Itaú BBA - Evening Edition – Industrial production surprises to the downside in Brazil

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Evening Edition – Industrial production surprises to the downside in Brazil

May 3, 2019

Next week, Copom, inflation and activity data on focus.

See our Week Ahead full note at the end of this report. 

Talk of the Day


Industrial production declined 1.3% mom/sa in March, below our forecast (-0.7%) and the median of market expectations (-0.6%), more than offsetting the 0.6% increase from the previous month. The 3-month moving average rate with seasonal adjustment declined 0.5%. In year-over-year terms, production receded 6.1% – also below our forecast (-5.1%) and the market’s (-4.7%). The index breakdown underscores the weak performance of industrial production, with 3 out of 4 economic categories declining in the month. Production of intermediate goods declined (-1.5%) for the third consecutive month, accumulating a 2.7% loss in the period. In the same direction, production of durable consumer goods declined 1.3%, while production of semi-durable and non-durable consumer items receded 1.1%. The production of capital goods increased 0.4%, after printing a 4.7% monthly increase in the previous month. Given these results and the weakness shown in others activity indicators, we expect a sluggish recovery in early 2019. Our forecast for 1Q19’s GDP is a 0.2% qoq/sa decline, and our preliminary estimate for April’s industrial production is a 0.5% drop at the margin. ** Full story here.

According to ABRAS, supermarket real sales increased 0.7% mom/sa in March (our seasonal adjustment). The 3-month moving average remained virtually stable. With this result, our forecast for March’s core retail sales - to be released on May 9th - increased to 1.1% mom/sa, from 0.7% previously. For the broad segment (which includes vehicle and construction material), our forecast went up to 1.2%, from 1.0%. 


Retail activity remained weak in March, with growth below market expectations. Retail sales including vehicles grew 0.7% over twelve months, below the market consensus and our 1.0% call, as vehicles sales slowed sharply. The weak growth follows the downwardly revised 0.1% increase in February (0.7% initially). Meanwhile, wholesale trade continued to drive commercial activity, as sales of investment-linked materials (machinery, equipment and construction materials) remain robust. Overall, the subdued retail activity, along with industrial production contracting for the third consecutive month, point to another weak Imacec print (monthly GDP proxy). We expect growth of 1.7% yoy in March (1.3% in February), resulting in sluggish start to the year (1.7% in 1Q19, versus 3.6% in 4Q18). In the first quarter of the year, the sectorial data indicates slowing consumption, with investment likely driving the economy. At the margin, retail activity slowed sharply. Retail sales (including vehicles) contracted 5.5% qoq/saar, after expanding 8.2% in 4Q18, despite a month-over-month expansion in March. Despite low inflation and expansionary monetary policy, private consumption related activity is weakening (in line with the drop is confidence levels). Overall, we see activity growing a milder 3.2% this year (from 4% recorded last year), as slowing consumption is only partly offset by improving investment.
** Full story

The Week Ahead in LatAm


Manufacturing and construction data for March will see the light on Monday. We expect to see another year-over-year drop in manufacturing (-8.5% in February). According to the IPI (a private index published by OJF consulting firm), manufacturing fell 10.4% in March. Construction activity also contracted in March according to private indicators like Grupo construya index (-16.3% yoy).

Also on Monday, the car-makers association (ADEFA) will release April data on production, exports and domestic sales to car dealers. Auto production fell 41.1% yoy in March, exports decreased 23.9% yoy and domestic sales plummeted 58.8% yoy affected by the depreciation of the peso and high interest rates. 


The Monetary Policy Committee of the Central Bank (Copom) will meet on Wednesday. We believe the committee will keep the Selic rate stable at 6.5% p.a., given their inflation forecasts anchored around the respective targets up to 2021 and the monetary authority's unwillingness to change the level of stimulus until there is more clarity about the outlook for reforms – in particular, for the pension reform.

April’s IPCA inflation will be released on Friday. We forecast a 0.63% monthly increase, leading the 12-month reading to 5.00% (from 4.58% in March). Due to base effects, we expect the 12-month inflation to accelerate during this year’s first semester. Once again, food at home and fuels will likely post the major upward contributions.

On economic activity, March’s retail sales (PMC) will be the highlight to be released on Thursday. We forecast a 1.1% mom/sa increase in core retail sales and a 1.2% gain in the broad segment (which includes vehicle sales and construction material). Three indicators related to April’s industrial production will also come in: Anfavea auto production (Tuesday), paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR), both without a specific date.

On the political front, as the Lower House members return from the holiday week, pension reform’s special commission will likely undertake its first steps.


On Monday, the central bank will publish the GDP proxy (Imacec) for March. Sectorial data showed industrial production contracted for the third consecutive month as the mining drag persisted, while manufacturing activity moderated. Meanwhile, retail activity remained subdued. Overall, we expect the monthly GDP proxy (Imacec) to grow 0.3% (SA) from February and result in annual growth of 1.7% (NSA) in March (1.3% in February), resulting in sluggish start to the year (1.7% in 1Q19 versus 3.6% in 4Q18).

The central bank will publish the trade balance for the month of April on Tuesday. In the first quarter of the year, still weak mining exports was partially offset by a widespread import slowdown. The rolling 12-month trade surplus dropped to USD 3.6 billion (USD 4.7 billion in 2018, USD 7.4 billion in 2017). We expect a trade surplus of USD 800 million (USD 770 million one year earlier) in April, as mining exports show some improvement, while import weakness persists.

Nominal wage growth for March will be released on Tuesday. Wage growth in February picked up to 4.3% yoy (3.8% previously). Nevertheless, with the slowdown in previous months, wage growth in the rolling quarter was in line with 4Q18 (4%), still around 1pp lower than gains in 1H18. The notable immigration influx in recent years has been a key determinant of subdued wage pressures. Yet, signs of wage growth recovery along with low inflation and an expansionary monetary policy would support the consolidation of the consumption recovery.

On Wednesday, inflation for the month of April will be released. Inflation surprised to the upside in March, taking annual inflation from 1.7% in February to 2.0% (the lower bound of the range around the central bank’s 3% target). While energy and food inflation gathered steam in the month, core inflation was stable. High frequency price tracking points to consumer prices rising 0.3% from March (in line with last year), lifted by energy prices, transportation tariffs amid the Easter holiday and seasonal adjustments to rent. As a result, annual inflation would remain at 2.0%.

On Thursday, the central bank will announce its monetary policy rate decision. Inflation hovered near 2% in April, far below the central bank’s 3% target, while activity has been sluggish in the first quarter of the year and risks from abroad persist. Hence, we see no reason for the board to alter its stance of stable rates, and once more not consider any other option this month.


Inflation for the month of April will be released on Saturday. Inflation in March increased due to a strike that affected food prices, lifting total inflation to 3.21% from 3.01% in February. Data tracking for April shows food price pressures did not unwind as quickly as initially expected (which could partly be explained by Easter falling in the month). Meanwhile, energy prices would result in the housing division also being a key driver to inflation in the month. We expect a month-over-month inflation of 0.42% (0.46% last year), resulting in annual inflation of 3.17%.

On Monday, the central bank will post the minutes from its third monetary policy meeting of 2019 (April), at which the monetary policy rate was kept at 4.25%. The message will likely reaffirm that with slowing global growth and subdued inflation pressures, stable rates ahead remain the base case scenario. 

The institute of statistics (DANE) will publish exports for the month of March on Monday. Exports improved in February as the drag from oil exports moderated. Total exports grew 6.2% yoy in February, up from the 7.8% drop in January. However, we expect March exports to come in at only USD 3.1 billion, a 7.8% yoy drop as commodity exports were partly affected by the strike that disrupted transportation.


On Tuesday, the Statistics Institute (INEGI) will announce February’s gross fixed investment, which we expect to decrease 3.5% year-over-year (from 1.7% in January). On an annual basis, coincident indicators deteriorated in February: construction output (-1.1% year-over-year, from 1.3% in January), business confidence (-3.3% year-over-year, from 0.7% in January) and imports of capital goods (-5.5% year-over-year, from 4.8% in January).

On Thursday, INEGI (the statistics institute) will publish CPI inflation corresponding to the full-month of April, which we expect to come in at 0.06% month-over-month (from -0.34% a year ago). The monthly figure will reflect pressure from tourism services prices and airfares that took place during the first half of April due to Easter holidays. In contrast, a sharp decline in electricity prices due to seasonal subsidies and a fall in regular gasoline prices are expected to exert downward pressure on the CPI. Assuming our forecast is correct, headline CPI would accelerate to 4.42% year-over-year (from 4.00% in March).

Ending the week, the Statistics Institute (INEGI) will publish March’s industrial production. We estimate industrial production decreased 0.6% year-over-year (from -0.8% in February). Recent data shows the coincident indicator, oil output kept contracting, while manufacturing exports deteriorated during March, on an annual basis. In contrast, vehicle production improved somewhat during the same period.


On Thursday, the Central Bank of Peru (BCRP) will publish its April decision on the reference rate, which we expect to remain unchanged at 2.75%. We think the central bank can afford to wait before removing its stimulus (given well-behaved inflation and recent softness in economic activity) and have more clarity on the economic outlook.


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