexes that worsened over twelve months was the 12-month ahead economic expectation (to 52.6 points, from 53.1 in November and 66.2 one year prior), as well as the current state of the economy (to 44.5 from 47.5 in November and 49.5 in Dec17). On a personal front, consumers still see some improvement, with their personal economic situation less downbeat at 44.5 (41.2 in November and 43.5 one year earlier). Meanwhile, the consumer expectation to purchase household goods is still optimistic at 55.9 points, improving by 0.8pp over 12-months to 55.9 points. A weaker Chilean peso could partly be behind the sentiment deterioration. Nevertheless, low and controlled inflation, along with a still expansive monetary policy could prevent consumers from becoming too demoralized. We expect the Chilean economy to expand by 3.5% this year, moderating from the 3.9% expected for 2018 (1.5% in 2017). However, low private sentiment could hamper the growth outlook.

Wage growth in November was a stable 4.1%. The National Institute of Statistics (INE) also reported that real wage growth increased 1.1%, from the 1.3% in the previous month. As a result, in the third ending in October, nominal wage growth ticked up 0.2pp to 1.3%. For the rolling quarter ending in November, nominal wage growth was 4.2%, up from 4.0% in 3Q18, but still below the 4.7% in 2Q18 and 5.3% in 1Q18. Accordingly, real wages in the quarter rose 1.2%, stable from 3Q18 nut also below the 2.5% in 2Q18 and 3.3% in 1Q18. Overall, the real wage bill (considering only salaried employment), grew 2.1% in the quarter (3.0% in 3Q18, 4.8% in 2Q18 and 6.0% in 1Q18). The central bank has highlighted the impact immigration has had on employment, partly explaining lower wage pressures, but overall reflect a labor market evolving in-line with the growth pace observed since mid-2017.

Tomorrow’s agenda: Inflation for the month of December will be released at 9:00 AM. Inflation was expectedly low in November, dragged down by lower fuel prices, but core pressures were also contained. Annual inflation dipped 0.1pp to 2.8%. The core measures were also under control in the month, with inflation excluding food and energy prices coming in at 2.2% (2.1% previously). Additionally, our diffusion index continued to show the persistence of downward inflationary pressures led by the tradable component. High frequency price tracking points to consumer prices falling 0.1% from November (+0.1% last year), with fuel, electricity, potatoes and seasonal vegetables dragging annual inflation further down to 2.6%.


Annual inflation ended 2018 by slowing to 3.20%, from 3.27% in November, falling within the central bank’s 2%-4% range around the target for first time since 2014. In December, consumer prices gained 0.33% from November (0.38% last year), broadly in line with the 0.33% Bloomberg market consensus and our 0.32% forecast. With global uncertainties on the rise and the domestic recovery not yet consolidated, limited inflationary pressures favor the central bank keeping policy rate unchanged at mildly expansionary 4.25% for the time being.

For 2019 we expect inflation to end the year at 3.4%. The modified tax reform (which dropped a proposal to increase VAT rates for food staples) has diminished inflationary risks for 2019. However, higher inflation during next year is likely as the weaker exchange rate (on the back of lower oil prices) leads to rising tradable inflation, food prices normalize and the above productivity growth minimum wage increase (6%) becomes effective. On the other hand, the still negative output gap and controlled inflation expectations would contain the acceleration.
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According to the Focus survey, the year-end Selic rate expectations fell to 7.00% for 2019 (from 7.13%) and remained stable for 2020 (8.00%). The IPCA inflation expectations did not change: 3.69% for 2018; 4.01% for 2019 and 4.00% for 2020. The median GDP growth expectations did not change for 2018 (1.30%) and 2020 (2.50%), but oscillated to 2.53% for 2019 (from 2.55%). Median forecasts for the exchange rate remained stable: BRL 3.80/USD for both 2019 and 2020.

Macro vision: Fiscal Policy in 2019. Meeting the spending cap and primary budget targets requires discipline, but it should not be a major challenge in 2019. The golden rule should have a significantly lower imbalance than assumed in the budget, and Congress is expected to authorize its non-compliance. In a more favorable scenario — in which the agenda for extraordinary revenues moves quickly, expense execution is more contained and development bank BNDES provides additional reimbursements to the National Treasury — the primary budget result may be slightly positive and public debt could decline temporarily in 2019. To achieve permanent fiscal improvement, approving social security reform and redefining rules that adjust the minimum wage and wages paid to public servants will be the main fiscal challenges in the first year of the new administration. We expect the approval of a social security reform that produces a fiscal impact similar to that of the proposal discussed in Congress over the last two years. Furthermore, the 2020 Budgetary Guidelines Law (LDO), to be submitted on April 15, will be an important milestone for the two latest topics, signaling the new administration’s commitment to fiscal rebalancing and, particularly, to the spending cap in 2020, when the scenario may become more challenging.
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Tomorrow’s agenda: November’s industrial production will be released at 9:00 AM. We forecast a 0.2% gain on a seasonally adjusted monthly basis, which translates to a 0.4% decrease in year-over-year terms. Also, Anfavea’s auto production for December will come out (11:20 AM), for which we forecast a 1.5% mom/sa decline.

Fixed Income LatAm Strategy

The drop in U.S. rates continues to drive some tightening in LatAm local rates as well, with Brazil and Mexico outperforming last week. The highlight of this week will be the U.S.-China vice-ministerial trade talks started in Beijing (Jan 7-8). Bloomberg reported that Chinese Vice Premier Liu He unexpectedly attended the first day of talks, signaling that China is attaching high importance to the meetings.
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We recommend extending duration in Brazil and receiving NTN-B 2050 at 4.84%. Nominal rates have been rallying hard since mid-September. Real rates also tightened, but are clearly lagging, and break-even inflation stands at historical lows. After a good gain receiving the DI Jan 21 nominal rate (see table), we are now recommending to receive the long-end of real rates.
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