Itaú BBA - Itaú Activity Surprise Index - Positive surprises, albeit moderate

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Itaú Activity Surprise Index - Positive surprises, albeit moderate

April 3, 2018

A batch of stronger than expected activity releases in Mexico pushed the subindex higher.

Our Itaú Activity Surprise Index turned slightly positive in March (0.08), coming from neutrality in February. Colombia’s component rose strongly on the back of the higher than expected retail sales clip. The Peruvian index recovered as well, albeit remaining in negative territory. We note political uncertainty diminished since the resignation of Pedro Pablo Kuczynski (PPK) and the sworn-in of Martín Vizcarra as the Interim President. Similarly, a batch of stronger than expected activity releases in Mexico pushed the subindex higher. On the negative side, the Chilean index took the route south, as all underlying indicators came on the soft side of expectations.

The Itaú Activity Surprise Index compares trends in economic activity indicators released during the month to what analysts had been expecting for them. It is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means favorable surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility. Surprises in activity often trigger revisions in GDP growth estimates.

Brazil's index increased to 0.17 in March (0.08 in the previous month), owing to the moving average dynamics. Negative surprises predominated at the margin, particularly private consumption data and the labor market releases. To be precise, core retail sales expanded 3.2% in January, a tad below market expectations (3.5%). Furthermore, February’s formal job creation (Caged) came weaker than expected by the consensus (61k vs. 110k). According to our seasonal adjustment, there was null formal job creation in the month (the weakest print since August), taking the 3-month moving average to +35k from +42k. In our view, the January and February results reflect some noise due to the more pronounced and unstable seasonality. Going forward, our scenario considers that monthly formal job creation will reach approximately +100k still in 1H18, as we continue to expect the economic recovery to further impact the formal labor market positively in coming months.

Mexico's index improved to -0.13 in March, coming from -0.20 in February. The monthly gross fixed investment indicator fell 0.4% year-over-year in December, somewhat higher than the 0.6% contraction expected by market analysts. In the same vein, the GDP proxy (IGAE) expanded 2.2% year-over-year in January, surpassing median market expectations (both 2%, as per Bloomberg). At the margin, activity momentum improved: quarter-over-quarter annualized growth increased to 4.4% (from 3.7% qoq/saar in December). Finally, private consumption surprised positively as well. After falling for five consecutive months, retail sales expanded 0.5% in January, whereas the consensus anticipated a 0.2% decline. We note base effects played a role, as the social protests caused by the “gasolinazo” adversely impacted retail activity in January 2017. Be that as it may, we believe retail sales will accelerate sequentially in coming months, driven by real wage bill growth. Looking ahead, we expect GDP growth to slow down to 1.8% in 2018, from 2% in 2017.

Chile's index retreated to 0.23 in March from 0.43 in the previous month, amid widespread negative surprises. Manufacturing increased 3.7% year-over-year in February, undershooting the Bloomberg market consensus of 5.9%. The paper production component dragged down the index. Similarly, retail sales grew 3.8% in January, below the median of analysts’ forecasts (5.0%). Excluding vehicles, retail sales slowed to 1.9% (3.7% in December), potentially affected by the visit of the Pope, which included public holidays in various regions of the country. Finally, the unemployment rate picked up by more than expected in February (6.7% vs. 6.6%), but the breakdown shows some promising signs. Although public employment remains the main job driver, the formal private sector is consolidating signs of improvement. Overall, we expect strong external demand, high copper prices, low interest rates and low inflation amid increased confidence to support a recovery this year. We project GDP growth of 3.6% in 2018.

Colombia's index jumped to 0.24 in March, coming from -0.04 in the previous month. Private consumption registered the largest positive surprise in the month. Retail sales rose 6.2% in January, well above the median of market expectations (1.2%). The surprise was due to car and motorcycle sales, which grew 26.0% and added 2.7 p.p. to the total retail sales gain. Excluding vehicle and fuel sales, retail sales grew 3.9%, boosted by the 25.9% increase in personal-use telecommunication equipment. In contrast, industrial production came on the soft side of expectations in January (1.0% year-over-year vs. 1.9%). Oil refining was the driving force in the monthly performance (5.8%), whereas production of machinery and equipment fell 21.5% reflecting a frail industrial sector. Labor market data also disappointed, as the urban unemployment rate printed above expectations in February (11.9% vs. 11.2%). Importantly, falling urban participation and job destruction continue to reflect a loosening labor market. All things considered, recent activity figures pose downside risks to our estimates. We see an activity pick-up to 2.5% this year, aided by an improvement in real wage growth, expansionary monetary policy and favorable external conditions.

Peru's index recovered to -0.25 in March, coming from -0.37 in February. The monthly GDP proxy grew 2.8% year-over-year in January, well above median market expectations (2.3%, as per Bloomberg). At the margin, GDP advanced 0.1% from the previous month with quarter-over-quarter annualized growth decreasing to 0.1% (from 1% qoq/saar in December). The breakdown reveals an unexpected contraction in mining output, but stronger construction activity on the back of rising mining investment and fiscal stimulus. Looking ahead, we see GDP growth accelerating to 4% in 2018 owing to the substantial increase of metal prices and expansive macroeconomic policies (mainly fiscal but also monetary). Importantly, since the resignation of Pedro Pablo Kuczynski (PPK) and the sworn-in of Martín Vizcarra as the Interim President, the political uncertainty, which had been affecting investment decisions in Peru, has diminished substantially.

Find our surprise indexes on Bloomberg:

LatAm: ITMRLAI

Brazil: ITMRBI

Mexico: ITMRMI

Chile: ITMRCHLI

Colombia: ITMRCOLI

Peru: ITMRPI

Find our surprise indexes on Broadcast:

LatAm: ITSLA

Brazil: ITSBR

Mexico: ITSMX

Chile: ITSCH

Colombia: ITSCO

Peru: ITSPR

Methodology Note

Our Itaú Surprise Index LatAm compares trends in economic activity indicators to what analysts had been expecting for them each month. The index considers the month that each indicator is released. Previously, the index was built considering the month that each indicator referred to. For instance, February’s industrial production released on March will be incorporated to March’s surprise index (before: February’s index).

The index is a GDP-weighted average of separate indexes for Brazil, Mexico, Chile, Colombia and Peru. An above-zero reading means good surprises. Below zero means disappointment. The index is a three-month average in order to avoid excess volatility.

We build the surprise index for each country using all activity indicators for which consensus estimates are normally provided in the Bloomberg survey. The weight of each indicator in the index depends on its importance for the economy. For example, GDP numbers enjoy a higher weight than consumer confidence and PMIs.

We use the deviation of the actual print from the consensus estimate (surprise), subtract the result from the historical average deviation and then divide the result by the standard deviation of the surprise. This methodology provides a better sense of how important was the surprise in each month.

The weight of each country in the aggregated LatAm Surprise Index depends on the size of its GDP. Brazil has the highest weight, followed by Mexico.

It’s worth noting that, due to revisions in the economic indicators and as lagged results are published (example: GDP), the surprise indexes may be revised.

Indicators on which the index is built:

Brazil: Caged Payrolls, Unemployment Rate, Exports, Imports, Retail Sales, Industrial Production, GDP, IBC-Br monthly GDP.

Mexico: Manufacturing PMI, Service PMI, Consumer Confidence, Investment, Industrial Production, Retail Sales, IGAE monthly GDP.

Chile: Manufacturing Production, Retail Sales, Unemployment Rate, Imacec monthly GDP.

Colombia: GDP, Industrial Production, Retail Sales, Unemployment Rate.

Peru: Monthly GDP, Unemployment Rate.


Luka Barbosa
Eduardo Marza



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