Itaú BBA - Evening Edition – Copom Minutes: Waiting for clarity

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Evening Edition – Copom Minutes: Waiting for clarity

March 26, 2019

We expect the Selic rate to remain stable at next meetings.

Talk of the Day


The BCB released the Copom meeting minutes. The report points to a committee that is aware of the weaker-than-expected pace of the economic recovery, and that attributes this weakness to the aftereffects of the shocks seen in 2018 (in particular the truckers’ stoppages and the tightening of financial conditions). The text notes, too, that the GDP forecasts for 1Q19 or 2Q19 onward have not changed, which hints that, if/when these do, the Copom will reassess whether its stance is appropriately expansionary. Given the current weakness seen in activity data, this might indicate willingness to adjust the degree of stimulus in the not too distant future, perhaps even within the first half of 2019. But the minutes also bring plenty of mentions on the needed fiscal reforms and the risks failure of this agenda would pose for the scenario. In sum, regardless of the state of the economy, the authorities seem to be unlikely to budge until we have much more clarity on the outlook for social security reform. Thus, for the time being, given all the uncertainty surrounding the central scenario, we expect the Selic to remain unchanged in coming meetings.
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Additionally, the mid-month consumer price index IPCA-15 was released.The indicator came in with a 0.54% increase in March, between our estimate (0.58%) and market expectations (0.51%). The year-over-year rate accelerated to 4.18% from 3.73%. Food (0.32 p.p.) and transportation (0.11 p.p.) provided the largest contributions, with the former group driven by the 1.91% hike in prices for food consumed at home and the latter driven by auto fuels, urban bus fares and airfares. Our preliminary estimate for the headline IPCA in March is a 0.59% increase, lifting the year-over-year rate to 4.41% – nevertheless, the annual inflation will likely decelerate towards our full-year estimate (3.6%) in the following months.
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Tomorrow’s Agenda: FGV business surveys with indicators for consumers and construction confidence will be released at 8:00 AM. Also, BCB’s credit report for January is expected to be released at 10:30 AM.


On an annual basis, retail sales expanded at a below trend pace in January. Retail sales increased 0.9% year-over-year in January (from -1.3% in December) – figure was above our forecast (-0.4%) and below median market expectations (1.1%, as per Bloomberg). Although retail sales accelerated in January (compared to last month), it grew at a below trend pace (from an average growth of 2.4% in 2018). The results could have been influenced by gasoline shortages (started the last week of December in some states of Mexico), which in turn is reflected in headline retail sales directly due to lower gasoline sales and indirectly as access to stores become more difficult. According to calendar-adjusted data reported by the statistics institute (INEGI), retail sales increased 1.1% year-over-year in January (from -1.0% in December), taking the three month moving average growth rate to 1.0% year-over-year in the quarter ended in January (from 1.3% in December).

We expect private consumption to moderate its pace in 2019 (relative to 2018), as the U.S. deceleration and uncertainties facing the economy curb GDP growth. In this context, employment is weakening. However, recent real wage increases are a buffer for activity. Recent figures continue to show an improvement in the real wage bill, which increased 8.1% qoq/saar in the quarter ended in February (from 4.8% in January), despite slowing job creation. Lower inflation and minimum wage increases, amid a still-tight output gap are the factors boosting real wages. 
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Tomorrow’s Agenda: At 11:00 AM, INEGI will announce February’s unemployment rate and trade balance. We expect the unemployment rate to come in at 3.5%.


The current account deficit narrowed to USD 2.3 billion in 4Q18, from a deficit of USD 9.4 billion in the same quarter of 2017. The deficit was slightly above the average response in the Bloomberg market analyst survey, of a deficit of USD 2.0 billion. As a result, the current account deficit for 2018 fell to USD 28.0 billion (5.4% of GDP), from USD 31.6 billion in 2017. At the margin, we estimate that the seasonally-adjusted current account deficit reached 0.5% of GDP in 4Q18. The current account deficit was mainly financed by IMF disbursements. The treasury received net inflows of USD 14.5 billion from the IMF as well as issuances of ARS-denominated instruments purchased by foreign investors (Lecaps). 

The rapid adjustment of the current account deficit is ongoing. A devalued currency, weak internal demand and the normalization of soy output will likely continue to support the trade and service balance. We forecast a significant narrowing of the current account deficit this year, to 1.2% of GDP.
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The central bank’s trader survey shows the market expects the central bank to proceed more gradually with the normalization cycle, likely motivated by global developments.  The policy rate is seen stable at 3% during the next 6 months (previously one hike was expected in this horizon) while one rate increase to 3.25% would come during the next semester (down from 3.5% in the previous survey), and 3.5% in 24 months’ time (below the 3.75% formerly expected). Traders also see the recent uptick in the US dollar as a transitory event, such that some appreciation of the Chilean peso is anticipated over the next month. Meanwhile, the relevant 2-year inflation forecast dipped to 2.8% from 2.9% previously. In the shorter term (1 year) inflation is viewed at 2.7% (2.65% previously). We see inflation dynamic uncertainty in the short term and the still high external risks supporting a cautious central bank. Nevertheless, a near closed output gap likely means the central bank would continue to normalize rates (we expect the next hike in 2H19).

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