Itaú BBA - Gross fixed investment improved at the margin in Mexico

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Gross fixed investment improved at the margin in Mexico

May 8, 2019

Uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment in the short-term

Talk of the Day


Gross fixed investment (GFI) came in above expectations in February. The monthly GFI decreased by 1.9% yoy in February, above our forecast of -3.5% and market expectations (-2.5%). According to calendar adjusted figures, GFI decreased at a similar rate (-1.9% yoy, from 1.4% in January), taking the three month moving average contraction to 2.4% yoy (from -2.7% in January). Looking at the breakdown, also with calendar adjusted figures, construction investment decreased by 0.7% (from -1.6% in January), mainly dragged by non-residential investment. In turn, Machinery & Equipment (M&E) investment fell 5.1% in the quarter ended in February (from –4.4% in January). However, at the margin gross fixed investment improved. With seasonally adjusted figures, the quarter-over-quarter annualized rate (qoq/saar) stood at 4.1% (from -4.9% in January). The recovery of investment is unlikely to be lasting. Uncertainty over the direction of domestic policy and the approval of the USMCA by the U.S. Congress will continue to weigh on investment in the short-term. ** Full story here.


According to Anfavea, auto production reached 267.5k in April, above our forecast (254k). In seasonally adjusted terms (our estimates), production increased 3.7%. The 3-month moving average increased 4.6%. Exports declined 10% while domestic sales remained virtually stable. Our preliminary forecast for April industrial production increased to -0.1% mom/sa (-4.5% yoy) from -0.5% previously.

Day Ahead: The Monetary Policy Committee of the Central Bank (Copom) will meet today at 6:00 PM (SP Time). We believe the committee will keep the Selic rate stable at 6.5% p.a., given that their inflation forecasts anchored around the respective targets up to 2021 and the monetary authority's unwillingness to change the level of stimulus until there is more clarity about the outlook for reforms – in particular, for the pension reform.


Another trade surplus was registered in April, yet the sixth consecutive month of contractions for mining exports has led to further narrowing of the rolling 12-month balance. A USD 612 million trade surplus was registered in April (USD 770 million one year earlier), below our USD 800 million call and the USD 950 million market consensus. As a result, the rolling 12-month trade surplus dropped to USD 3.5 billion (USD 4.7 billion in 2018, USD 7.4 billion in 2017). Our seasonally adjusted series shows a USD 3.8 billion (annualized) trade surplus in the rolling quarter, an improvement from USD 2.4 billion in 4Q18 when low global copper prices hampered exports. Mining exports remain a key export drag, but there is some improvement at the margin. For the month of April, total exports dropped 6.3% yoy (-4.6% in March) with all three divisions (mining, agriculture and industrial) shrinking, reflecting the weaker global economy. A second consecutive month of falling imports was registered in April (-4.3% yoy). We expect the current account deficit to remain broadly stable and wide this year around 3% of GDP. Moderating growth among trade partners and the consolidation of the domestic recovery will keep the deficit wide. Nevertheless, the composition of imports (stronger capital goods relative to other categories) partly mitigates external vulnerabilities.** Full story here.

Strong wage growth of 4.8% yoy was recorded in March (4.3% previously), resulting in a real wage expansion of 2.3% (2.1% in February). In the first quarter of the 2019, nominal wages grew 4.3% (4.0 in the 4Q18; the highest since 2Q18), while real wages picked up to 2.0% (1.2% in 4Q18) aided by low inflationary prints. The real wage bill (considering only salaried employment), accelerated to 3.0% in the quarter (2.5% in 4Q18, same as in 3Q18). Signs of a wage growth recovery, along with low inflation (expected to stay below the central bank’s 3% target this year) and an expansionary monetary policy, would support the consolidation of the consumption recovery.

There was no relief for consumer confidence in April despite recovering wage growth, still low inflation and an expansionary monetary policy at the start of the year. The GFK consumer confidence index came in at 43.2 points in April (50 = neutral; 42.3 In March), more than 8pp inferior to levels one year ago. Once again, only one of the five sub-indexes was in optimistic ground (expectations to purchase household goods). It is now the ninth consecutive month in pessimistic territory. The sub-indexes registering the largest 12-month deterioration are those related to the outlook for the economy. The 5-year perspective for the economy sits at 23.8 points (a sharp drop from 42.2 points one year earlier). Meanwhile, the twelve months perspective for the economy is at 49.2 points, a 16pp decline in one year. Another drag came from the respondent’s current economic situation at 42.2 points (1.9pp down from one year earlier), and the current evaluation of the economy (down 2.6pp to 46.3). On the plus side, expectations to purchase household goods remained firmly in optimistic ground at 57.2 points (moderating only mildly from 55.9 in April last year). Going forward we can expect that stable interest rates and controlled inflation can help increase consumer confidence indicators.

According to the central bank’s quarterly survey of credit conditions, private banks reported the supply conditions of loans in Chile was broadly similar to 4Q18, while demand was less dynamic in the first quarter of 2019. On balance, entities saw signs of lower loan demand by consumers in the first quarter (-8.3% from +33% in 4Q18; index centered at 0), while growth of mortgage demand slowed (to 9.1% from 18.2%). Large corporate demand growth posted the most notable deterioration (-6.7% from +60% in 4Q18). Meanwhile, construction and real estate loan demand continues to expand, but is less widespread. On the supply side, credit supply conditions to real estate companies tightened in the quarter, while there was a mild loosening for large businesses and consumers. After accelerating during 2018, credit growth rates appear to have peaked in 1Q19, so the less upbeat demand conditions reported by banks suggests that a credit growth acceleration is unlikely. However, our expectation of close-to-potential growth this year is in line with loan growth stability ahead.

Also, the central bank’s Business Perception Report, shows there is a growing divergence between the investment and consumption outlook. Investment is dynamic and in line with expectations (in mining, fishing and forestry) and its expectations are upbeat. This in line with our expectations that investment would be the activity driver this year. However, there is growing concern from retail and service sectors (in line with the low consumer confidence registered so far this year). Respondents see little room to increase prices in the midst of greater competition (in some cases due to the entry of new players), a more informed purchaser and greater sensitivity to price changes. Regarding the labor market there was no relevant change, while wage pressures are still contained by the increased labor force in recent quarters. The immigrant workforce is valued positively, highlighting the commitment and willingness to work. Meanwhile, credit conditions remain favorable, with low interest rates. Overall, the deteriorating evaluation of consumption activity is in line with activity slowing this year from the 4% recorded in 2018 to our 3.2% expectation.

Day Ahead: At 9:00 AM, inflation for the month of April will be released. High frequency price tracking points to consumer prices rising 0.3% from March. As a result, annual inflation would remain at 2.0%.

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