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Stable rates in Chile

October 16, 2020

The policy rate was kept unchanged at 0.5%, as widely expected.

Talk of the Day

Chile

COVID-19 update: the latest official information from the Ministry of Health is that Chile registered a daily increase of 19 deaths (19 on the previous day) and 1,124 confirmed cases (from 1,092). The 7-day moving average of deaths decreased to 38, from 46 on the previous day. The total number of deaths now stands at 13,434, with 486,496 confirmed cases, which implies a 2.8% mortality rate. The estimated reproduction rate (R) is currently at 0.75 (from 0.74).

The central bank of Chile’s board unanimously voted to leave the policy rate unchanged at 0.5% in its October meeting, as widely expected. The press release reiterated the message that rates at the technical minimum would be the norm for a “large part” of the two-year policy horizon, and noted that non-conventional monetary stimulus measures and asset purchase programs would endure for the time being. Inflation inching closer to the 3% target in September was deemed transitory, likely due to the effect of stimulus measures, including pension fund withdrawals and some supply restrictions. Meanwhile, inflation expectations continue to reveal subdued inflationary pressures, staying below the target in the short-term and nearing 3% in two years. The board appeared cautiously upbeat by some activity improvement, with the GDP proxy gaining at the margin and the labor market showing signs of stabilization in August, while consumer and business sentiment improved albeit remained pessimistic. The press release also noted decreased dynamism in credit growth and restrictive loan practices amid increased credit risk concerns (alongside a weak consumer credit demand), likely justifying a continuation of stimulus measures. Overall, the decision is in line with our view that rates would remain on hold until at least the end of 2021. **Full story here.

Colombia

COVID-19 update: the latest official information from the Ministry of Health is that Colombia registered a daily increase of 165 deaths (156 on the previous day) and 6,061 confirmed cases (from 5,015). The 7-day moving average of deaths remained stable at 161. The total number of deaths now stands at 28,306, with 930,159 confirmed cases, which implies a 3% mortality rate. The estimated reproduction rate (R) is currently at 0.87 (from 1.0).

Manufacturing edged up mildly in August, while retail activity dropped significantly at the margin, suggesting that the pace of the expected activity recovery during 2H20 is likely to be sluggish. Retail sales contracted 17.1% yoy in August (-12.4% previously), well below the market consensus of a 10.8% contraction and our 9.0% call, pulled down by fuels and vehicles, but there was generalized weakness. The retail slump comes amid the absence of a VAT-free sales day in the month, and despite encouraging labor market data along with decreasing interest rates as expansionary monetary policy is transmitted to market prices. Despite manufacturing sentiment bouncing back to optimistic ground in the month, manufacturing contracted 10.3% yoy in August (8.5% drop in July), inferior to the market consensus of a 7.3% drop and our -5.0% call. Overall, the disappointing data is in line with the monthly coincident activity indicator (ISE) contracting 12.5% in August (9.6% decline in July). As the mandatory quarantine was lifted in September, monetary stimulus expanded and job gains recorded at the margin (8% mom/sa), the recovery dynamism is likely to improve in the latter part of the year. The main drag in manufacturing was beverage production falling 16.8% yoy in the month, subtracting 2.0 p.p. from headline activity, as it was likely hampered by the lack of carnivals and fairs normally active during the month, along with restriction for alcoholic beverage consumption in some regions more affected by the coronavirus outbreak. Core retail sales dropped 4.9% (seasonally-adjusted) from July, leaving retail activity more than 12% below pre-pandemic levels, reflecting that the weakness goes beyond volatile vehicle and fuel sales. While the full reopening of the economy from September would aid the recovery process, disappointing activity at the start of 2H20 likely mean the GDP contraction this year would exceed our 6% call (+3.3% last year). **Full story here.

Day Ahead: The trade balance for August will be published at 12:00 PM (SP time). A trade deficit of USD 902 million was recorded, narrowing mildly from the USD 1.1 billion deficit last year. Although commodity exports remained weak in July, there were signs of a consolidating global demand recovery as non-commodity exports increased for the second consecutive month. The import decline was the mildest since the onset of the pandemic, but the still double-digit drops for both durable consumption and capital goods reflect the severity of the shock on domestic demand. For August, we see a trade deficit of USD 950 million, narrowing from the USD 1.4 billion deficit last year as the trade deficit correction gradually continues.

Peru

COVID-19 update: the latest official information from the Ministry of Health is that Peru registered a daily increase of 93 deaths (62 on the previous day) and 2,977 confirmed cases (from 2,803). The 7-day moving average of deaths remained stable at 72. The total number of deaths now stands at 33,512, with 856,951 confirmed cases, which implies a 3.9% mortality rate. The estimated reproduction rate (R) is currently at 0.83 (stable).

Non-natural resource sectors supported a further recovery of monthly GDP in August, while natural resource sectors lagged behind. The monthly GDP proxy contracted 9.8% yoy in August (from -11.7% in July), below our forecast of -8.6% and above market expectations of -10.3%, taking the annual quarterly rate to -13.2% (from -20.9% in July). The non-natural resource sectors recovered further (-11.2% in August, from -13.9% in July) driven by construction (-6.5%, from -12.8%), retail (-8.1%, from -11.5%) and services (-12.7%, from -13.5%), reflecting further easing of distancing measures. In contrast, natural resource sectors deteriorated to -10.1% yoy in August (from -4.1% in July), dragged by the volatile fishing output (-6.5% yoy in August, from 33.3% in July) and mining (-11.2%, from -6.2%). Using our own seasonally adjusted series, activity continued to recover (1.2% month-over-month in August, from 7.6% in July), taking the quarter-over-quarter non-annualized rate to 23.3% in August (from -3.0% in July). The data highlights downside risks to our GDP forecast of -11.9% for 2020. We expect the large fiscal stimulus and expansionary monetary policy to support the economic recovery during the rest of the year. However, uncertainty stemming from market-unfriendly policies from Congress may curb the recovery. **Full story here.

Brazil

COVID-19 update: the latest official information from the Ministry of Health is that Brazil registered a daily increase of 713 deaths (749 on the previous day) and 28,523 confirmed cases (from 27,235). The 7-day moving average of deaths decreased to 500, from 503 on the previous day. The total number of deaths now stands at 152,460, with 5,169,386 confirmed cases, which implies a 2.9% mortality rate. The estimated reproduction rate (R) is currently at 0.81 (from 0.79).

As has been the case since April, FGV has anticipated preliminary results for its confidence indexes in October. The survey was conducted between October 1st and 14th (the original publication calendar remains as scheduled, with the final confidence indexes being released from October 23rd onward). The report shows a 1.1 p.p. drop in the aggregate business confidence (to 96.4). The level of confidence is more important for economic activity than its monthly changes, and it remains above the pre-crisis level (96.0 in February 2020). The result in the month was driven by the expectations (-3.8 p.p.) component, offsetting the current condition index gain at the margin (+2.9 p.p.). The industrial sector posted an increase in the month (+5.4 p.p.), followed by stability in the construction confidence level (+0.1 p.p.). On the other hand, the consumer confidence index as well as the retail and services sectors showed negative figures (-3.9 p.p., -5.1 p.p. and -1.4 p.p., respectively). When compared to the period before the social distancing measures (February 2020), the industrial sector registered the strongest recovery, now at 10% above the pre-Covid levels, followed by construction (-1.3%), retail (-5.3%) and services (-8.4%). The consumer confidence is the one that recovered the least so far, being 9.5% below February’s level.

Itaú Daily Activity Tracker: Our Daily Activity Tracker increased by 4.3 p.p., to 100.1 (latest available data from Saturday, October 10th). The 7-day moving average increased slightly, by 0.1 p.p., to 98.5. The indicator is up 43.5 p.p. from the bottom seen on April 11th, and is now 0.1% above the mid-March level, when the series started. See our report here.

Argentina

COVID-19 update: the latest official information from the Ministry of Health is that Argentina registered a daily increase of 421 deaths (349 on the previous day) and 17,096 confirmed cases (from 14,932). The 7-day moving average of deaths decreased to 376, from 385 on the previous day. The total number of deaths now stands at 25,342, with 949,050 confirmed cases, which implies a 2.7% mortality rate. The estimated reproduction rate (R) is currently at 1.17 (from 0.97).

The central bank hiked interest rates once more to support the peso and prevent further losses of international reserves. The monetary authority set the 1-day repo rate at 30% from 27% previously, accumulating 1100 bps increase since the beginning of January. To maintain the cost of sterilization, the Leliq rate was cut to 36% from 37%. At the same time, the regulated interest rate paid to retail depositors was increased to 34% and the Badlar rate was set at 32%, from 33% and 30% respectively. Finally, import invoices over USD 50,000 must request prior authorization from the central bank to access the official FX market. The decisions followed continuous interventions in the spot FX market during the week and a widening gap between the blue-chip swap and the official exchange rate to 118%.


Paraguay

The IMAEP GDP proxy decreased by 2.1% yoy, but it edged up 0.5% in the quarter ended in August (-0.9% in July). On a sequential basis, the index fell 3.6% mom, but reached 9.5% qoq/sa for the quarter ended in August, up from 2.5% in July. Activity excluding agriculture and binational dams slipped 0.1% in the quarter ended in August but rose 11.3% qoq/sa. The service sector continued to contract, affected by social distancing measures, followed by manufacturing, livestock and energy output due to the low water levels in the Paraná river. On the other hand, construction showed a new year-over-year gain due to higher private and public works. Agriculture continued to expand (but at a slower pace), following the normalization of the harvest after the drought last year. We forecast a GDP contraction of 2.0% for 2020. A drought and the increase in COVID-19 cases continue to be the main risks going forward.

Mexico

COVID-19 update: according to the Johns Hopkins University, Mexico registered a daily increase of 478 deaths (475 on the previous day) and 4,056 confirmed cases (from 4,295). The 7-day moving average of deaths increased to 310, from 296 on the previous day. The total number of deaths now stands at 84,898, with 829,396 confirmed cases, which implies a 10.2% mortality rate. The estimated reproduction rate (R) is currently at 0.64 (from 0.59).



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