Itaú BBA - Seasonally-adjusted formal job creation remained positive in Brazil

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Seasonally-adjusted formal job creation remained positive in Brazil

January 24, 2019

Our preliminary forecast for the headline IPCA in January is a 0.40% increase, lifting the year-over-year rate to 3.86%

Talk of the day


CAGED registered a net destruction of 334.5k formal jobs in December, in between our call (-314k) and the market’s (-344k). It’s worth noticing this apparent weak headline is due to a strong seasonality in the month. Seasonally-adjusted, 55k formal jobs were created in December, taking the 3-month moving average to 66k (from 72k in the previous month). In 2018, the Brazilian economy created 529,554 jobs (the highest print since 2012). The sectorial breakdown shows significant gains in the services, retail and civil construction sectors, while the manufacturing sector remained flat. Going forward, we expect the improvement in financial conditions since October to continue supporting the formal labor market. 

The mid-month consumer price index IPCA-15 rose 0.30% in January, printing somewhat below our estimate and the median of market expectations (both at 0.35%). Industrial prices were behind the biggest deviation from our call, with weaker results for apparel and personal care items. Food and beverages (0.22 p.p.), healthcare and personal care (0.08 p.p.), and personal expenses (0.05 p.p.) provided the largest upward contributions during the month. In the opposite direction, transportation gave a downward contribution (-0.09 p.p.), still reflecting falling fuel prices. Our preliminary forecast for the headline IPCA in January is a 0.40% increase, lifting the year-over-year rate to 3.86%.
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Central bank looks comfortable with current monetary policy stance. Deputy governor Gustavo Cañonero said the central bank is comfortable with a gradual and slow increase of the monetary base originated in purchases of dollars. In our view, it is likely the central bank will keep the maximum amount of dollars that can be purchased in February limited to 2% of the monetary base target (approximately USD 730 million) and up to USD 50 million per day. 

Cañonero reiterated that FX interventions are shock absorbers for the monetary policy. According to the monetary policy framework (monetary aggregate targeting), if the monetary policy becomes too tight, the exchange rate will likely strengthen below the lower bound of the non-intervention zone. Consequently, the central bank may intervene in the FX market (purchasing dollars) to provide liquidity in pesos in addition to the monetary base target. In the presentation of the monetary policy report, the authority stated that the intervention policy is subordinated to the monetary impact of the FX transactions. Potential expansion of the monetary base is conditional to the growth of money demand under the limits specified at the beginning of the month. The agreement with the IMF set the maximum amount of intervention is USD 150 million per day. 

We expect the downward trend in market interest rates to continue but a gradual pace. Given the still high inflation and inflation expectations, the central bank will be cautious with monetary easing. 

Day ahead: The INDEC will publish the EMAE (official monthly GDP proxy) for November at 5:00 PM (SP Time). According to leading and coincident indicators, the recession deepened that month. The IGA (GDP proxy published by OJF consulting firm) fell 6.5% yoy (-3.8% in October), industrial output dropped 13.3% yoy (-6.8% in the previous month) and construction activity plummeted 15.9% yoy, after falling 6.4% in October. We expect activity to post a 7.4% yoy contraction in November.


According to think-tank Fedesarrollo, industrial confidence was still in pessimistic territory (below zero) in December, but improved to -1.1%, from the -4.8% one year earlier and the -4.3% in November. Compared to December 2017, there was an important advancement in the volume of orders, moving from -30.6% to -17.9%, while expectations for production in the upcoming quarter remained optimistic, improving 0.8pp to 13.5%. Despite the weakening of the Colombian peso, lower oil prices are likely weighing on Industrial confidence. Meanwhile, retail confidence remains deep in optimistic territory at 29.3% (21.4% in December 2017 and 28.0% in November), likely boosted by low inflation and the monetary stimulus in place. A considerable improvement in expectations of the economic situation in the coming semester (45.0% vs. 36.2% in December 2017) and lower inventories drove retail confidence advancement over twelve months. We forecast activity ticking up to 3.3% this year, from 2.6% expected for 2018. However, lower oil prices and slowing growth for major trade partners will limit the recovery. 


Day ahead: INEGI will publish CPI inflation figures for the first half of January at 12:00 PM (SP Time). We expect bi-weekly inflation to post 0.18% (from 0.24% a year ago). Assuming our forecast is correct, headline inflation would be 4.60% yoy (from 4.66% in the second half of December). At the same time, INEGI will publish November’s monthly GDP proxy IGAE, which we expect to slow to 1.1% yoy (from 2.9% in October).

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