Itaú BBA - Evening Edition – Output rebounds in Argentina

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Evening Edition – Output rebounds in Argentina

June 27, 2019

The risks are still tilted to the downside, given ongoing adjustments and uncertainties regarding the outcome of the upcoming presidential election

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Activity posted a sequential gain in April. The EMAE (official monthly GDP proxy) posted a 0.8% mom/sa increase from March, although the quarter-over-quarter growth rate remained in negative territory (-0.3% annualized). Compared to the same month of last year, activity fell by 1.3% in April, beating the market consensus and our expectations (-2.9% yoy and -3.5% yoy, respectively). Our seasonal adjustment shows gains in most sectors. Primary activities climbed 12.8% qoq/saar, similar to the 11.1% posted in 1Q19. Construction also grew by 18.6% qoq/saar, up from the 8.6%, while manufacturing increased by 9.5% qoq/saar (from 7.6%). Finally, services continued on a downward trend, at -4.5% qoq/saar, following the 2.3% contraction posted in 1Q19. For 2019, we recently adjusted our GDP forecasts down to -1.4%, on expectations for weaker global growth, despite an anticipated sequential recovery in 2Q19 led by a good harvest. We note that the risks are still tilted to the downside, given ongoing adjustments and uncertainties regarding the outcome of the upcoming presidential election. **Full story here.


On the fiscal side, the central government posted a BRL 14.7 billion primary deficit in May, virtually in line with our forecast (BRL 15.1 bn) and lower than the market’s estimate (BRL 17.5 bn). Compared to our call, the expenditure line surprised to the upside, mainly driven by discretionary spending. Additionally, the net revenue also surprised to the upside. Year-to-date, the central government accumulates a BRL 17.5 bn deficit (from a BRL 15.2 bn deficit in the same period for 2018). The consolidated primary result for May (including regional governments and state-owned companies) will be released on Friday, for which we now expect a BRL 14 bn deficit. 

According to the Central Bank’s credit report for May, new non-earmarked loans for consumers increased 0.3% mom, after expanding 1.3% in the previous month. New business loans increased 3.6%, after a 2.8% decline registered in April - all in real terms, seasonally adjusted. The NPL ratio remained unchanged at 4.7% for consumers and declined to 2.6% for businesses (from 2.7%). The average interest rate on consumer loans decreased to 52.9% (from 53.6% in April), while, on business loans, it decreased to 19.5% (from 19.9%). 

FGV released today June’s confidence indicators for the retail and construction sectors. In the retail sector, confidence registered the first increase since the beginning of the year, rising 1.8 p.p., to 93.2. The improvement was driven by the 5.1 p.p. advance in the expectation component, while the current situation index receded 1.5 p.p. in the period. Confidence in the construction sector rose 2.1 p.p. in June, to 82.8, after a 1.8 p.p. drop in the last month. Both the expectation (+3.1 p.p.) and the current situation (+1.2 p.p.) components increased in the period.

Tomorrow’s Agenda: At 8:00 AM, the Quarterly Inflation Report for 2Q19 will be published. At the same time, FGV’s industrial business confidence index for June will be released. Additionally, the CMN (National Monetary Council) will meet tomorrow and will likely set the inflation target for 2022, which we expect to be at 3.5%, following the downward trend of -0.25 p.p. per year, from 4.25% this year to 3.75% in 2021.


According to the central bank’s trader survey, lower expected inflationary pressures support a call for further easing. The results of the survey followed the surprise 50bps cut by the central bank earlier this month (from 3% to 2.5%). Prior to that meeting, traders saw rates stable at 3% for at least one year, before a hike to 3.25% in two years’ time. Since that survey, activity data continued to disappoint and the external scenario became more complex as trade tensions heightened, so traders still see space for lower rates ahead. However, only room for one 25bp cut in October to 2.25% is envisioned, with rates stable thereafter for at least a year. A hike to 2.5% is expected before the close of the two-year horizon. Despite the median results showing only one rate cut, it is worth noting that around 35% of respondents see the policy rate at 2.0% (two 25bps cuts; in line with our scenario) before July next year. Short-term inflation forecasts (one year) dropped 0.2pp to 2.6% and from 3% to 2.8% for the relevant two-year outlook (3% target). Overall, we believe the effects of an unresolved trade war on Chile could be larger than that outlined in the central bank’s new scenario. A prolonged period of uncertainty would likely result in a sharper investment and export slowdown, resulting in further widening of the output gap that motivates the board to cut rates by an additional 50bp this year (to 2.0%) to ensure inflation converges to the 3% target in the relevant two-year forecast horizon.


Tomorrow’s Agenda: At 10:00 AM, INEGI will announce May’s trade balance, which we expect to post a deficit of USD 0.5 billion. On monetary policy, the Central Bank of Mexico’s (Banxico) decision on the reference rate will be published at 3:00 PM. We expect Banxico to remain on hold at 8.25%. Recently, deputy governor, Jonathan Heath, said that starting an easing cycle amidst so many uncertainties would be counterproductive. 


Tomorrow’s Agenda: May’s industrial and retail confidence will be released.

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