Itaú BBA - Lower-than-expected inflation in Brazil

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Lower-than-expected inflation in Brazil

February 10, 2020

The reading was the lowest for the month of January since 1994.

See our Week Ahead full note at the end of this report.

Talk of the Day


January’s IPCA inflation came in at 0.21% mom, well below our call (0.33%) and the market’s (0.35%). The reading was the lowest for the month of January since 1994. In yoy terms, inflation receded to 4.19% (our call: 4.32%; mkt: 4.34%), from 4.31% in the previous month. Importantly, this was the first inflation reading under the new weight structure from the updated version of the household budget survey (“Pesquisa de Orçamento Familiar” – POF). Looking at the breakdown, the food and beverage contribution for the monthly headline receded sharply in January (to +0.07 p.p., from +0.83 p.p. in the previous month), influenced by the 4.03% mom decline in protein prices (from an 18.06% increase in December). The transportation component contribution to the monthly reading receded to +0.06 p.p. in January (+0.32% mom inflation), after a +0.28 p.p. contribution in December (+1.54% mom inflation). Compared to our call, the negative deviation was concentrated in the market set prices (-0.11 p.p. contribution than our call). Such surprise was driven by the food at home (-4.9 p.p. contribution) component – particularly the lower-than-expected beef prices (actual: -4.86% mom; Itaú: -3.00% mom) – and the industrial component, given the monthly deflation in perfume prices (-4.66% mom) that led to lower-than-expected health and personal care dynamics (-0.085 p.p. contribution). 

In all, January’s IPCA inflation numbers confirm the deflationary trend after the beef prices shock, underscoring the well behaved trajectory for inflation going forward. Given the magnitude of the output gap and the time it will take for it to close, we currently see no significant risk of demand-led inflation for the relevant monetary policy horizon (2020 and 2021). ** Full story here.


Consumer prices gained 0.6% from December to January (0.1% rise last year), above the Bloomberg market consensus and our call of 0.4%. A higher-than-expected rise in tourism packages (priced in USD) was a key factor behind the surprise, while rising food, energy prices and transportation services also lifted inflation. As a result, annual inflation picked up to 3.5% (3.0% in December), while core inflation was stable at a still-low 2.5%. The central bank has highlighted the uncertainty going forward regarding the dominance of the two opposing forces currently in play in the outlook for consumer prices: one inflationary (the accumulated CLP depreciation), the other disinflationary (weakening internal demand). Hence, caution regarding future rate moves will still likely prevail in the short term as the board opts to accumulate and digest additional information. We expect inflation to remain under pressure in the coming months, as pass-through pressures persist, before ending the year at a near-target level of 3.3%. Weak internal demand amid anchored inflation expectations and a better performing CLP would diminish pressures. ** Full story here.

Still falling imports along with accelerating mining exports led to a large trade surplus of USD 1.2 billion in January (similar to last year). The surplus came in just below the Bloomberg market consensus of USD 1.5 billion and our USD 1.3 billion call, with possible trade disruptions with China (amid the coronavirus spread) towards the end of the month restricting the trade balance. As a result, a USD 4.3 billion trade surplus was registered in the year ending in January (USD 4.2 billion in 2019 and USD 4.7 billion in 2018). Our own seasonal adjustment points to a higher trade balance surplus of USD 7.5 billion annualized in the quarter (USD 5.6 billion in 4Q19 and USD 3.5 billion in 3Q19). With internal demand constrained and export growth normalizing, we expect the current account deficit to narrow to 0.4% of GDP this year (from the nearly 3% that we estimate for last year). The swift external deficit adjustment will likely alleviate some pressure on the CLP. ** Full story here.

Consumer confidence was still downbeat at the start of 2020 and far below levels registered one year earlier, hinting at weak consumption. The GFK consumer confidence index retreated 16.6 p.p. over twelve months to reach 30.4 points, near historical lows (29.4 in December; 50 = neutral). All five sub-indexes remain below neutral levels, with the main drag coming from the 5-year economic outlook (24.4 points), while the current economic evaluation sits at 27.2 points (a 23.1pp drop over twelve months). Meanwhile, the twelve-month economic outlook retreated 19.0pp to 36 points, the lowest reading since September 2016. Still depressed private sentiment, alongside a loosening labor market and falling imports of consumer goods underscore the expected strain on consumption activity going forward. We expect growth of 1.2% this year (similar to last year). 

Scenario Review: Chile’s congress unanimously passed a tax modernization bill that will help finance the recently announced social agenda, while the government reached a deal with part of the opposition to advance a pension reform bill. Both pieces of legislation include meaningful concessions to opposition demands relative to the government proposals that were submitted before the recent protests started. Activity ended 2019 with a better-than-expected acceleration, yet with abundant domestic uncertainty and global growth concerns, we are maintaining an unfavorable forecast of 1.2% growth for this year (similar to 2019). The central bank paused its FX intervention program. Still, the peso has not overshot, even with the risk-off market mode in global markets. We continue to expect the exchange rate to end this year at 780 CLP/USD (from 753 CLP/USD at the close of 2019). Besides external factors, the domestic political scenario (including the process of writing a new constitution) will dictate Chilean asset prices throughout the year. We expect the central bank to remain cautious regarding future rate moves in the short term. We still expect more easing later in the year (to 1.25% by year-end), but we note that the risks tilt toward stable rates given the domestic uncertainties. Full story here.


Inflation in Mexico surprised to the downside in January, printing at 0.48% (Bloomberg consensus was at 0.52%). Core also was lower than expected (0.33% vs. 0.35%). As a result, inflation stood at 3.24% yoy (close to the target, though above December’s level - 2.83% - due to some tax increases and an unfavorable base of comparison linked to tax reductions in the northern frontier last year). Annual core inflation also saw a rebound: to 3.73%, from 3.6%, also reflecting the same factors that lifted headline annual inflation. Within core, we highlight that core services slowed down to 3.51%, from 3.64%. And other core services (arguably the part of inflation more sensitive to the output gap) reached 3.51% (from 3.64%).

Scenario Review : AMLO’s administration met fiscal targets by using resources from the rainy-day fund, aided by a slow implementation of expenditures. Looking ahead, we believe that managing the fiscal accounts will be complicated by weak economic activity, the challenge of increasing oil production and diminished fiscal buffers. The flash GDP estimate for 4Q19 suggests that the economy was stagnant in 2019 overall, contracting by 0.1%. We now expect economic activity to recover more gradually in 2020, growing by 0.9% (we previously estimated 1.1%). An improvement from last year is still expected due to the fading effect of the government transition on fiscal spending and the approval of the USMCA in the U.S. Congress, which reduces uncertainty. We expect Banxico’s monetary policy rate to reach 6.00% by the end of 2020, with the first 25-bp rate cut of the year coming at the February meeting. Low headline inflation, a widening output gap and a stronger Mexican peso support gradual rate reductions. However, persistent core inflation and latent inflationary risks (such as the minimum wage hike) may prompt the bank to ease in a gradual, stop-and-go approaches. ** Full story here.

Day Ahead: The Statistics Institute (INEGI) announces November’s gross fixed investment, which we expect to decrease 2.1% YoY in November (from -8.7% in October). On an annual basis, the construction output, a coincident indicator, improved (but kept contracting) in November, while imports of capital goods remained weak.

The Week Ahead in LatAm


On Thursday, the INDEC (the official statistical agency) will publish the national CPI for the first month of 2020. Elypsis consulting estimated a 3.2% month over-month increase for consumer prices. If this estimation is correct, last 12-month inflation will increase to 54.3% in January, from 53.8% in December 2019.


On Tuesday, the Copom will publish the minutes of its latest monetary policy meeting, at which the committee delivered the widely expected 25-bp rate cut, taking the Selic rate to 4.25% pa, and stated, clearly, that given the lagged effects of the easing cycle, it would be warranted to interrupt the process. It should be noted that, in their wording, the authorities’ opted for “interrupt” rather than “end”, which signals they may eventually, under appropriate circumstances, revisit the issue. The text suggested that easing might only resume if the inflation forecasts for 2021 begin to deviate from the 3.75% target. In that sense, this week’s minutes will be important to learn more about the Copom’s forecasts and overall rationale.

On economic activity, retail sales (Wed.) and service sector revenue (Thu.) for December will be released. Regarding retail sales, we forecast a 0.3% mom/sa decline for the broad index and a 0.2% mom/sa increase for the core index, which excludes vehicles and construction material. For the service sector revenue, we expect a 0.8% mom/sa drop. All these forecasts are preliminary, conditional on the release of ABRAS supermarket sales for the same month. On Friday, the central bank will release its monthly economic activity indicator (IBC-Br), for which we anticipate a 0.5% mom/sa decline.


The minutes of the January monetary policy meeting will be published on Thursday. The board unanimously voted to hold the policy rate at 1.75% and the communiqué signaled that a neutral stance would continue, pointing to stable rates for at least this quarter as policymakers accumulate additional information about how the economy is responding to the recent disruptions. The minutes would likely focus on the uncertainty of the inflation path, highlighting the two opposing forces in play: one inflationary (the accumulated CLP depreciation), the other disinflationary (weakening internal demand).


On Thursday, activity indicators for the month of December will be released. Activity was expectedly weaker in November, partly affected by disruptions to operations from protest action, along with a higher base of comparison. Retail sales growth slowed to 4.4% yoy (7.4% in October). Meanwhile, manufacturing contracted 1.5% yoy (+2.1% in October). We expect retail sales growth to pick up to 7.3% over twelve months, given the normalization of activity in the month, while our call for manufacturing is a 4.5% gain, aided by a low base of comparison and a favorable calendar effect.

On Friday, the institute of statistics will release GDP for the final quarter of 2019. GDP expanded 3.3% yoy in 3Q19 (3.0% in 2Q19), the highest rate since 2015, despite some slowdown at the margin (2.3% qoq/saar, from 5.3% in 2Q19). As had been the case in 1H19, growth was boosted by better consumption and investment. We expect growth of 3.3% in 4Q19 (3.3% for 2019; 2.6% in 2018), boosted by retail and financial services, while mining and construction likely remained the key drag. Later in the day, the monthly coincident activity indicator (ISE) will be published for the month of December. We expect growth of 3.6% (2.9% previously).


Today, the Statistics Institute (INEGI) will announce November’s gross fixed investment, which we expect to decrease 2.1% YoY in November (from -8.7% in October). On an annual basis, the construction output, a coincident indicator, improved (but kept contracting) in November, while imports of capital goods remained weak.

On Tuesday, the Statistics Institute (INEGI) will publish December’s industrial production. We estimate industrial production fell by 0.2% year-over-year (from -2.1% in November), consistent with 4Q19 GDP flash estimate. We expect the mining sector improved, associated to a slight recovery in oil output. On the other hand, we expect the manufacturing sector to decelerate further, while construction output remained weak.

The Central Bank of Mexico (Banxico) will hold a board meeting on Thursday, to decide on the reference rate. We expect Banxico to cut the policy rate in 25-bp (reaching a rate of 7.00%). Weakness in economic activity and a stronger currency support gradual rate reductions. However, the persistence in core inflation and inflationary risks associated with the recent minimum wage hike stand in the way of a bolder policy response and will probably lead the central bank to space the cycle with pauses at some point this year. 


On Thursday, the Central Bank of Peru (BCRP) will publish its February’s monetary policy decision, which we expect retention at 2.25%. We expect the BCRP to evaluate further information before adjusting its policy rate. Low inflation and weak activity, increases the odds of the BCRP cutting the policy rate further in the short-term. We see another 25-bp rate cut in 1H20.

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