Itaú BBA - Inflation in line with expectations in Brazil

Latam Talking Points

< Back

Inflation in line with expectations in Brazil

August 10, 2020

The next IPCA readings tend to sustain the benign dynamics

Our LatAm Macro Monthly report was published on Friday, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru and the global economy. **Full story here.

Talk of the Day


COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 572 deaths (905 on the previous day) and 24,167 confirmed cases. The 7-day moving average of deaths increased to 992, from 988 on the previous day. The total number of deaths now stands at 101,049, with 3,035,422 confirmed cases, which implies a 3.3% mortality rate. The estimated reproduction rate (R) is currently at 0.96 (from 0.97).
The consumer price index IPCA climbed 0.36% in July, in line with our forecast (0.37%) and the median of market expectations (0.35%). The main highlights were rising prices for gasoline, electricity and food items. Core inflation measures remain low. Underlying service inflation stood out with 0.03% deflation during the month, while its year-over-year change decelerated to 2.5% from 2.7%. The average of core inflation measures tracked by the Central Bank (EX-0, EX-3, MS, DP and P55) rose 0.13% during the month, while the year-over-year increase receded slightly to 2.10% from 2.12%. The next IPCA readings tend to sustain the benign dynamics, with pressure concentrated on a few regulated items. We forecast increases of 0.09% in August, 0.12% in September and 0.22% in October. We expect the IPCA to rise 1.7% in 2020 and 2.8% in 2021. **Full story here.
Auto production reached 170.3k in July, according to Anfavea. In seasonally adjusted terms (our estimates), production increased 68.8% mom/sa, a large gain due to the very low comparison base in June. Despite the increase in production, the current level remains low (-36.2% yoy) – for comparison, the average production in July from 2016 to 2019 was 233k vehicles. From a demand standpoint, after a sharp contraction in April and May, exports started picking up strongly in June and continued in July (+57.0% mom/sa;-30.8% yoy). Domestic sales are also rebounding (+28.1% mom/sa in July; -28.4% yoy).
Macro Scenario – Firmer stabilization: There are signs that the spread of the virus is stabilizing. Easing social distancing measures in different regions did not increase the number of daily deaths, which has hovered near the same high level since late May. Data show that the gradual reopening has allowed for some recovery of economic activity. Our GDP forecasts remain at -4.5% for 2020 and +3.5% for 2021. Meanwhile, fiscal risks remain high. We expect primary deficits of 11.0% of GDP in 2020 and 2.5% of GDP in 2021. Next year's deficit includes an increase in social spending that will be partially offset by tax hikes. Notwithstanding the worsening domestic risks, we revised our year-end exchange rate forecast to BRL 5.25/USD (from 5.75 previously) to reflect a more benign global scenario for risky assets. Our estimate for 2021 remains at BRL 4.50/USD. We revised our 2020 inflation forecast to 1.7% from 1.8%. Our call for 2021 remains at 2.8%, but with more significant downside risks. The inflation scenario remains benign, and this year's low inflation is expected to carry over into the next year. As for monetary policy, the Copom reduced the Selic rate to 2.0% p.a., as expected, and indicated that eventual next movements will occur even more gradually (strongly suggesting a pause at the next meetings). We expect interest rates to remain at the current level until at least the end of 2020. **Full story here.

Itaú Daily Activity Tracker: Our indicator increased by 6.8 p.p., to 89.3 (latest available data from Tuesday, August 4th). The 7-day moving average increased slight, by 0.2 p.p., to 86.4. The indicator is up 61% from the bottom seen on March 28th, and is now 11% below the mid-March level, when the series started. See our report here.


COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 66 deaths (53 on the previous day) and 2,033 confirmed cases (from 2,198). The 7-day moving average of deaths receded slightly to 67, from 68 on the previous day. The total number of deaths now stands at 10,077, with 373,056 confirmed cases, which implies a 2.7% mortality rate. The estimated reproduction rate (R) is now at 1.09 (from 1.06).
Consumer prices rose 0.1% from June to July (0.2% last year), in line with expectations, leading to a headline inflation drop of 0.1 p.p. to 2.5% yoy as domestic demand remained weak and oil prices low, while upside pressure came mainly from food prices. The continued transfer of low global oil prices to consumers, along with social mobility restrictions still mostly in place during the month, meant that the key price drag came from the transportation division (-10bp contribution). Meanwhile, the food and non-alcoholic beverage division, driven by bread prices, rose 0.6% from June, contributing 12bps to July inflation, while core inflation - prices excluding food and energy - recorded a similar gain to that of the headline print. With only a slow economic recovery expected, inflationary pressures are likely to remain under control, allowing the central bank to keep rates at its technical floor of 0.5% for a prolonged period. We expect inflation to end the year at 2.3% (above the 2.0% expectation of surveyed analysts, according to the central bank), as some inflationary pressure from consumption-directed spending of the 10% pension withdrawal and recovering global oil prices limit further declines. **Full story here.
The trade balance came in with a USD 1.2 billion surplus in July, a significant improvement from the USD 95 million deficit recorded one year ago, as mining exports remain robust and consumer and oil imports remain major drags. The trade surplus was larger than our USD 0.8 billion estimate and market consensus of USD 0.7 billion. As a result, the rolling 12-month trade surplus increased to USD 9.5 billion, above the USD 8.2 billion recorded at the close of 2Q20 and more than double the surplus recorded at the close of 2019. At the margin, our own seasonal adjustment shows the trade balance surplus is even wider, at USD 16.6 billion, as exports improved at the margin, offsetting some milder import declines. Going forward, higher copper prices and a gradual normalization in the global economy will support a wide trade surplus in Chile. Expectations of a consumption impulse from early pension withdrawals would likely support some consumer import improvement. Nevertheless, significant uncertainty (including from the upcoming constitutional referendum) would keep investment contained and limit capital imports. Overall, soft internal demand would lead to a current account surplus of 0.5% of GDP this year, compared with a 3.9% deficit last year. **Full story here.

Macro Scenario – Entering a slow recovery phase, amid a return of domestic risks: With new coronavirus cases and deaths trending down in July, the country began to partially open up. Congress approved a 10% early-pension-withdrawal package, providing citizens with added relief during the current economic hardships. Nevertheless, this marked a political blow to the government, which opposed the measure that, along with the upcoming constitutional referendum, would keep investor uncertainty elevated. We have revised the expected GDP growth for this year to a milder contraction of 5.5% (from 7%) on the belief that activity would receive a significant boost from consumption-directed pension withdrawals as well as a new stimulus package directed at the middle class. An improved carry-over effect and consumer spending extending into 2021 would lead to a stronger, albeit transitory, recovery to 5.5% next year (4.5% previously). Meanwhile, the monetary authority is comfortable keeping rates low, at 0.5%, for as long as necessary, and indicates a willingness to respond with QE measures if needed, with an enhanced toolkit following the reform that allows the purchase of government debt in the secondary market. The central bank also boosted liquidity measures to contain financial-market volatility arising from significant asset sales (over 4% of GDP) by pension fund managers. **Full story here.

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 292 deaths (695 on the previous day) and 4,376 confirmed cases (from 6,495) The 7-day moving average of deaths increased slightly to 650, from 648 on the previous day. The total number of deaths now stands at 52,298, with 480,278 confirmed cases, which implies a 10.9% mortality rate. The estimated reproduction rate (R) is currently at 0.9 (from 1.0).
Consumer prices grew 0.66% month-over-month in July (from 0.38% a year ago), slightly below our forecast of 0.70% and close to market expectations of 0.65%. In turn, core inflation was in line with our forecast and market expectations of 0.40%. Annual headline and core inflation accelerated to 3.62% in July (from 3.33% in June) and 3.85% (from 3.71%), respectively. Within core inflation, goods prices continue to increase at a strong pace (5.19% year-over-year in July, from 4.69%). Persistence in core goods inflation is associated to supply/demand shocks amid the pandemic. On the benign side, services inflation decelerated further to 2.40% in July (from 2.65% in June), reflecting the downward pressure from the widening of the negative output gap. Finally, non-core CPI (2.92% year-over-year in July, from 2.16% in June) was pressured by an upturn in energy prices (-0.41%, from -4.57%). We expect inflation at 3.7% for this year-end, pressured by the persistence in core goods inflation. While our base scenario considers a 50-bp policy rate cut in the next monetary policy meeting (August 13), the central bank may opt to slowdown the easing pace in the subsequent meetings amid the upturn in inflation. Still, we expect lower inflation looking forward (3.2% for the end of 2021) driven by the widening of the negative output gap and appreciation of the currency. **Full story here.

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 302 deaths (290 on the previous day) and 10,611 confirmed cases (from 9,674). The 7-day moving average decreased to 313, from 316 on the previous day. The total number of deaths now stands at 12,842, with 387,481 confirmed cases, which implies a 3.3% mortality rate. The estimated reproduction rate (R) is now at 1.02 (from 1.09).
Macro Scenario – A harsh reopening: The Colombian economy continues to gradually reopen in cities that are less affected by COVID-19. Yet, on a national scale, Colombia is experiencing record-high caseload and deaths, leading to extended lockdowns in key cities, including Bogotá and Medellin. The evolution of the virus would be key to the pace of the recovery anticipated during 2H20. We expect a GDP contraction of 6.0% this year (+3.3% in 2019). The central bank cut its policy rate by 25 bps, to 2.25%, and indicated that any further move would be data dependent. Given the extent of the recession and the benign behavior of inflation, we still expect one additional interest rate cut of 25 bps before year-end. **Full story here.

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 83 deaths (112 on the previous day) and 4,688 confirmed cases (from 6,134). The 7-day moving average of deaths increased to 140, from 136. The total number of deaths now stands at 4,606, with 246,473 confirmed cases, which implies a 1.9% mortality rate. The estimated reproduction rate (R) is currently at 0.79 (from 1.05).


COVID-19 update: according to the Johns Hopkins University, Peru registered a daily increase of 228 deaths (195 on the previous day) and 7,012 confirmed cases (from 7,137). The 7-day moving average of deaths increased to 208, from 205 on the previous day. The total number of deaths now stands at 21,072, with 478,024 confirmed cases, which implies a 4.4% mortality rate. The estimated reproduction rate (R) is currently at 1.2 (from 1.3).

The Week Ahead in LatAm


On Thursday, the INDEC (the official statistical agency) will publish the national CPI for July 2020. According to the average of several price-tracker consultancies, consumer prices rose 2.2% month over-month in July as in the previous month. If this estimate is correct, last 12-month inflation will remain at 42.8% in July.


The Central Bank will publish the minutes of its latest monetary policy meeting tomorrow, helping to shed light on the authorities’ rationale to cut the Selic rate by 25 bps, to an all-time low of 2.0% p.a., as widely expected. The statement brought both dovish elements – with the authorities more somber on the economic recovery, highlighting sector issues and implying a potential fiscal cliff once emergency support measures are withdrawn – and hawkish elements, with the statement mentioning, sooner than norm would require, forecasts for 2022 that will be on target, with the Selic rate back at 3.0% p.a. by end 2021. The text also highlighted the importance of fiscal policy to the set of choices available to monetary authorities, suggesting the board will choose to stand pat until there are greater clarity on the fiscal outlook. In all, the communication did not formally close the door to further easing, but indicated that, if at all, this is likely to be even more gradual than the latest move, hinting strongly at a pause in the next few meetings. See more on our view regarding Copom’s decision here.
On economic activity, this week’s highlights will be June’s retail sales (PMC) (Wed.), the service sector revenue survey (PMS) (Thu.) and the IBC-Br monthly activity index (Fri.). For the PMC, we expect the broad indicator to increase 13.7% mom/sa, while core retail sales are expected to advance 11.9% mom/sa. Regarding the service sector revenue, we forecast a 5.0% mom/sa growth, but this estimate may change according to the retail sales results. For IBC-BR, we forecast a 4.6% mom/sa increase, also conditional on the retail sales and service sector revenue releases. Finally, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for July may come out this week (both without a scheduled date). We continue to see economic activity rebounding from the strong declines in March and April. The speed of recovery has been faster in the industrial and retail sectors, while some specific service sectors have been posting slower results.
On the political front, discussions regarding government´s budget for 2021 (to be presented by the end of the month) may heat up during the week. It will be key to monitor in what manner issues such as public investment and income support programs will be handled to comply (or not) with the spending cap. Aside from that, the COVID-19 outbreak and its implications will continue to take center stage, with new deaths still averaging slightly above 1,000 per day. Any changes to isolation guidelines in major cities and potential signs of deceleration of the surge will also be closely monitored.
On Tuesday, the central bank will publish the results from its monthly economist survey. While no significant change is expected for rates (0.5% for a prolonged period), the implementation of the 10% pension withdrawal reform would likely result in a milder GDP contraction (currently a 6.1% drop) and somewhat more elevated inflationary pressures (currently at 2.0% yearend).
On Thursday, activity indicators for the month of June will be released. Activity indicators for May continued to show the significant impact the coronavirus is having on the Colombian economy, yet there were signs that the worst of the crisis had passed as activity posted meaningful gains at the margin. Retail sales fell 26.8% yoy in May (42.9% drop in April). Meanwhile, manufacturing contracted 26.2% yoy (-35.8% in April). With the lockdown persisting through June, albeit with added flexibility, the activity decline is likely to moderate further. Car sales fell 38.5% YoY, milder than the 59.9% drop in May, and the month included a VAT-free sales day. As a result, we expect retail sales to contract 10%. Meanwhile, with energy demand shrinking 5.4% (milder than the 6.7% drop previously), PMIs rebounding and a lower base of comparison, we see manufacturing retreating a milder 15% yoy.
The trade balance for June will be published on Thursday. With the export decline moderating and imports falling at an accelerating pace, the trade deficit narrowed in May to USD 475 million (USD 833 one year earlier). As a result, the rolling 12-month trade deficit sits at USD 11.1 billion, still wider than the USD 10.8 billion in 2019, but narrowing mildly from the USD 11.5 billion as of April. With global oil prices and the global economy initiating a partial recovery process and domestic demand remaining sluggish as partial lockdown persists until August, some improvement in external accounts is expected. Hence, we see a trade deficit of USD 475 million, narrowing from the USD 708 million deficit last year.

On Friday, the national statistics agency will publish the second quarter GDP. The March onset of the coronavirus outbreak in Colombia and the oil price collapse meant activity disappointed in 1Q20 with a mild 1.1% yoy increase (+3.5% in 4Q19). While the consumption slowdown was moderate, the drop in investment and export activity dragged growth down. With the nationwide lockdown extending beyond the second quarter, the bulk of the economic adjustment will be reflected in 2Q20. Private consumption, investment and exports are set to be key drags in the quarter, resulting in activity contracting 14.0% from 1Q20, and falling 15.1% over one year. In turn, the monthly activity coincident indicator (ISE) for June will also be released on Friday. A 8.2% drop is consistent with our GDP call.


On Tuesday, the Statistics Institute (INEGI) will publish June’s industrial production, which we expect to post -18.0% yoy (from -30.0% in May), consistent with the 2Q20 GDP flash estimate. Using seasonally adjusted figures, we estimate industrial production expanded 17.9% mom in June.

On Thursday, the Central Bank of Mexico (Banxico) will hold a board meeting to decide on the reference rate. We expect Banxico to cut the policy rate by 50 bps (to 4.50%), continuing with the easing pace shown in the past 4 meetings. However, Banxico can signal a more gradual approach in the coming meetings amid an upturn in inflation and the substantial rate cuts already implemented.


The central bank will publish its monthly GDP proxy (IMAEP) for June on Friday. The IMAEP rose 9.7% mom/sa in May (-7.4% yoy), after falling dramatically in the previous two months due to the full effects of the lockdown. We forecast a new sequential expansion in June (2.3% mom/sa), due to the easing of social distancing measures. On a year-over-year basis, we expect 3.8% drop.


On Thursday, the Central Bank of Peru (BCRP) will publish its August’s monetary policy meeting. We expect the BCRP to keep its policy rate at 0.25%. The wide negative output gap amid subdued inflation supports the BCRP keeping the policy rate at 0.25% for the foreseeable future.

< Back