Itaú BBA - Itaú Surprise Index LatAm - LatAm averages neutral surprises

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Itaú Surprise Index LatAm - LatAm averages neutral surprises

June 2, 2016

Mexico leads the index on favorable activity data, whereas Brazil casts the month’s last position.

Our Itaú Surprise Index LatAm reverted to neutrality, at -0.01 in May, down from a positive 0.08 in April. Mexico leads the index on favorable activity data, whereas Brazil casts the month’s last position with underperforming results. Numbers released at the beginning of June (not incorporated in this report) indicate that Brazil’s surprise index may improve going forward.

Our Itaú Surprise Index LatAm 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 good 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 registered -0.21, down from last month’s -0.07. In March, industrial production expanded 1.4% in sequential terms, but contracted 11.4% in year-over-year terms, yielding a negative surprise (mkt: -10.8%). Half of the 24 activity segments posted gains, a result consistent with stable industrial production. Leading indicators show an adjustment is taking place, as confidence stabilizes (recently increasing 2.2% in May) and inventory levels gradually fall. April’s industrial production was released simultaneously with this report, delivering a strong positive surprise, which will contribute positively to next month’s index. The good surprise in Q1 GDP will also contribute positively to the surprise index in June. On the demand side, retail sales declined sharply in March, falling 5.7% yoy (mkt: -4.7%). Sales have not shown signs of stabilization, and were dragged down by the supermarket segment in March. Contrary to the expected stabilization in industrial production, we project further declines in retail sales as the labor market weakens, inhibiting household consumption. The Central Bank’s IBC-Br activity index fell 6.3% yoy, also negatively surprising the market (consensus at -5.9%). In the labor market, the national unemployment rate contributtd negatively, hitting 11.2% in the month of April while the market had 11.1%. The deterioration should continue ahead as the labor market responds to weak economic activity. In sum, Brazil had an overall worse performance relative to last month, which had already been under par.

Mexico’s index dotted 0.38 in May, from 0.32 in the previous month, approaching its historical highs. Retail sales and year-over-year investment skewed surprises to the upside, topping a negative surprise from industrial production. Retail sales expanded 6.4% yoy, above the market’s 4.8%. Consumption in Mexico remains supported by the growth of formal employment, low inflation, credit and remittances. Looking ahead, a moderation of consumption is likely, given the poor performance of the exporting sector, which impacts Mexico’s open economy. Year-over-year investment increased 5.2%, also above the market’s 4.4% growth estimate. Industrial production surprised in the opposite direction, down 2.0% yoy vs. the market’s -1.1% estimate. Sequentially, industrial production increased 2.0% qoq/saar, but nonetheless contracted 1.1% in 4Q15. The industry in Mexico continues to drag activity down, hurt by declining oil production and sluggish manufacturing exports.

Chile’s index registered 0.25 in May, advancing from last month’s 0.18. The most important component in the index, the monthly activity indicator (Imacec), grew 2.1% yoy in March, in line with market consensus. Retail sales surged in March, growing 7.9% yoy vs a market reading of 4.5%, leading to a healthy growth of 5.5% in the quarter ending in March. The unemployment rate, although higher in April than it was in March, was 0.1p.p. lower than the market expected, landing at 6.4%. Manufactuing surprised to the negative side, but its effect on the index was negligible. Overall, activity gained momentum in the 1st quarter of 2016 and surpassed expectations on average, but remains low paced.

Colombia’s index recorded 0.09, down from 0.27 last month. While the leap year-effect favored activity in February, religious celebrations in March had the reverse effect. Retail sales contracted 2.9% yoy in March, a negative surprise from the 3.4% growth rate expected by the market, led by a downfall in vehicle sales. Industrial production also underperformed, growing only 1.4% yoy vs. the market’s 4.2%. Despite the negative surprise, the expanding operations at the Cartagena oil refinery are still lifting manufacturing activity.

Peru’s index came in at -0.14, from 0.13 in April. The monthly GDP for March grew less than expected as manufacturing proved to be more of a drag than anticipated. Still, the number remains consistent with recovery this year. The unemployment rate in Lima for the quarter ending in April came in at 7.0%, slightly above the 6.9% the market had dotted. Peru came second to last in the index, and reverted to negative bounds after a long streak of positive surprises. Nonetheless, our assessment is that the Peruvian economy fared well in 1Q16, and we expect solid growth this year, with GDP expanding 4%, up from 3.3% in 2015.

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
Lourenço Paiva


 



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