Itaú BBA - Evening Edition – Industrial production declines in Mexico

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Evening Edition – Industrial production declines in Mexico

February 11, 2019

We expect economic activity to slow to 1.7% this year

Talk of the Day


Industrial production came in below market expectations in December. The indicator decreased 2.5% yoy in December (from -1.2% in November), below our forecast (-1.2%) and the median of market expectations (-1.6%). At the margin, all sectors weakened in the 4Q18. With seasonally adjusted figures, industrial production decreased 0.4% mom in December (from -0.6% in November), taking the quarter-over-quarter annualized growth rate to -6.5% in the 4Q18 (from 1.4% in the 3Q18).

We expect economic activity to slow to 1.7% this year, with risks tilted to the downside, from a preliminary estimate of 2.0% in 2018. Uncertainty over the new administration’s policy direction and over the approval of the renegotiated NAFTA by the U.S. Congress will continue to weigh on investment. Deceleration in the U.S. economy will also curb growth. Moreover, fall in oil output is also a downside risk to economic activity. 


Paper cardboard dispatches (ABPO) disappointed again in January. The result was consistent with industry capacity usage (NUCI) and the Anfavea’s auto sector data over the same period, but weaker than traffic of heavy vehicles. The index rose 1.3% mom/sa in January (our estimates), yet, the increase was not enough to offset the 2.8% accumulated decline since October, so the 3-month moving average fell 0.5%. In year-over-year terms, the index fell 0.2%. 

We believe that the relative weakness of the industrial sector is a consequence of two factors: i) lagged effect of tightening financial conditions in previous quarters; and ii) slowing global growth, particularly in countries that are large buyers of Brazil’s manufactured items.

Our preliminary forecast for January’s industrial production weakened by 0.3pp to 0.3% mom/sa (-0.4% yoy).

According to the Focus survey, the IPCA inflation expectations for 2019 declined 7 bps to 3.87%, and did not change for 2020 and 2021 (at 4.0% and 3.75%, respectively). The year-end Selic rate expectations remained stable at 6.50% for 2019 and at 8.0% for 2020 and 2021. The median of the forecasts for the exchange rate did not change for the three years horizon (2019-2021): at BRL 3.70/USD for 2019; at BRL 3.75/USD for 2020; at BRL 3.80/USD for 2021. The median of GDP growth expectations also remained unchanged at 2.50% for the three years horizon (2019, 2020 and 2021).

Tomorrow’s agenda: The Copom minutes will be released at 8:00 AM. In the last meeting, the Copom kept the base rate at 6.5% pa, as widely expected, but the message was more hawkish than we had anticipated. While the committee concedes that inflation risks have receded, it still sees them as tilted to the upside. We will learn more about the authorities’ thinking with the release of the meeting minutes.


The Central Bank of Argentina limited banks’ holdings of seven-day central bank bills (Leliqs) to avoid volatile capital inflows. The new regulation establishes a cap on investments in Leliqs of 65% of banks’ peso deposits (excluding deposits from other financial institutions) or 100% of the banks’ capital. The deadline for adapting to the new regulation is April 2019. We noted that the ARS has recently traded below the lower bound of the non-intervention zone, prompting the central bank to purchase dollars without sterilization, as agreed with the IMF. Meanwhile, the yield of the Leliqs fell below 50% (from 59% in December). Our measure of the ex-ante real interest rate (using the expected inflation for the next three months) is currently at 20%.

Fixed Income LatAm Strategy

Brazilian rates were the only ones in LatAm that widened and steepened last week, as the market reassessed the timing for pension reform. Elsewhere in Latam, rates continued to tighten slightly, still reflecting the dovish shift in the Fed, lower U.S. rates, and benign domestic inflation and activity data. This week the global focus will be on the U.S. and China trade negotiations, as government officials from both countries (Mnuchin, Lighthizer and Lie He) are set to meet in China on Thursday and Friday. We see a good chance that talks advance and President Trump may set up a meeting with Xi to close the deal (in case of a deal we see 65% chance of no further tariffs, and a 35% chance of removing some of the existing tariffs).

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