Itaú BBA - Itaú Activity Surprise Index - Widespread positive surprises in Brazil

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Itaú Activity Surprise Index - Widespread positive surprises in Brazil

September 5, 2017

The Brazilian component was the only one to improve in August

Our Itaú Activity Surprise Index moderated to 0.14 in August, coming from 0.16 in July. The Brazilian component was the only one to improve in August, buoyed by positive surprises in June’s activity indicators and better-than-expected labor data for the month of July. Elsewhere, Chilean releases printed stronger than forecasted by the market, whereas Mexican indicators disappointed.

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 rose to 0.30 in August from 0.22 in the previous month, amid widespread positive surprises. Core retail sales (excluding vehicles and construction material) expanded 3.0% year-over-year in June, beating median market projections (2.15%) and marking a third consecutive gain in the annual comparison. By the same token, June’s industrial production registered 0.5% annual growth, whereas the consensus expected a 0.1% decline. The labor market posted even stronger surprises. According to the labor ministry, 35.8 thousand formal jobs were created in June, well above the median forecast (5.8 thousand). The nation-wide unemployment rate also surprised positively (12.8% vs. 13.0%), but the breakdown reveals a flattish formal employment growth. In fact, the bulk of the unemployment slide is due to higher employment in other categories - especially self-employment.

Mexico's index fell to 0.00 in August, coming from 0.16 in July. Industrial production for the month of June fell 0.3% year-over-year, below the median forecast of the Bloomberg market survey (+0.3%). In a nutshell, industry was supported by manufacturing output but dragged by mining (largely oil) and construction activities. Retail sales disappointed as well, growing a modest 0.4% year-over-year in June - significantly below median market expectations (2.8%). The factors behind the weak private consumption growth are the lower real wages, slower consumer credit (given the monetary tightening), and less impulse from remittances converted into MXN. We forecast GDP growth of 2.3% this year.

Chile's index oscillated down to -0.26 in August, coming from -0.21 in July, on the back of moving average dynamics. At the margin, the activity indicators released on August actually registered positive surprises. Manufacturing production grew 2.6% year-over-year in July, surpassing the median of forecasts (2.0%). For the same month, the unemployment rate printed at 6.9%, below the consensus estimate of 7.1%. However, the breakdown shows a loose labor market, as private salaried employment growth remains lackluster. In all, our projection for GDP growth this year is 1.3%.

Colombia's index fell to -0.23 in August, coming from -0.11 in July, mostly on base-effects. At the margin, activity indicators came through roughly in line with the consensus’ projections. The unemployment rate for the month of July was the exception, printing at 11.3% (mkt: 10.7%). We see activity improving in 2H17, taking the full-year GDP growth to 1.6%. Lower inflation, the ongoing monetary-easing cycle, and higher average oil prices vis-à-vis 2016 will favor growth going forward.

Peru's index edged close to zero in August (0.03), coming from 0.34 in July. On the negative side, July unemployment rate printed above the market’s expectation (7.1% vs. 7.0%). Yet, the breakdown paints a brighter picture, with employment registering the highest year-over-year growth rate in 12 months. The GDP proxy grew 3.6% year-over-year, surpassing the median of market projections (3.5%, as per Bloomberg). All-in, we forecast Peru’s GDP to slow down this year to 2.9% (from 3.9% in 2016), affected by temporary shocks.

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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