Itaú BBA - Lower House approaches pension reform vote in Brazil

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Lower House approaches pension reform vote in Brazil

July 10, 2019

According to local news, the Lower House is set to begin in the next hours the first round of voting on the pension reform.

Talk of the Day


Day Ahead: According to local news, the Lower House is set to begin in the next hours the first round of voting on the pension reform. Other than that, June’s IPCA inflation will be released at 9:00 AM. We forecast a 0.01% monthly drop in prices, leading the 12-month reading to 3.35% (from 4.66% in May). The significant deceleration in the yearly indicator is partly explained by the low monthly reading forecast, and partly because the 1.26% jump seen in June 2018 (due to the truckers' stoppages in the previous month) will be excluded from the 12-month calculation.


June’s CPI came in line with market expectations, pulled down by non-core CPI. Consumer prices grew 0.06% month-over-month in the month (from 0.39% a year ago), slightly below our forecast (0.07%) and in line with market expectations. CPI was pulled down by non-core CPI (-0.68%, from 0.84% a year ago), driven by lower energy prices (-1.55%) and fruits and vegetables (-1.58%). In turn, core inflation stood at 0.30% (from 0.23% a year ago). On an annual basis, headline inflation slowed down, pulled down by energy prices, but with core inflation accelerating. Headline inflation slowed to 3.95% year-over-year in June (from 4.28% in May), crossing the upper bound of the range around central bank’s target. However, core inflation accelerated somewhat to 3.85% in June (from 3.77% in May), with both tradables (3.92%, from 3.82%) and services (3.75%, from 3.69%) accelerating.

We expect inflation to end 2019 at 3.7%. While core CPI accelerated (one of Banxico’s main concern), its 2Q19 annual rate was in line with Banxico’s forecast (3.8%) in its latest inflation report. Still, we think the central bank will want to see more information before being comfortable to start an easing cycle. Moreover, the uncertainties over Mexico’s economy continue to constitute upside risks for inflation (through a weaker currency). ** Full story here.


The average of the core measures monitored by the central bank remained near the 3% target (2.96% vs. 2.92% in May) in June. The measure excluding food and regulated prices (previously highlighted by the central bank) was stable at 2.54%. Meanwhile, non-tradable inflation (excluding food and regulated prices) was broadly stable at 3.36%. The reading is in line the central bank’s evaluation that headline inflation is only transitorily high. The regulated component continues to pull up inflation, increasing 5.33% yoy, but is gradually moderating (5.54% previously). Tradable goods inflation (also excluding food and regulated items) was stable at a low 1.17%, as the pass-through from previous depreciation remains contained. As supply shocks fade, inflation is likely to retreat towards the central bank’s 3% target. Broadly anchored inflation expectations and the negative output gap would keep inflationary pressures in check. However, the recent increase in food prices constitutes an upside risk to our 3.2% yearend call.

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