Itaú BBA - Evening Edition – Inflation virtually in line with expectations in Brazil

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Evening Edition – Inflation virtually in line with expectations in Brazil

February 21, 2019

In year-over-year terms, the inflation registered a 3.73% change

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February’s IPCA-15 inflation came in at 0.34%, slightly above our call (0.30%) and broadly in line with the market’s (0.36%). In year-over-year terms, the inflation registered a 3.73% change, from 3.77% in the previous month. The education component posted the major positive monthly change (3.52%). On the opposite side, the transportation (-0.46%) and clothing (-0.92%) components declined in February. Compared to our call, the market set prices surprised to the upside (with a contribution of 4 bps higher than our call). The diffusion index (which measures the share of products with positive price changes) reached 58.9% in February (from 62.5% in the previous month).
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Tomorrow’s agenda: FGV’s consumer confidence survey for February will be released at 8:00 AM. Also, January’s CAGED formal job creation may be published tomorrow, although the certain date has not been specified (it is also possible that the data will only be released next week).


A welcomed primary surplus to start the year. The treasury ran a primary surplus of ARS 16.7 billion in January, compared with a surplus of ARS 3.9 billion reported in the same month of 2018. We estimated that the 12-month rolling primary deficit as of January totaled 2.6% of GDP, down from the 2.7% in December 2018. The nominal deficit, which includes the interest payments, was 5.6% of GDP.

Primary expenditures fell by 10.9% yoy in January in real terms (or an increase of 33% yoy in nominal terms). Within expenditures, payroll fell 16.1% in real terms as wage negotiations for the public sector haven’t started yet, while pension expenditures (which are indexed to past inflation) decreased by 11.3% yoy in real terms. On the other hand, total revenues decreased by 7.1% in real terms in January, in spite of higher earnings on assets held by the pension fund and on ARS-denominated deposits. 

We expect further fiscal consolidation this year. Last year the treasury posted an estimated primary deficit of 2.7% of GDP, matching the official target (from a 3.8% of GDP deficit in 2017). Congress has approved a budget with a zero primary deficit based on increasing revenues (through export taxes and sales of public pension fund assets) and reducing expenditures (transfers to provinces, energy subsidies and capital spending). However, downside risks to activity in an electoral year mean that the fiscal target is also at risk, although a sharp reduction in the fiscal deficit is still likely. 

Argentina’s trade balance posted another surplus in January. The trade balance showed a surplus of USD 0.4 billion in January 2019, compared with a deficit of USD 0.9 billion in the same month of 2018. The surplus was below both our forecast (USD 0.5 billion) and the market consensus (USD 1.1 billion). The 12-month trade balance fell to a deficit of USD 2.5 billion, from USD 3.8 billion in 2018. However, at the margin, the result showed a USD 11.4 billion surplus (three-month cumulative and annualized) from USD 10.2 billion in 4Q18 and a USD 5.2 billion deficit in 3Q18.

Exports fell due to lower external industrial product sales. Total exports fell by 4.7% yoy in January (-6.3% mom/sa) due to lower industrial product sales, particularly biodiesel and cars to Brazil. Agricultural exports (including manufactured agricultural products) grew 9.0% yoy in January, following increased sales of wheat and soy oil. 

Imports plummeted in January, vs. the same month of 2018, but stabilized at the margin.  Purchases of foreign goods fell by 26.5% yoy in January, with a significant drop across sectors. However, total imports rose 0.7% mom/sa, indicating that imports may have reached a floor. Imports of capital goods and parts fell by 31.7% yoy, reflecting weak investment. Consumer goods imports (including cars) dropped by 43%, while imports of intermediate goods fell by 4.3%, helped by purchases of soy that will likely be exported later.

We forecast a significant narrowing of the current account deficit this year. We expect a USD 5.5 billion surplus for 2019 (from a USD 3.8 deficit in 2018), due to the weak currency, subdued internal demand and the normalization of soy output. We therefore expect a current account deficit of 1.2% of GDP for 2019, compared with an estimated 4.4% of GDP in 2018. We expect the current account deficit in 2019 to be mostly financed by IMF disbursements. 


The central bank of Mexico (Banxico) published the minutes of February’s meeting, held two weeks ago, when the board members voted unanimously to leave the policy rate unchanged at 8.25%. As in the statement, the minutes show all board members agree that the balance of risk for economic activity is tilted to the downside. 

However, board members dissent on the outlook for inflation. The minutes reflect three members have a more cautious view about inflation outlook, while the other two seem less concerned, influenced by activity weakening and recent downside surprises on inflation. In this context, most members considered that the balance of risk for Banxico’s inflation outlook is still tilted to the upside. However, one member said that the balance of risk for inflation is only slightly tilted to the upside, while another said the scenario for inflation is more benign than in the previous decision. We recall this is the first meeting attended by the two recently-appointed board members. 

In this context, disagreement on the policy rate outlook seems to be emerging, with most board members holding a more conservative view. One member said that a tight monetary policy should be maintained for a prolonged period of time, while another member mentioned that the board should focus on the convergence of inflation of the target, not ruling out additional interest rate hikes, strengthening central bank’s credibility. A third member reinforced that the communication of the central bank should reflect the persistence of inflationary risks, rather than activity weakness, calling attention to the fact that core inflation has been sticky despite a tight monetary policy. On the other hand, one board member warned that that a tight monetary policy shouldn’t be sustained for long, if the output gap keeps widening significantly.   

We expect the central bank to keep the policy rate unchanged throughout this year. Amid a still-high inflation and domestic and external (mainly approval of USMCA in the U.S. congress) uncertainties, we think that rate hikes in the short-term are more likely than cuts. However, with inflation falling within the target range and growth below potential, a dissipation of uncertainties would allow the central bank to start a gradual normalization cycle (so we expect three 25-bp rate cuts in 2020).
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Tomorrow’s agenda: AT 11:00 AM, INEGI will publish CPI inflation figures for the first half of February. We expect bi-weekly inflation to post 0.01% (from 0.21% a year ago), which would lead the headline inflation to 4.00% yoy (from 4.21% in the second half of January).


Tomorrow’s agenda: The board of the central bank will hold its first meeting for the year (of four) that focuses on technical aspects other than the policy rate. The rolling-over of the put option auctions to accumulate reserves is likely.

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