Itaú BBA - Lower-than-expected inflation in Brazil

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Lower-than-expected inflation in Brazil

November 26, 2018

For the year-end, our estimate for the IPCA is 3.9%. 

Talk of the Day


The mid-month consumer price index IPCA-15 rose 0.19% in November, printing below our estimate (0.27%) and the median of market expectations (0.24%). The biggest deviation from our call was caused by market-set prices in the industrial segment. Year-to-date inflation reached 4.03%, while the year-over-year change receded to 4.39% from 4.53% in the previous month. Food and beverages (0.13 p.p.) provided the largest upward contribution during the month, followed by transportation (0.06 p.p.) and personal expenses (0.04 p.p.). On the other hand, healthcare and personal care (-0.04 p.p.), and housing (-0.02 p.p.) provided negative contributions. Our preliminary forecast for the headline IPCA in November is a drop of 0.05%, pushing the year-over-year rate down to 4.2%. For the year-end, our estimate for the IPCA is 3.9%. 
** Full story here.

According to FGV’s industry survey preview, business confidence in the industrial sector rose 0.6pp in November to 94.7. The breakdown shows an increase in current conditions (+2%) partially offset by weaker expectations (-1.5%). The increase was disappointing because other confidence survey (Brazilian National Confederation of Industry), for the same sector, showed a 17% gain over the same period. The preview of the capacity utilization (NUCI) fell 0.9pp to 75.3. The index remains well below the neutral level (81.5, according to our estimates). The final survey will be released on November 29.

According to FGV’s monthly consumer survey, consumer confidence increased 7.1 p.p mom/sa in November to 93.2. Both expectations (9.8 p.p) and current conditions (2.7 p.p) have improved in the month.


Adjusted by calendar effects, GDP accelerated in 3Q18 on an annual basis. Mexico’s monthly GDP proxy (IGAE) expanded 2.1% year-over-year in September, below our forecast and median market expectations (2.8%, as per Bloomberg) – which implied a GDP growth of 2.5% year-over-year in the 3Q18. Looking at the breakdown, also using calendar adjusted figures, all sectors improved. Primary sector accelerated (2.2% year-over-year in the 3Q18), while services sector grew 3.2% in the 3Q18.  Likewise, Industrial sector accelerated to 1.1% year-over-year, supported by an improvement in mining (-2.9%) and manufacturing (2.3%) sectors, while construction sector (0.7%) decelerated slightly. GDP excluding primary sectors and mining output accelerated to 2.8% year over year, also adjusted by calendar effects.

We expect economic activity to grow 2.0% in 2018, as manufacturing exports recover (benefited by growth in the U.S.) and the labor market (coupled with lower inflation) supports consumption growth. While growth in Mexico remains around potential, uncertainty over domestic policy direction from the incoming administration and remaining uncertainties over the approval of NAFTA in the US congress could weight on the investment outlook, posing downside risks for growth next year (we currently expect 2.0% for 2019). Oil production trend is also an important risk for the economic outlook.
** Full story here.

Although the rolling four-quarter current account deficit (CAD) remained unchanged in 3Q18, there was a deterioration at the margin. The CAD came in at USD 5.1 billion in 3Q18 (1.6% of GDP) – wider than median market expectations (USD 4.4 billion, as per Bloomberg). Looking at the breakdown, with respect to the 3Q17, the deterioration of net income balance (-0.4 pp) was compensated by an improvement in trade (0.2 pp) and service (0.1 pp) accounts and transfers (mainly remittances from the U.S.) with 0.1 pp. On the funding side, net foreign direct investment (FDI) and portfolio inflows deteriorated. Rolling 4-quarter net direct investment fell to USD 22.3 billion (1.8% of GDP) in 3Q18, which was still enough to cover the CAD. Likewise, rolling 4-quarter net portfolio investments also fell (0.9% of GDP in the 3Q18).

We expect the CAD of 1.4% of GDP in 2018 as manufacturing exports recover, while internal demand expands at a moderate pace. The data shows that Mexico is facing a scenario of greater uncertainty over domestic policies departing from strong fundamentals, which should provide a buffer for asset prices.
** Full story here.

Day Ahead: The statistics institute (INEGI) will announce September’s retail sales. We estimate that retail sales grew 3.9% year-over-year (consensus: 4.1%). ** Read our full week ahead note below.  


Peru’s GDP lost momentum in 3Q18.  According to the Central Bank’s (BCRP) data, GDP grew 2.3% year-over-year in 3Q18. Final domestic demand decelerated to 2.2% year-over-year in 3Q18. Looking at the breakdown, public consumption (-1.8% in the 3Q18) and gross fixed public investment (-1.6% in the 3Q18) decelerated the most, associated to a base effect and some delays in fiscal expenditure execution. Private sector demand also weakened, with private gross fixed investment expanding 1.4% year-over-year, although private consumption remained somewhat resilient (growing 3.3% year-over-year), consistent with the growth rate of real wage bill and consumption credit. Finally, exports (-0.6% year-over-year in the 3Q18) and imports (0.7% year-over-year in the 3Q18) also decelerated. We expect GDP growth at 4.0% both in 2018 and 2019. However, recent data suggests downside risks for the number. Specifically, the persistence of copper prices at lower levels, due to trade war risks, could keep growth at a slower pace than we currently expect.

On another note, Peru’s current account deficit (CAD) deteriorated in 3Q18, but remained narrow and fully funded by FDI. The rolling 4-quarter current account deficit deteriorated to 1.7% of GDP in the 3Q18, dragged by a smaller trade balance surplus (3.2% of GDP in 3Q18), higher net income payments (mainly profits from foreign mining firms) and a slightly wider services deficit. Likewise, according to our calculations, the quarterly seasonally adjusted CAD deteriorated to 1.9% of GDP in 3Q18. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (whose rolling 4-quarter measure posted 4.3% of GDP in the 3Q18,). 

Finally, nominal fiscal deficit improved somewhat, although public debt increased. The rolling 4-quarter nominal fiscal deficit narrowed to 2.1% of GDP in 3Q18 with revenues more than offsetting the increase of expenditures. Nominal deficit is on track to reach the fiscal target of 3.0% of GDP in 2018. Despite this improvement, public finances will require consolidation in the coming years to reach the fiscal target for 2021 (a deficit of 1% of GDP). Turning to public debt ratios, gross debt increased slightly to 23.8% of GDP in 3Q18, while net debt also increased to 9.4% of GDP. Debt ratios comply with Peru’s fiscal rule, which dictates that the gross public debt to GDP ratio cannot exceed 30%.
** Full story here.

The Week Ahead in LatAm


This week, 3Q18 GDP will be the main highlight, to be released on Friday. Our preliminary forecast is 0.7% qoq/sa growth. The strong forecast is due to a base effect: 2Q18 was negatively affected by truckers’ stoppages. Moreover, the 3Q release is more uncertain than usual, given that the quarterly series since 1Q16 will also be revised. These adjustments tend to revise upwards real growth, therefore imposing an upward bias to our forecast. In addition, the national unemployment rate for October will come out on Thursday – we expect a 0.3 p.p. decrease to 11.6% (decreasing 0.1 p.p. in seasonally adjusted terms). Finally, FGV’s business confidence surveys for November on consumer, construction, commerce, industry (the preview was released today) and services, as well as t he econo mic uncertainty indicator, also for November, will be released throughout the week.

On fiscal accounts relative to October, we expect the central government (Thu.) to post a BRL 2.7 bn primary surplus, and the consolidated public sector (Fri.) to post a BRL 1.8 bn primary surplus. Tax collection will also be released throughout the week (without an official release date), for which we forecast a BRL 127.3 billion result.

Finally, on external accounts, we expect the current account (Tue.) to post a USD 1.1 billion surplus, above the USD 300 million deficit posted in October last year. In spite of somewhat stable service deficit, the trade balance posted a larger surplus and the income balance will likely register a smaller deficit. Over 12 months, we expect the current account deficit to decrease to USD 14.5 billion (0.8% of the GDP) and the 3-month seasonally adjusted moving average to recede to USD 4 billion. Direct investment in the country will likely amount to USD 9.0 billion in October, leading the 12-month reading to USD 72 billion (3.7% of GDP).


On Friday, the national institute of statistics (INE) releases industrial activity indicators for October. In September, industrial production shrunk 3.2% (-1.7% in August) partly hampered by an unfavorable calendar effect (two fewer working days), but activity slowed noticeably at the margin, too. Manufacturing dragged activity down in the month, contracting 5.4% year over year (+4.2% in August), pulled down by food and chemical production. We expect manufacturing production to post a growth rate of 5.0% year over year (-5.4% previously), favored by two additional working days.

On the same day, INE releases the national unemployment rate for the quarter ended in October. In 3Q18, the unemployment rate of 7.1% came in just below expectations, but was 0.4pp higher than in 3Q17 and was partly contained by a 0.5pp drop in the participation rate, showing labor market slack persists. Salaried job creation maintained momentum in 3Q18 growing 2.3% (2.2% in 2Q18), which is a positive development. We expect the unemployment rate for the quarter ended in October to come in at 7.1%, above the 6.7% recorded one year before.

Finally, Friday is also the deadline for the Congress to approve the 2019 fiscal budget. An intense discussion with the opposition regarding distribution of the resources is advancing, with total public expenditure aimed at reaching CLP 47.4 trillion (22,9% of GDP), consistent with a 1.7% of GDP nominal deficit, lower than the estimated 1.9% of GDP deficit for 2018.


On Friday, the institute of statistics will release the unemployment rate for October. In September, the national unemployment rate came in at 9.5%, up from 9.2% one year ago, as urban unemployment rose a full percentage point to 10.5%. We expect the urban unemployment rate in October to come in at 9.4% (9.5% one year before), leading to 10.0% unemployment in the quarter ending in October (same as in 2017).


Today, the statistics institute (INEGI) will announce September’s retail sales. We estimate that retail sales grew 3.9% year-over-year (a similar growth rate from August). We expect favorable labor market indicators (real wages and employment) and remittances converted in pesos continued to support consumption.

On Wednesday, INEGI will announce October’s unemployment rate. We expect the unemployment rate to post a rate of 3.4%. Labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment increased 3.7% year over year in October.

Ending the week, INEGI will announce October’s trade balance. We expect trade deficit to narrow amid firmer activity in the U.S. (which boosts Mexico’s manufacturing exports). On the energy side, we expect a smaller energy deficit (compared to last month), as the latest oil output figures improved somewhat.

In the middle of the week, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (3Q18). In this document, Banxico will provide an update of its macro outlook on the Mexican economy, including updated forecasts for the main variables, and probably more guidance on its future policy decisions. Amid a weaker exchange rate and downside surprises on inflation, it will be key to monitor how the inflation outlook of the central bank will change. 

On Thursday, Mexico’s Central Bank (Banxico) will publish the minutes of November’s monetary policy meeting, when most of Banco de Mexico (Banxico) board members voted to increase its policy rate by 25-bp to reach a level of 8%. We expect the minutes further explain the reasons behind one board member voted for a 50-bp hike. Also, we expect to see more detail on the discussion about internal risks, which increased downside risks to economic activity and putted pressure on the currency, increasing upside risks to inflation.  


The statistics institute (INEI) will announce November’s CPI inflation on Saturday, which we forecast at 0.07% month-over-month. We expect normalization of food prices and firmer domestic demand to push prices up. Assuming our forecast is correct, annual headline inflation would post a 2.1% year-over-year in November (from 1.84%). We note there is an unfavorable base effect in November, as monthly inflation in November was negative last year (-0.20%).

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