Itaú BBA - Industrial production declines in Brazil

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Industrial production declines in Brazil

August 2, 2019

The components more closely related to investment (construction inputs and capital goods) also receded in the month, with no signs of recovery.

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Industrial production decreased 0.6% mom/sa in June, in between our call (-0.7%) and market consensus (-0.5%), from -0.2% in the previous month. As expected, manufacturing production declined (-0.7%) and mining production increased (+1.4%). The trend for manufacturing production has been broadly stable in the last few months, while mining increased slightly, after the collapse caused by Brumadinho’s dam break. The components more closely related to investment (construction inputs and capital goods) declined in the month, with no signs of recovery. A faster recovery of the Brazilian economy depends, in our view, on investment picking up. All in all, today’s result continues to indicate a slow recovery of economic activity. Our GDP growth forecasts stand at +0.5% qoq/sa in 2Q19, 0.0% qoq/sa in 3Q19 and 0.8% in 2019 as a whole. ** Full story here.

According to Fenabrave, vehicle sales reached 244k in July (-4.0% mom, according to our seasonal adjustment). In year-over-year terms, sales increased 12.0%. The breakdown shows a 4.0% decrease in “passenger cars + light vehicles”, and a 3.5% decline in “trucks + buses”. This number precedes our July’s retail sale forecast, which now stands at +0.3% mom/sa for the core index and at -0.2% for the broad index (which includes vehicles and construction material). 

The trade surplus in July reached $2.3 billion, missing our forecast ($3.2 billion) and market expectations ($3.4 billion). Stronger growth in imports was behind the deviation from our call. The seasonally-adjusted annualized quarterly moving average receded to $41.1 billion in July from $50.4 billion in June, while the surplus over 12 months receded to $55.1 billion from $56.7 billion. ** Full story here.


Business confidence remains constrained. ICARE’s confidence index decreased to 50.4 in July, from 52.2 points one year ago (50 = neutral). Both industrial and construction confidence are entrenched in pessimistic territory, while retail confidence had the sharpest deterioration over twelve months. Industrial confidence decreased 6.0 p.p. from last year (to 44.3), but moderated the deceleration compared to previous months. Construction confidence inched down 0.4 p.p. to 45.8 points, unable to build on the recovery printed last month. Retail confidence dropped 7.9 p.p. from last year, to 50.6 points, registering the ninth consecutive month of worsening and the worst print since 2017. Mining continues to prop up business sentiment, despite the gloomy global environment. Business confidence excluding the volatile mining component dropped 5.3 p.p., to 46.6 points, similar to levels recorded in the previous month. Low private sentiment amid a still complex global environment would likely lead to below potential growth ahead (averaging close to 3% in 2H19 and 2.4% for 2019, down for 4% last year).

Day Ahead: The minutes of July’s monetary policy meeting (stable rates at 2.5%) will be released. The meeting followed the surprise 50-bp rate cut in June, and the stay-on-hold decision in July was in line with market expectations. However, the decision was not unanimous, with board member Pablo Garcia voting for a 25-bp rate cut. We expect the minutes to consolidate the dovish message incorporated in the press release, preparing the market for a rate cut in September. Additionally, INE will publish the private consumption activity indicators for June. We expect retail sales growth to slow to 0.2% (3.3% in May), hampered by a higher base of comparison, sharper contraction of new car sales and still downbeat consumer confidence.


Core and headline inflation decelerated in July, increasing the odds of a rate cut in August. July’s CPI posted a month-over-month rate of 0.20% (from 0.38% a year ago), below our forecast of 0.32% and market expectations of 0.26%. The CPI figure was pressured mainly by an increase in prices of fishes due to lower production and an increase in bus tariffs associated to national holidays in July. Looking forward, we now expect inflation at 2.1% (from 2.3%) by the end of 2019. ** Full story here.


Day Ahead: The central bank will publish the minutes of the decision to hold the policy rate at 4.25% at July’s monetary policy meeting. Despite the stable rates decision, we expect the minutes to build on concerns for the growth recovery and reaffirm that core inflationary pressure is controlled, suggesting that rate cuts are more likely than hikes ahead. Additionally, the institute of statistics (DANE) will publish exports for the month of June, which we expect to come in at USD 3.1 billion, a 7.4% yoy drop, as coal exports moderate.


Day Ahead: The central bank will release its monthly expectations survey. In the latest survey, analysts slightly reduced their inflation forecasts for 2019 (to 40.0% from 40.3%), but increased for 2020 (27.0% from 26.1%). We expect no significant changes in the inflation expectations, given the tight monetary policy and the stabilization of the nominal exchange rate.

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