Itaú BBA - Evening Edition – Inflation decelerates in Brazil

Latam Talking Points

< Back

Evening Edition – Inflation decelerates in Brazil

June 7, 2019

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

Talk of the Day

Brazil

May’s IPCA inflation came in at 0.13% mom (from 0.57% in April), below our call and the market consensus (both at 0.20%). The print was the lowest reading for the month of May since 2006. The food component declined 0.56% mom, posting the major negative contribution for the headline (-0.14 p.p.). On the opposite side, the housing (+0.98% mom) and health and personal care (+0.59% mom) components presented the highest contributions for the monthly figure (0.15 p.p. and 0.07 p.p., respectively). In year-over-year terms, inflation declined to 4.66% (our call: 4.74%; mkt: 4.73%), from 4.94% in the previous month.
** Full story
here.

Chile

May’s inflation came in above market expectations, but remains at low levels. The 0.6% increase from April (0.3% one year ago) was 0.1 p.p. above the market consensus and our forecast. The surprise was explained by a higher seasonal rise in volatile tourism package prices. As expected, an increase in electricity tariffs strongly contributed to inflation in the month. The resulting annual change moved up 0.3 p.p., to a still-low 2.3%. Furthermore, core measures stayed low and our diffusion index sits at low levels. With inflationary pressures contained and an output gap that is widening, we expect the board of the central bank to hold the policy rate at 3% at its next monetary meeting, to be held later today. However, amid the deteriorating global context, we expect to see changes to rate guidance in Monday’s Inflation Report, including the conditions that would warrant increasing the monetary stimulus. For 2019, as oil price gains earlier in the year unwind and domestic demand growth is restrained (amid a more complex external scenario), we expect inflation to only gradually edge towards the central bank’s 3% target, ending the year at 2.8% (2.6% in 2018).
** Full story
here.

On external accounts, a USD 371 million trade surplus was registered in May (USD 415 million one year earlier). The print was below our USD 500 million estimate and the USD 572 million market consensus. The result was the seventh consecutive trade surplus recorded, yet the rolling 12-month balance continues to gradually narrow as both mining and industrial exports shrink (symptoms of weakening global demand). For the fourth consecutive month, all three export divisions (mining, agriculture and industrial) contracted, resulting in a total drop of 2.3% yoy in exports (-6.3% in April), while also falling at the margin. In the same direction, imports declined 1.7% in May (-4.3% in April), as recovering energy imports failed to offset weaker consumer and capital goods imports. With reduced global demand and low copper prices ahead amid the escalating trade war, there are upside risks for our 3.0% of GDP current account deficit forecast (3.1% in 2018).
** Full story
here.

Colombia

Core inflation remained broadly stable at low levels in May. According to the central bank, the average of core inflation measures remained close to the target at 2.92% (from 2.95% in April). The core index that excludes food and regulated prices (highlighted by the Governor) grew 2.55% yoy in May (2.57% previously). Meanwhile, the tradable good inflation (excluding food and regulated items) drag persists at 1.22% (from 1.16%). Non-tradable inflation (also excluding food and regulated prices) edged down to 3.34% (3.42% previously). The regulated component continues to moderate, increasing 5.54% yoy in May (from 5.78%), the lowest level since January 2018. The negative output gap and controlled core inflation mean interest rate hikes are unlikely, while opening the door for the central bank to consider additional monetary easing given the more complex external scenario. 

Mexico

Consumer prices fell by 0.29% month-over-month in May (from -0.16% a year ago), below our forecast and market expectations, both of -0.22%.CPI was pulled down by non-core CPI (-1.66%, from -1.38% a year ago) associated to a decline in electricity prices due to seasonal “summer” subsidies to electricity tariffs, while non-core food exerted some upward pressure due to an increase in chicken prices as local production decreased amid avian flu outbreaks. In turn, core inflation was 0.16% (from 0.26% a year ago). On an annual basis, both headline and core inflation decelerated in May. Headline inflation slowed down to 4.28% yoy in May (from 4.41% in April), still above the upper bound of the range around central bank’s target. In turn, non-core inflation decelerated to 5.78% in May (from 6.08%), with food inflation accelerating to 6.08% (from 4.77%), while energy prices sharply decelerated to 6.51% (from 8.58%). At the margin, both headline and core inflation accelerated. For 2019, we expect inflation to end the year at 3.6%. However, the lingering uncertainties surrounding Mexico’s economy continue to constitute upside risks for inflation (mainly through a weaker currency). In particular, the potential implementation of tariffs would put the central bank in a more challenging situation, of weaker growth and high inflation.
** Full story
here.

The Week Ahead in Latam

Argentina

On Thursday, the INDEC (the official statistical agency) will publish the National CPI for May 2019. The consulting firm Elypsis, which tracks prices, estimates a 3.1% month-over-month increase, down from 3.4% in April. For the core reading, Elypsis estimated a higher disinflation (3% from 3.8% in April). If this forecast is correct, the twelve-month headline inflation would hit 57.3%, up from 55.8% in April. 

Brazil

On economic activity, April’s retail sales will be released on Wednesday. We expect a 0.4% mom/sa growth in the broad indicator, and a 0.4% mom/sa decline in core retail sales. For the service sector revenue survey, to be released on Thursday, we forecast a 0.5% mom/sa gain in April. On Friday, the central bank’s monthly GDP proxy (IBC-Br), also for April, will come through, for which we forecast 0.3% mom/sa growth, but this estimate may change depending on the previous activity releases. Indicators related to industrial production in May (ABCR - traffic of heavy vehicles and ABPO - paper cardboard dispatches) may also come through next week, without a specified date. Data released so far indicate economic activity has increased in April, but declined again in May. Our preliminary GDP forecast for 2Q19 stands at +0.2% qoq/sa, a weak result after the 0.2% qoq/sa decline in 1Q19.

On the political front, according to the news, the rapporteur for the pension reform in the Lower House’s special committee, Samuel Moreira, may present his report on Tuesday – however, it’s important to note that this date is not the official deadline, so this expected anticipation may not materialize.

Chile

On Monday, the central bank releases its 2Q Inflation Report. In the previous edition, the central bank saw signs of a gradual output gap narrowing, despite increasing global risks. Consequently, the board saw stable rates for two quarters and maintained a tightening bias with the policy rate expected to reach neutral levels (4%-4.5%) towards the end of the 2-year policy horizon. In the recent monetary policy decision, the board evaluated the merits of cutting rates amid a more complex external scenario, controlled inflation, and some signs of domestic demand weakness. Given the disappointing start to the year and trade war developments, we expect a downgrade to the growth forecast from the current 3%-4% range to 2.75%-3.5%. Also considering the drop in global interest rates, it is possible that the central bank revises its estimate for the neutral rate by 25 or 50 basis points from the range reported in past editions of the report (4%-4.5%). Finally, we expect to see changes to rate guidance, including the conditions that would warrant increasing the monetary stimulus.

Colombia

On Friday, activity indicators for the month of April will be published. Activity indicators for the month of March were solid, as retail sales expanded 5.3% yoy and manufacturing grew 3.2%, both above expectations. For April, we expect industrial production to contract 2.0%, despite upbeat oil refining, as a notably high base of comparison and unfavorable calendar effect hamper activity. Meanwhile, retail sales growth is likely to moderate to 4.2% in twelve months (5.3% previously) as auto sales slowed and confidence dropped.

Mexico

On Tuesday, the Statistics Institute (INEGI) will publish April’s industrial production. We estimate industrial production fell by 4.2% year-over-year (from -0.2% in March). Recent data shows, on an annual basis, coincident indicator oil output kept contracting, while manufacturing exports improved in April (but grew at below trend pace). In turn, vehicle production decelerated during the same period.

Peru 

On Thursday, the Central Bank of Peru (BCRP) will publish its June’s decision on the reference rate, which we expect to remain unchanged (at 2.75%). Given the weaker growth in the core economies, the more accommodative stance of the Fed, controlled inflation and the recent trade war developments, we believe that the central bank can keep an expansionary monetary policy and may even signal the possibility of lower interest rates ahead.



< Back