Itaú BBA - Itaú Activity Surprise Index - Surprises remain balanced in February

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Itaú Activity Surprise Index - Surprises remain balanced in February

March 6, 2018

The Brazilian index showed slight changes and continues on positive territory

Our Itaú Activity Surprise Index remained close to neutrality in February (-0.02), coming from -0.03 in January. The Brazilian index showed slight changes and continues on positive territory, with a negative surprise from retail sales being partially offset by an improvement in industrial production. Also on positive territory, Chilean´s component advanced, with positive surprises in manufacturing and retail. The Colombian index remained virtually flat in the month, with mixed results among retail, industry and labor market indicators.

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 posted a slight improvement to 0.06 in February (0.04 in the previous month). The main positive surprise came from industrial production, which rose 2.8% in December mom, above the median of expectations (2.0%). The better than expected result in the month should be read with caution. The recent recession has changed the composition of the industry, reducing the importance of cyclical sectors (which seasonally tend to contract more in December). Thus, the statistical filter that corrects the series by seasonal factors probably adjusted the level of production (upward) more than what would be consistent with the new industry composition. Along the same lines, according to the Ministry of Labor, 77.8 thousand formal jobs were created in January, above the median of expectations (58 thousand). Seasonally-adjusted data point to the creation of 46 thousand jobs in the month, which leads the 3-month moving average to fluctuate from 48 thousand to 46 thousand jobs. The pace of the past 3 months is already above the net job creation needed to stabilize employment without increasing informality (approximately 40 thousand/month). On the other hand, there were negative surprises in retail sales and unemployment rate. Core retail sales fell by 1.5% in December, seasonally adjusted. The result was below the median of expectations (-0.4%). Sales in the broad concept (which includes vehicles and construction materials) decreased 0.8% in the month, slightly above the median of expectations (-0.9%). Weak performance in December was widespread, but sectors more influenced by promotions (furniture and appliances and personal items) were particularly relevant, underscoring the importance of Black Friday to explain the result. On the labor market side, the national unemployment rate rose to 12.2% in the quarter ended in January, from 11.8% in the quarter ended in December. The increase is mainly due to the seasonality of the labor market, with the layoffs at the end of the year.

Mexico's index remained at -0.20 in February, despite weaker numbers at the margin. Gross fixed capital formation, which is currently the weakest component of domestic demand, continued to deteriorate in November, influenced by the fiscal consolidation process and uncertainties associated with the NAFTA renegotiation process and the presidential elections. The indicator declined 4.5% in November, negatively surprising market expectations (median: -2.9%). According to data adjusted for calendar effects released by the official statistics agency (INEGI), the indicator declined 4.2% year-over-year.

In addition, retail sales contracted 2% in December, below the median of market expectations (-0.4%). Likewise, the IGAE (GDP proxy) negatively surprised market expectations, expanding 1.1% yoy (market: 1.2%). In general, the uncertainties related to the presidential election and the NAFTA renegotiation are halting investment decisions, but we expect the economy to grow at the same pace as in 2017 (2.1%), sustained by the acceleration of the US economy and falling inflation.

Chile's index advanced to 0.26 in February from 0.10 in the previous month. The Imacec (monthly proxy for GDP) started 2018 above expectations, posting a 3.9% expansion (median: 3.4%), the highest rate in two years. The component related to mining activity rose 8.6%, while the non-mining component surprised the market by posting an expansion of 3.5% (2.5% in the previous month). The latter’s performance was influenced by the services, trade and industrial production indicators. In sum, the stronger global growth outlook, higher copper prices, recovery in confidence levels and expansionary monetary policy will boost activity this year.

Colombia's index remained virtually flat in the month (-0.03). Activity data deteriorated at the end of 2017. Both industrial production and retail sales declined over twelve months, and are in line with the weaker data in the last quarter of the year. Industrial production in December dropped 0.8%, above the median of expectations (-2.3%). Despite the result, the industrial sector still shows signs of weakness. Retail sales fell by 3.8% in December, below expectations (-1.6%). The main components explaining the weaker result in the month are sales of vehicles and fuels. Finally, the unemployment rate reached 11.8% in January, 0.3 pp above expectations. Overall, the weaker employment data imply that our growth recovery scenario is not risk-free. We see activity accelerating to 2.5% this year amid higher real wages (as inflation falls), low interest rates and a favorable external environment.

Peru's index receded to -0.37 in February, from -0.06 in January. The GDP proxy expanded 1.3% in December yoy, below median market expectations (2.0%, according to Bloomberg). The index was pulled down by the delay of the fishing season (which the beginning was postponed from November 2017 to January 2018), and on a lesser extent, by the uncertainties related to the vote on the president's impeachment process (which affected public investments in the two last weeks of the year).

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.


Eduardo Marza
André Matcin

 



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