Itaú BBA - Evening Edition – Brazilian Lower House may vote the pension reform in the next hours

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Evening Edition – Brazilian Lower House may vote the pension reform in the next hours

July 10, 2019

The Lower House is currently analyzing the requirements and, once this step is completed, the plenary will be able to vote the main text.

Talk of the Day


The Lower House is currently concluding the analysis of the requirements related to the pension reform. Once this step is completed, the plenary will be able to vote the main text, which, according to local news, may happen in the next hours. Afterwards, the House may start to vote the highlights and, possibly later this week, move on to the second round of voting on the proposal.

June’s IPCA inflation came in at 0.01% mom, broadly in line with our forecast (-0.01%) and slightly above the market consensus (-0.03%). In year-over-year terms, inflation declined to 3.37%, from 4.66% in the previous month, also above our call of 3.35% and the market consensus (3.33%). The strong deceleration in the yearly indicator is partly explained by the low monthly reading, and partly because the 1.26% jump seen in June 2018 (due to the truckers' stoppages in the previous month) was excluded from the 12-month calculation. The difference to our forecast was explained by milder deflation in costs for food consumed at home and higher prices for some industrial items, particularly personal care products. Core inflation measures remain at comfortable levels, and we maintain our assessment that inflation remains on a benign path due to substantial spare capacity in the Brazilian economy, favorable inertia and anchored expectations. ** Full story here.

According to our seasonally adjusted series, traffic of heavy vehicles (ABCR) remained virtually stable in June. With the result, our preliminary forecast for June's industrial production decreased to -0.9% mom/sa (-6.7% yoy), from -0.8%.

Tomorrow’s Agenda: On economic activity, May’s retail sales will be released at 9:00 AM. We expect a 0.4% mom/sa growth in the broad indicator, and a 0.2% mom/sa gain in core retail sales, leading to year-over-year growth of 6.4% and 1.3%, respectively.


Car sales declined sharply in June. The National Automotive Association of Chile (ANAC) reported that car sales contracted 14.4% year-over-year in June, the worst performance since August 2015. In 2Q19, new vehicle sales fell 11.2% (-3.5% in 1Q19; 15.6% in 2018), and, year-to-date, care sales have fallen 7.5% year-over-year. At the margin, sales contracted further, by 16.9% qoq/saar (-9,4% in 1Q19). The moderation of car sales in 2Q19 is consistent with depressed consumers, and reveals feeble durable consumption, which likely led to a consumption slowdown in the quarter. This, paired with low inflation, support our view of lower rates by yearend. We expect growth of 2.4% this year (from 4% in 2018).

According to the results of the central bank’s monthly analyst survey, lower inflation in the short-term, along with weaker growth, led to the expectation of further monetary stimulus. Last month’s edition came in shortly after the central bank implemented a surprise 50bps cut to 2.5% and analysts saw rates stable at 2.5% for at least one year. One month later, the distribution of responses show a move towards lower growth and rates ahead. The policy rate is expected to be cut in December to 2.25%, thereafter stable until at least June 2020. A slow normalization process is expected with the policy rate seen at 2.75% in two year’s time (3% previously). It’s worth noting that last month’s survey showed only 10% of respondents saw the policy rate at 2% by yearend, our baseline scenario, whereas now nearly 30% expect two 25bp cuts ahead. Uncertainty also persists within the market, with respondents nearly evenly split at one of the five 25bps levels between 2% and 3% by the end of 2020. Short-term inflation forecasts (one-year outlook) dropped 0.1 p.p. to 2.8% (in line withour expectations) while remaining at the 3% target for 2020 (also the 23-month expectation). Growth for this year was cut for the sixth consecutive time from 2.9% in June to 2.8% (BCCh sees a range of 2.75%-3.5%; Finance Ministry: 3.2%; Itaú: 2.4%). Growth expectations for 2019 at the start of this year sat at 3.6%. Additionally, almost half of respondents see growth coming in below the 2.8% median forecast. The 2020 outlook declined by a milder 0.1 p.p. to 3.2%. We believe a prolonged period of uncertainty (mainly from a global front) would likely result in a sharper investment and export slowdown, resulting in further widening of the output gap that motivates the board to cut rates by an additional 50bp this year (to 2.0%) to ensure inflation converges to the 3% target in the relevant two-year forecast horizon.


Tomorrow’s Agenda: At 11:00 AM, Mexico’s Central Bank (Banxico) will publish the minutes of June’s monetary policy meeting (held two weeks before), when the majority of board members voted to leave the policy rate unchanged at 8.25%. We expect the minutes to discuss a widening of slack conditions and a more balanced stance of risks for inflation, potentially opening the doors for an easing cycle starting in the near term.


Tomorrow’s Agenda: On Thursday, the Central Bank of Peru (BCRP) will publish its July’s decision on the reference rate at 8:00 PM, which we expect to remain unchanged at 2.75%. We expect the BCRP to discuss the impact on the economy of the trade war to decide on potential future rate cuts, as recently mentioned by Julio Velarde, BCRP President. Rate cuts by the Fed would also give the BCRP room to act. We expect the central bank to cut the policy rate during the second half of 2019 to a level of 2.25% (through two 25-bp rate cuts).

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