Itaú BBA - Evening Edition – Soft industrial production in Mexico

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Evening Edition – Soft industrial production in Mexico

June 11, 2019

At the margin, industrial production improved, but momentum remained moderate.

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Industrial production declined 2.9% yoy in April (from -0.1% in the previous month), above our forecast (-4.2%) and below market expectations (-2.2%). The figure was dragged by a negative calendar effect due to the Easter Holidays. In fact, according to figures adjusted by the number of working days, industrial production fell 0.2% (from -2.5% in the previous month), taking the three month moving average growth rate to -1.3% yoy (from -1.5%). Looking at the breakdown, also using calendar adjusted figures, the mining sector kept contracting in the quarter (-8.6%, from -10.3%), while construction output deteriorated to -2.7%, from -1.9%. In turn, manufacturing output improved to 1.1% (from 0.5% in March). At the margin, industrial production improved, but momentum remained soft. With seasonally adjusted figures, industrial production grew 1.5% mom in April, from -1.2% in March, taking the quarter-over-quarter annualized growth rate (qoq/saar) to 0.4% (from -0.7% in March). For 2019, we expect economic activity to remain weak. Uncertainty over the direction of domestic policy and trade relations with the US along with weaker U.S. economic growth will likely keep growth below potential. In the short term, lower public spending is also playing against activity. ** Full story here.


President Macri announced that Miguel Angel Pichetto will accompany him as the vice-presidential candidate in October’s election. Senator Pichetto was, until now, the leader of the Peronist caucus at the Senate and a fierce opponent to Cristina Kirchner. Macri said Argentines will decide in the next elections if they want to live in a republic or return to a populist authoritarianism. The ticket provides a clear commitment with governability in an eventual Macri’s second term, given Pichetto’s capacity to manage the Senate and dialogue with Peronist governors. According to political analysts, despite the recent changes, Macri’s chances to be re-elected depends heavily on an improvement in economic conditions.


According to the central bank’s monthly analyst survey, no changes were made to the inflation outlook. Growth was revised down for the fifth consecutive month and rates are seen stable at 2.5% for the remainder of the year and through the 1H20, before a gradual normalization unfolds. The results of the survey followed the surprise 50bps cut by the central bank on Friday (from 3% to 2.5%). Last month, analysts saw rates stable at 3% until yearend. Since that survey, activity disappointed in 1Q19, and the external scenario became more complex, as trade tensions heightened. Yet, for now, the market is following the central bank’s communication and expects no additional rate cuts. Only 22% of respondents see room for further easing by yearend, Itaú included. The policy rate is seen reaching 3% in the two-year horizon (3.5% previously). Short-term inflation forecasts for the end of 2019 stayed at 2.8% (in line with our forecast) and at the 3% target for 2020 (also the 23-month expectation). Growth expectations for this year declined from 3.2% in May to 2.9% (BCCh sees a range of 2.75%-3.5%). The 2020 and 2021 outlook was cut by a milder 0.1pp to 3.3%. 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: On economic activity, April’s retail sales will be released at 9:00 AM. We expect a 0.4% mom/sa growth in the broad indicator, and a 0.4% mom/sa decline in core retail sales, leading the year-over-year print to 3.8% and 2.1%, respectively.

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