Itaú BBA - Itaú’s monthly GDP expands in October

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Itaú’s monthly GDP expands in October

December 17, 2018

Components breakdown shows that the headline result was stronger than suggested by diffusion

Talk of the Day
 

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

Brazil

October’s Itaú Unibanco monthly GDP rose 0.6% mom/sa and 2.1% yoy. Importantly, real revenues from services, retail sales and industrial production all picked up in year-over-year terms, according to census bureau IBGE. Components breakdown shows that the headline result was stronger than suggested by diffusion. Seven out of 13 monthly GDP components advanced on the seasonally-adjusted monthly basis, led by extraction and mining (3.6%) and electricity, water and sewage services (2.7%). On the opposite end, construction stood out with a decline of 1.7%. For November, based on already released coincident indicators, we expect PM-Itaú to increase 0.5% mom/sa.
** Full story
here.

According to the IBGE’s monthly services survey (PMS), services sector real revenues rose 0.1% mom/sa in October. The breakdown shows that the gains in “other services” and IT & telecom were offset by decreases in the other three components. It is worth mentioning that the survey encompasses approximately 34% of the services GDP, so it should not be seen as an indicator for the whole services sector. In year-over-year terms, service sector real revenue came in at 1.5%, below consensus and our forecasts (both at 1.8%). The surprise reinforces the outlook of weak qoq/sa growth in 4Q18.

Macro Scenario: A more benign inflation scenario. Our forecasts for GDP growth are 1.3% in 2018 and 2.5% in 2019. We decreased our estimate for the primary budget deficit in 2018 to 1.7% of GDP, from 1.8%. For 2019, we expect a 1.3% deficit, but the result may be better due to possible extraordinary revenues. We maintained our year-end forecasts for the exchange rate at BRL 3.90 per USD in 2019 and 2020. Our inflation forecasts were revised downward, to 3.8% this year and 3.9% next year. For 2018, we adjusted our estimates for fuels, electricity and some market-set prices. For 2019, we incorporated the impact of lower fuel prices and inflationary inertia. The changes in inflation forecasts and balance of risks in the statement of the December meeting of the Copom (Monetary Policy Committee) are consistent, in our view, with our forecast of stable Selic rate at 6.5% p.a. throughout 2019.
** Full story
here.

Day Ahead: The Central Bank will release its monthly activity index (IBC-Br) for October at 8:30 AM (SP Time), for which we forecast a 0.1% mom s.a. decrease.
** Read our full week ahead note below.

Peru

Peru’s monthly GDP was above market expectations in October. The monthly GDP expanded 4.2% yoy in the month, above our forecast (2.8%) and median market expectations (3.1%). As a result, the three-month moving average (3mma) growth rate accelerated to 2.9% yoy in October. Non-natural resources sector, which accounts for three quarters of the economy, accelerated to 4.8% yoy, taking the 3mma growth rate to 3.3% yoy. Looking at the breakdown, also using 3mma growth rates, construction accelerated to 2.1%. Likewise, non-primary manufacturing grew 3.2% yoy, while commerce (2.2%) and services (4.1%) sectors remained resilient. In contrast, natural resources decelerated to 1.5% yoy, taking the 3mma growth rate to 0.9%. Inside natural resources sector, also using 3mma growth rates, agriculture (6.6%) and fishing (22.9%) output accelerated, while mining & hydrocarbon (-1.8%) kept contracting.

We expect real GDP growth at 3.8% in 2018. For 2019, we forecast 4.0%, assuming trade tensions dissipate, benefiting metal commodity prices and, consequently, investment, which would offset a lower fiscal impulse.
** Full story
here.

Colombia

Activity advanced at the start of 4Q18. Retail sales and manufacturing surprised to the upside in October, with the latter favored by one additional working day compared to last year. Nevertheless, even after adjusting for calendar and seasonal effects, manufacturing activity was solid. Retail sales increased 6.5% in October, coming in above the market consensus of 5.5% and our call of 5.0%. Car and motorcycle sales (+14.3% yoy, contributing 1.8pp to the headline gain), alongside food and non-alcoholic beverage sales (+5.8%, contributing 1.3pp) lifted sales. Meanwhile, pharmaceutical, medicinal, and book sales mildly contracted (a joint null subtraction to headline growth). 

The manufacturing recovery is consolidating. The 5.8% yoy rise in manufacturing was led by the production of pharmaceuticals and medicines (+18.2%), beverages (+5.2%) and oil refining (+2.8%). Growth came in above the market consensus of +3.9% and our +3.8% estimate. After adjusting for seasonal and calendar effects, manufacturing grew 5.9%. Amid lower oil prices, we expect the recovery of the Colombian economy to remain gradual, despite the stronger-than-expected data for October. We forecast 3.3% growth for 2019.
** Full story
here.

Day Ahead: Think-tank Fedesarrollo will release November’s consumer confidence.
** Read our full week ahead note below.

The Week Ahead in LatAm

Argentina

On Tuesday, the GDP figures for 3Q18 will see the light. We expect a 3.5% year-over-year drop, in line with the official monthly GDP proxy (EMAE). 

The INDEC will publish the labor market indicators for 3Q18 also on Tuesday. Unemployment rate came in at 9.6% in 2Q18. We expect the labor market to show a new deterioration on a year-over-year basis (unemployment rate in 3Q17 was 8.3%), in line with the contraction in economic activity.

The trade balance for November will come out on Wednesday. A weak currency and contraction of internal demand led to trade surpluses in the previous months. We forecast a surplus of USD 150 million in November (up from a USD 1.5 billion deficit registered in the same month of 2017) due to a significant drop in imports, more than offsetting weak exports. If our forecast is correct, the rolling 12-month trade deficit will fall to USD 6.8 billion from USD 8.5 billion in October. 

On Thursday, the treasury ministry will publish the federal fiscal accounts for November. According to our estimations, the 12-month rolling primary deficit posted in October was slightly below the 2.7% target for the year. The Congress recently passed a budget for 2019 that targets a zero primary deficit, consistent with the target agreed with the IMF.  

Brazil

The Copom minutes will be released on Tuesday, at 8:00 AM, when we will learn more about the committee’s thinking. In the last meeting the Copom kept the base rate at 6.5% p.a., as widely expected. But the statement brought important changes, showing lower inflation forecasts and the assessment that risks of lower-than-expected inflation have increased, while the risks surrounding the continuation of reforms and adjustments have diminished. Additionally, the Central Bank’s Quarterly Inflation Report will be released on Thursday.

On economic activity, November’s CAGED formal job creation will probably come through (release date not yet specified), for which we forecast a net creation of 36k jobs. On seasonally adjusted terms, our forecast implies a 63.5k formal jobs creation, leaving the 3-month s.a. moving average virtually stable in 62k. Also, the BCB will release its monthly activity index (IBC-Br) for October today, for which we forecast a 0.1% mom s.a. decrease. Finally, FGV’s confidence surveys for December on industry (preview) and consumers will be released Thursday and Friday, respectively.

December’s IPCA-15 inflation will be released on Friday. We forecast a 0.12% monthly decrease, leading the full-2018 IPCA-15 reading to 3.90% (from 2.94% in 2017). Transportation and housing will likely post the major downward contributions to the monthly reading, driven by the decline in the electricity and fuel prices. On the other hand, food and beverages, and personal expenses, are expected to post the main upward contributions.

Finally, on external accounts, we expect the current account (Fri.) to post a USD 3.0 billion deficit, above the USD 2.2 billion deficit seen in November last year. In spite of a smaller service deficit and a relatively stable trade balance, the income balance will likely register a wider deficit. Over 12 months, we expect the current account deficit to decrease to USD 16.2 billion (0.8% of the GDP) and the 3-month seasonally adjusted moving average to increase to USD 6 billion. Direct investment in the country will likely amount to USD 11.0 billion in November, leading the 12-month reading to USD 81 billion (4.2% of GDP).

Chile

On Wednesday, the central bank will publish the minutes of the December monetary policy meeting at which the board unanimously chose to keep the policy rate steady at 2.75%. We anticipate there will be limited new information in the minutes, considering the publication of the flagship Inflation Report the day following the decision. The report outlined the baseline trajectory for the policy rate: gradual normalization to neutral levels (4%-4.5%) in 1H20 with the activity recovery remaining in check, short-term inflation expectations lowered on the back of weaker global oil prices, but still seen anchored in the relevant 2-year horizon.

Colombia

Today, think-tank Fedesarrollo will release the November consumer confidence. For the second consecutive month, consumer sentiment was in pessimistic territory (< 0) in November at -1.3 points (following 5 months of optimism: April-August). However, consumers are far less pessimistic than one year earlier (-10.6 points). The depreciation of the Colombian peso and the financing law discussion could be behind weaker consumer confidence. However, with the financing bill dropping the increase in VAT on basic foods, consumer confidence may experience some improvement.  

On Tuesday, the central bank will publish the trade balance for the month of October. In September, slowing import growth amid a modest export expansion led to a smaller-than-expected trade deficit. As a result, the rolling 12-month trade deficit has been broadly stable since June at USD 5.1 billion, but remained narrower than the USD 6.1 billion in 2017. We expect a trade deficit of USD 1,228 million in October (USD -489 million last year), driven by rising imports (industrial and transport). 

On Friday, the coincident activity indicator (ISE) for the month of October will be released. In September, the original series of activity grew 2.3% year-over-year (3.3% in the prior month), meaning growth in 3Q18 was a broadly stable 2.7%. Once adjusted for seasonal and calendar effects, activity picked up 2.6% in the quarter (2.2% in 2Q18). For October, we expect the original series to pick up to 3.6% yoy, boosted by industrial production.

Also on Friday, think-tank Fedesarrollo will release November Industrial and Retail confidence indices. In October, industrial confidence came in at +1.3% (0 = neutral), above the -8.7% recorded one year earlier, while the seasonally adjusted series improved from September. Meanwhile, retail confidence rose 8.6pp from one year earlier to 26.8% (28.6% in September). A dilution of the financing bill (tax reform) regarding VAT will likely aid the improvement of retail confidence, while proposed lower corporate tax rates will also please.

At the close of the week, the central bank will hold its final monetary policy meeting of 2018. We expect stable rates remaining likely for still some time. The dilution of the financing law reduces the inflation risks for next year and activity is still fragile, meaning the board is unlikely to reduce the mild stimulus just yet.

Mexico

On Saturday, Mexico’s 2019 Budget will be published by the Ministry of Finance (MoF). We expect the 2019 budget will likely reflect conservative fiscal targets, as they will try to be consistent with AMLO’s message of responsible public finances. For instance, Carlos Urzua, Minister of Finance, indicated that they will achieve a primary surplus of around 1.0% of GDP. Also, attention should be paid on the consistency of the fiscal deficit target, expenditure growth and extra programs included in the budget, as well as potential details on how the government plans to find fiscal savings.

In the middle of the week, the statistics institute (INEGI) will publish Q3’s aggregate supply whose growth we estimate at 5.5% year-over-year (from 3.9% in the 2Q18). We already know that real GDP expanded 2.5% year-over-year in 3Q18. Moreover, based on balance of payments data, we estimate that real imports of goods and services expanded 9.0% year-over-year in the 3Q18.  

On Thursday, the statistics institute (INEGI) will announce October’s retail sales. We estimate growth of 3.9% year-over-year, from 4.11% in September. Retail sales have remained robust, consistent with a solid labor market. Downside risks to private consumption and the economy in general have increased, as uncertainty over future domestic policies could weight on the currency, inflation and business confidence at a time that monetary policy is tight and could be tightened further.

The Central Bank of Mexico (Banxico) will hold a board meeting on Thursday, to decide on the reference rate. We expect Banxico to hike rates by 25-bps to reach a level of 8.25%. The latest minutes showed two board members seem to have their mind set for a December hike, while a third member is waiting for further news on the incoming administration policies. Moreover, Banxico is expected to take into account an environment of still-high inflation, monetary policy tightening in the U.S. (although the risks of more rate hikes by the Fed than expected seem to have diminished more recently) and uncertainties over the approval in the U.S. congress of the renegotiated NAFTA.

Ending the week, INEGI will publish CPI inflation figures for the first half of December. We expect bi-weekly inflation to post 0.30% (from 0.44% a year ago). Assuming our forecast is correct, headline inflation would decrease to 4.70% year-over-year (from 4.87% in the second half of November). We expect energy prices exerted less pressure on an annual basis.

On Friday, INEGI will publish October’s monthly GDP proxy IGAE which we expect to grow 2.5% year-over-year (after growing 2.1% in September). We already know industrial production decelerated to 1.0% year-over-year in October (from 1.8% in September), with mining contracting (-5.6% year-over-year), while manufacturing grew 2.5% year-over-year. However, employment dynamism likely supported services sectors.

 



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