Itaú BBA - Evening Edition – Stable rates in Chile, for now

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Evening Edition – Stable rates in Chile, for now

July 19, 2019

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

Talk of the Day

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


Following the surprise 50-bp rate cut last month, the board of the Chilean central bank opted to hold the policy rate at 2.5%, in line with market expectations. However, the decision was not unanimous, with Pablo Garcia voting for a 25-bp rate cut. It was the first split decision since August 2017, when the same board member voted to continue with rate cuts after the central bank had implemented a 100-bp cycle to 2.5%. Meanwhile, the press release announcing the decision moved from a neutral tone to a dovish bias. The board states that since the 2Q19 Inflation Report (released on June 10), risks to the convergence of inflation to the target have increased. Particularly, it highlighted the slowdown of inflation measures closely reflecting economic slack and the growth recovery risk given the uncertain global context. The board noted that if these tendencies persist, additional monetary stimulus would be required.

Looking forward, we expect the policy rate to reach 2.0% by yearend, with the next cut likely in September. Global uncertainty, weak private sentiment and contained copper prices would limit the activity recovery in 2H19. Hence, we believe the output gap would not narrow in line with the central bank’s 2Q19 baseline scenario, keeping inflationary pressures contained and providing room for additional stimulus. ** Full story here.


A larger-than-expected trade deficit was recorded in May, as weaker oil exports was only partially offset by slowing imports. The USD 817 million trade deficit came in above the market consensus of USD 716 million (also our forecast) and wider than the USD 600 million deficit registered in May last year. The rolling 12-month trade deficit increased from USD 8.2 billion as of March (USD 7.0 billion in 2018) to USD 8.6 billion, the highest since mid-2017. The rise is a result of a gradual moderation of the energy trade surplus since the end of 2018, while the non-energy trade deficit also edges up. Meanwhile, our own seasonal adjustment shows the trade deficit remained stable at a wider USD 9.6 billion (annualized) in the quarter. Imports grew at its slowest pace since April 2018, despite a continuing boost (likely to fade ahead) from imports of transportation equipment (linked to renewal of bus fleets in Bogota). Export growth slowed in May as oil exports were hampered by slower volume growth and falling prices. With moderating global demand and low oil prices, we expect the current-account deficit to remain wide at 4.3% of GDP this year (3.9% last year). ** Full story here.

The Week Ahead in Latam


The INDEC will publish the EMAE (official monthly GDP proxy) for May on Thursday. According to leading and coincident indicators, economic activity rose on a sequential basis in that month. The monthly GDP proxy published by OJF consulting firm (IGA index) expanded 0.8% mom/sa in May, while the official manufacturing output index grew 0.6% mom/sa and construction expanded 2.3% mom/sa. We forecast a 1.0% increase in May relative to April 2019, implying a 0.8% year-over-year drop.

The trade balance for June will also come out on Thursday. A weak currency and contracting internal demand are leading to trade surpluses. We forecast a surplus of USD 1.0 billion in June (versus a USD 322 million deficit registered in the same month of 2018). 


On economic activity, CAGED formal job creation will probably come out next week. We expect a net creation of 28k formal jobs (13k in seasonally adjusted terms, increasing the 3-month s.a. moving average to 24k from 13k). Additionally, FGV’s confidence indexes for July on the industrial (preview), consumer, construction and retail sectors will be released throughout the week.

July’s IPCA-15 inflation will be released on Tuesday. We forecast a 0.14% monthly increase, which would lead the 12-month reading to 3.33% (from 3.84% in June). Food at home will likely post a close-to-zero contribution in the month, while airfares and electricity bills should be responsible for the major upward pressures on July's inflation. Additionally, ANEEL will announce the tariff flag on electricity bills for August on Friday. We expect a yellow flag, with no additional impact on inflation for the period.

On external accounts, we expect the current account (Thu.) to post a USD 1.4 billion deficit in June 2019, below the USD 160 million surplus seen in June 2018, mostly due a weaker trade balance. Over 12 months, we expect the current account deficit to increase to USD 15.5 bn (or 0.8% of the GDP) and the 3-month seasonally adjusted moving average to advance to a USD 25.8 bn deficit (from USD 21.5 bn). Direct investment in the country will likely amount to USD 5.8 billion in June, leading the 12-month reading to USD 95 billion (5.1% of GDP).

On the fiscal front, June’s tax collection will likely be released throughout the week, for which we expect a BRL 115.5 bn print.


On Monday, the coincident activity indicator (ISE) for the month of May will be published. In the previous month, growth continued below potential, meaning the output gap widened further. The index grew 2.1% year-over-year (1.9% in March), and 2.4% in the quarter ended in April (2.8% in 1Q19 and 2.7% in 4Q18). Meanwhile, the rolling 12-month growth remained broadly stable at 2.6% (versus 2018). Activity indicators for May surprised to the upside, led by retail sales. We expect growth of 3.5% in May, yet going forward, low consumer confidence, a loosening labor market and weakening external demand do not suggest a meaningful acceleration of activity will persist.

Think-tank Fedesarrollo will publish industrial and retail confidence for the month of June on Wednesday. In May, both industrial and retail confidence remained in optimistic ground, with the former consolidating its recovery while the latter fell over the twelve month period for the first time since February 2018. Industrial confidence came in at 7.1% in May (0 = neutral), 6.6pp higher than one year ago, with the improvement mainly explained by the rebound in the expectations for production in the upcoming quarter. Meanwhile, retail confidence came in at 26.3% in May (0 = neutral), down from 27.0%. Going forward, a weak labor market amid elevated global uncertainty would likely prevent a notable growth improvement and contain confidence levels.

On Friday, the central bank of Colombia will hold its monetary policy meeting. In June, the central bank unanimously opted to hold the policy rate at 4.25%, resulting in the longest period of stable rates in the decade (fourteen months). The board expects growth dynamism to pick up through the remainder of the year, inflation returning to the 3% target in 2020 as transitory shocks unwind, while external imbalances must be monitored. Under such expectations, we expect the wait-and-see approach to continue (hold rates once more at 4.25%), but communicate a willingness to react if risks to its baseline scenario intensify.


In the middle of the week, INEGI will publish CPI inflation figures for the first half of July. We expect bi-weekly CPI to grow 0.27% (from 0.32% a year ago). Non-core food is expected to pressure the CPI index. Assuming our forecast is correct, annual headline CPI would decelerate slightly to 3.84% year-over-year (from 3.89% in the second half of June).

On Thursday, the statistics institute (INEGI) will announce May’s retail sales. We estimate retail sales grew 2.6% year-over-year, from 1.6% in April. Private consumption indicators have shown a moderation, consistent with recent weakness in the labor market. However, recent real wage increases are a buffer for activity, sustaining the real wage bill and smoothing the consumption slowdown. 

Ending the week, INEGI will also publish May’s monthly GDP proxy (IGAE), which we forecast to fall by 0.9% year-over-year (after falling by 1.4% in April). We already know that industrial production fell by 3.3% year-over-year in May, dragged by the mining sector (fall in oil output) and construction output (associated to a restrictive fiscal stance), while manufacturing sector decelerated. 

The same day, INEGI will announce June’s trade balance, which we expect to post a surplus of USD 0.3 billion. We expect manufacturing exports and non-oil imports remained soft, reflecting weakness in external and internal demand, respectively.

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