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Evening Edition – Brazilian industrial production ticks up in December

February 1, 2019

Our preliminary forecast for January is a 0.3% rise at the margin

Talk of the Day

Brazil

In December, industrial production increased 0.2% mom/sa, beating the median of market expectations and our estimate (-0.1% and -0.4%, respectively). The data breakdown indicates that the underlying growth is worse than the headline. Only 10 out of 24 surveyed segments posted expansion during the month. Production of capital goods, construction material and durable consumer goods declined in December. Our preliminary forecast for January is a 0.3% rise at the margin. Improving financial conditions since October, employment gains and the rebound in new loans should boost industrial production growth going forward.
** Full story here.

The trade surplus reached $2.2 billion in January, missing our forecast ($2.7 billion) and market consensus ($3.5 billion). Exports of manufactured items and capital goods imports were distorted by operations involving oil-drilling rigs last month. The surplus over 12 months remained at $58 billion, while the seasonally-adjusted annualized quarterly moving average slid to $72 billion from $73 billion in December.
** Full story here.

The MDB party has announced Renan Calheiros as the official candidate for the Senate’s speakership. The senator defeated his party colleague Simone Tebet by 7 votes to 5. The Congressional elections are scheduled for tonight.

Week ahead: The Copom will meet again next week. With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Committee will keep the Selic rate stable at 6.5% p.a. at the February meeting. January’s IPCA inflation will be released on Friday. We forecast a 0.37% monthly increase, leading the 12-month reading to 3.83% (from 3.75% in December). On economic activity, auto production data for January will be the highlight. Anfavea’s auto production will be released on Wednesday and Fenabrave’s vehicle sales will probably come out on Tuesday.
**Read the full week ahead note below

Argentina

The monetary policy committee reaffirmed a cautious approach with monetary expansion originated in exchange interventions. In the statement, the monetary authority increased the maximum expansion of the monetary base due to dollar purchases to 3% of the monetary-base target for February (USD 1.4 billion) from 2% in the previous two months. If the peso strengthens below the lower bound of the non-intervention zone, the central bank can purchase up to USD 75 million per day (USD 50 million before). According to the current monetary policy framework (monetary aggregate targeting), if the monetary policy becomes too tight, the exchange rate will likely strengthen. Consequently, the central bank may conduct unsterilized interventions to provide additional liquidity in pesos. We note th at these self-restricted limits are below the USD 150 million permitted under the agreement with the IMF. In the event of a weaker currency than the upper bound, the central bank can purchase up to USD150 million per day without cap for the month.

The central bank said its main objective is to reduce inflation. The monetary authority stated that the expansion of the monetary base in January was 0.6% lower than that targeted for that month (adjusted by the impact of the purchase of USD 560 million) and do not rule out a similar outperformance in February (zero growth relative to January).  According to the press release, the purchase of dollars in January was the counterpart of the increase in peso-denominated time deposits. While the defect of monetary-base expansion will likely be reversed in the coming months, the central bank said it will maintain a cautious management of the monetary expansion.

In our view, there are positive developments on the monetary front.  While the levels are still high, interest rates and inflation are on a downward path. However, we note that the existing inertia (mostly in wage negotiations) poses a major challenge to faster disinflation. We maintain our inflation forecast of 30% for 2019 and we expect the market-determined Leliq interest rate to fall to 32% by December this year.

Week ahead: On Monday, the central bank will release its monthly expectations survey. In the latest publication, analysts raised their inflation forecasts for 2019 (to 28.7% from 27.5%) and for 2020 (to 19.9% from 19.2%). Inflation expectations for the next twelve months ticked up to 28.7%, from 28.6% in the previous survey. Manufacturing and construction data for December will see the light on Tuesday. We expect to see a new yoy drop in manufacturing (-13.3% in November). Also on Tuesday, the car-makers association (ADEFA) will release January data on production, exports and domestic sales to car dealers. We expect some recovery in car production in 2019 mostly led by higher exports to Brazil as domestic sales will likely remain weak.
**Read the full week ahead note below

Peru

January’s CPI posted a month-over-month rate of 0.07% (from 0.13% a year ago), below our forecast (0.22%) and the median market expectations (0.17%). Household costs contributed the most to the headline figures (contributed 14 bp to the headline growth) due to an adjustment of power utility and water tariffs. In contrast, the item transport and communication contributed negatively to inflation with -10 bp due to a base effect (normalization of airfare and bus tickets after holidays in December) and a deceleration in gasoline prices.

We forecast annual headline inflation of 2.6% by the end of 2019, supported by a recovery of domestic demand. Lower energy prices dragged headline inflation in January. However, core inflation (excluding energy and food items) seems to be accelerating gradually, reflecting some demand pressure. 

** Full story here.

Week ahead: On Thursday, the Central Bank of Peru (BCRP) will publish its February decision on the reference rate, which we expect to remain unchanged.
**Read the full week ahead note below

Chile

Week ahead: On Monday, INE will publish the private consumption activity indicators for December. Still low consumer sentiment at the close of 2018 and mild new car sales point to retail sales growth of 3.2% in December. This would result in growth of 3.5% in 2018, compared to 3.9% in 2017.
**Read the full week ahead note below

Colombia

Week ahead: On Tuesday, the institute of statistics (DANE) will publish exports for the month of December, which we expect to come in at USD 3.5 billion, down 12.6% from last year on the back of lower oil prices (+7.9% previously). Later on Tuesday, inflation for the month of January will be released. High frequency data for the first month of 2019 indicate month-over-month inflation at 0.71% (0.63% last year), lifted by food and health prices, resulting in annual inflation of 3.26%. On Thursday, the minutes of the January monetary policy meeting - at which the policy rate was kept stable at 4.25% - will be published.
**Read the full week ahead note below

Mexico

Week ahead: On Thursday, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of January, which we expect to come in at 0.21% month-over-month. Assuming our forecast is correct, headline inflation would be 4.50% year-over-year (from 4.83% in December). 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%. Ending the week, the Statistics Institute (INEGI) will announce November’s gross fixed investment, which we expect to decrease 0.5% year-over-year (from 3.4% in October).
**Read the full week ahead note below

The week ahead in Latam

Argentina

On Monday, the central bank will release its monthly expectations survey. In the latest publication, analysts raised their inflation forecasts for 2019 (to 28.7% from 27.5%) and for 2020 (to 19.9% from 19.2%). Inflation expectations for the next twelve months ticked up to 28.7%, from 28.6% in the previous survey.

Manufacturing and construction data for December will see the light on Tuesday. We expect to see a new year-over-year drop in manufacturing (-13.3% in November). According to the IPI (a private index published by OJF consulting firm), manufacturing fell 9.6% in December accumulating a 4.7% drop in 2018. Construction activity also contracted in December according to private indicators like cement deliveries (-19.4% yoy) and the Grupo construya index (-31.7% yoy).

Also on Tuesday, the car-makers association (ADEFA) will release January data on production, exports and domestic sales to car dealers. Auto production fell 38.5% yoy in December, while domestic sales dropped 46.4% yoy affected by the depreciation of the peso against the dollar. Exports rose 26.1% yoy in December. We expect some recovery in car production in 2019 mostly led by higher exports to Brazil as domestic sales will likely remain weak.

Brazil

The Brazilian Central Bank's Monetary Policy Committee (Copom) meets again next week. The Copom's inflation forecast for 2019 will probably remain stable in the market scenario (which includes the exchange and interest rates forecasts reported in the Focus survey) and recede in the reference scenario (which assumes constant exchange and interest rates), compared to those disclosed in the 4Q18 quarterly inflation report. For 2020, the inflation forecast will likely show a slight increase in the market scenario and remain stable in the reference scenario. With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Copom will keep the Selic ratestable a t 6.5% p.a. at the February me eting.</>

January’s IPCA inflation will be released on Friday. We forecast a 0.37% monthly increase, leading the 12-month reading to 3.83% (from 3.75% in December). Food and healthcare & personal care will likely post the major upward contributions to the monthly reading. On the other hand, clothing group is expected to post the negative contribution.

On economic activity, auto production data for January will be the highlight to come out. Anfavea’s auto production will be released on Wednesday and Fenabrave’s vehicle sales will probably come out on Tuesday.

Finally, with the return of the Senate and the Lower House from the legislative recess, the discussions on the pension reform will likely increase. Local news indicate that the government will send the official proposal to congress this month.

Chile

On Monday, INE will publish the private consumption activity indicators for December. Consumption related activity was weak in November with retail sales contracting 0.8% year over year and also declining from October (once corrected for seasonal effects), while wholesale growth slowed. Still low consumer sentiment at the close of 2018 and mild new car sales point to retail sales growth of 3.2% in December. This would result in growth of 3.5% in 2018, compared to 3.9% in 2017.

On Tuesday, the central bank will publish the GDP proxy (Imacec) for the final month of 2018. Industrial indicators for the month had manufacturing growing a mild 0.8% and mining up 1.3%,while we expect retail sales of 3.2%. Overall, we expect the monthly GDP proxy (Imacec) to fall 0.1% from November and result in annual growth of 3.5% (3.1% in the previous month), leading to growth of 4.0% in 2018 (1.5% in 2017).

On Thursday, the central bank will publish the trade balance for the month of January. Plummeting oil prices in 4Q18 aided a large trade surplus last year (USD 5.4 billion), albeit still a moderation from 2017 (USD 7.9 billion). We expect a trade surplus of USD 750 million (USD 1.2 billion one year earlier) in January, as energy import growth slows (on the back of lower prices).

Nominal wage growth for December will also be released on Thursday. Wage growth in November was stable at 4.1%, resulting ingrowth of 4.2% in the moving quarter (4.0% in 3Q18 and 4.7% in 2Q18). The central bank has highlighted the impact immigration has had on employment supply, partly explaining slowing wage pressures.

On Friday, inflation for the month of January will be released. This will be the first measurement using the new CPI basket (based in 2018). Inflation expectedly dipped 0.2 pp to close 2018 at 2.6%, a mild increase from the 2.3% in 2017 but still below the central bank’ 3% target. Core measures ticked up and our diffusion index shows a moderation in downward inflationary pressures (relative to the 3% target). The January data will make use of a new consumer basket of goods. High frequency price tracking points to consumer prices rising 0.1% from December (0.5% estimated for the new basket for January 2018), driven by some fruit and vegetable prices, cigarettes and electricity tariff adjustments, resulting in annual inflation of 2.2%.

Colombia

On Tuesday, the institute of statistics (DANE) will publish exports for the month of December. Oil exports continued to drive overall performance, but largely due to a quantum recovery offsetting slowing price gains. Nevertheless, data was yet to fully reflect the recent oil price moderation, hence the support from oil exports to the trade balance is likely to falter in December. We expect December exports to come in at USD 3.5 billion, down 12.6% from last year on the back of lower oil prices (+7.9% previously).

Later on Tuesday, inflation for the month of January will be released. Annual inflation ended 2018 slowing to 3.18%, from 3.27% in November, within the central bank’s 2%-4% range around the target for first time since 2014. Core inflation continued to moderate. The January data will make use of a new consumer basket of goods. High frequency data for the first month of 2019 indicate month-over-month inflation at 0.71% (0.63% last year), lifted by food and health prices, resulting in annual inflation of 3.26%.

On Thursday, the minutes of the January monetary policy meeting - at which the policy rate was kept stable at 4.25% - will be published. The minutes will likely show the board is continuing to balance various risks: some inflation measures remaining high, the current account adjustment proceeding slower than expected, while there is uncertainty on the speed of the recovery and global risks are elevated.

Mexico

On Thursday, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of January, which we expect to come in at 0.21% month-over-month. We expect energy prices exerted less inflationary pressure. Moreover, we expect the effect on prices from lower VAT in the northern frontier region to be reflected in the monthly inflation (as in the first half of January figure). Assuming our forecast is correct, headline inflation would be 4.50% year-over-year (from 4.83% in December).

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%. The USD has depreciated against the peso given a more dovish message from the FED, putting less pressure on Banxico’s board to hike rates in the next monetary policy meeting. Looking forward, we expect one additional interest rate hike (bringing the policy rate to 8.5%) in 2019. While the currency has strengthened recently, inflation remains high and the currency could be pressured due to the uncertainty over the domestic policy direction and the approval in the U.S. Congress of the renegotiated NAFTA.

Ending the week, the Statistics Institute (INEGI) will announce November’s gross fixed investment, which we expect to decrease 0.5% year-over-year (from 3.4% in October). On an annual basis, the coincident indicator, construction output, decreased 3.1%, while business confidence and imports of capital goods decelerated in the month.

Peru

On Thursday, the Central Bank of Peru (BCRP) will publish its February decision on the reference rate, which we expect to remain unchanged. Recently, BCRP chief economist said that the BCRP doesn’t see any reason for inflation to accelerate and that he sees room for fuel prices to decline. We think the central bank can afford to wait before removing its stimulus (given well-behaved inflation) and have more clarity on the economic outlook.



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