Itaú BBA - Itaú Surprise Index LatAm - July disappoints after brighter months

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Itaú Surprise Index LatAm - July disappoints after brighter months

agosto 1, 2016

Countries overall disappointed, most deteriorating substantially compared to the month of June.

Our Itaú Surprise Index LatAm was -0.18 in July, sliding from 0.10 in June - a historically high monthly change. Countries overall disappointed, most deteriorating substantially compared to the month of June. Mexico remained in the positive range leading the group, whereas Colombia placed last. In Brazil, retail sales and labor market data disappointed, although this matches our assessment that consumption and employment will still be impacted by the recession ahead. Conversely, industrial activity in Brazil has shown signs of a rebound in the year’s second half.

The 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 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 was -0.28 in July, slipping from 0.03 in June, dragged down by retail sales. May sales contracted 9.0% yoy, well below the market’s -6.3% expectation. The result surprised negatively, but matched our assessment that the labor market deterioration is consistent with weakness in sales throughout this year. Labor market worsening is reflected in June’s job report, as 91k positions were closed, negatively surprising the market’s -59k estimate. The unemployment rate was consistent with this trend, rising 11.3% in June (as expected). Retail sales also weighed down on the central bank’s economic activity index for May, which shrunk 4.9% in year-over-year terms, worse than consensus had estimated (-4.2%). On the other hand, May industrial production stood flat - in line with expectations - and saw a fifth consecutive growth rate in capital goods production. In June, confidence among industrial entrepreneurs maintained its upward trend, and industrial demand has been showing signs of expansion in recent months. Moreover, coincident industry indicators in June improved, leading us to believe that coming industrial production numbers will be better, with positive results extending into the second half of the year. In sum, it is our view that economic activity is beginning to stabilize, but the recession’s impact on the job market and retail sales is not over yet.‎‎

Mexico’s index registered 0.19 in July, down from 0.46 in June. Although in decline from last month, Mexico has been leading the LatAm surprise index for the past four months - ex-Mexico, the index would have been negative in the last 3 months. Boosting the index’s performance, Mexico’s retail sales grew 8.6% yoy in May, surprising to the upside (market: 6%), indicating that private consumption remains strong, reflecting low inflation, solid remittances and credit growth. Looking forward, we expect some moderation of consumption, as temporary employment slows and inflation rises a bit due to currency depreciation. Consumer confidence saw an uptick in June, surprising positively, yet remaining below the level recorded last year. We don’t see significant improvement in confidence due to a less tight labor market, lower real wages and less impulse from remittances. Mexico’s activity index yielded no surprises (growth rate of 2.2% yoy), but is weakening at the margin. Industrial production grew 0.4% yoy in May, undershooting market expectations (at 1.6%), evidencing an underperforming manufacturing sector. Mexico’s industry continues to disappoint.

Chile’s index registered -0.35, standing virtually flat from last month (-0.34). Manufacturing production fell 2.4% yoy in June, negatively surprising the market’s -0.5% estimate, hampering industrial production’s result in the month. Retail sales disappointed the market, growing 1.1% yoy (expectations: 2.8%) in June, underlining the a slowdown in private consumption. Activity indicators came in weaker than expected in June, as was the case in May, reaffirming an economy that is struggling to recover. Low commodity prices, weak private sentiment and less fiscal support are behind the slowdown in Chile.

Colombia’s index was -0.57, down from -0.15 in June. Colombia was the worst performing country of the group, reflecting disappointing indicators as it is still adjusting to the terms-of-trade shock. Retail sales declined 0.5% yoy in May, well below the 3.6% growth forecasted by the market. This was largely due to a contraction in vehicle and motorbike sales. Industrial production grew 4.5% yoy, also disappointing market estimates (at 7.0%). The unemployment rate rose 1.2 p.p. to 10.2% in June, negatively surprising consensus. We expect Colombian activity to slow to 2.3% this year, down from 3.1% in 2015.

Peru’s index recorded -0.33 in July, down from -0.17 in June. Peru’s poor performance in July is largely due to previous months’ effect on the 3-month moving average. The monthly GDP proxy increased 4.9%, above expectations – boosted by mining and hydrocarbons sector. We view May’s GDP as a sign of strength, considering that the natural resources engine still has fuel to burn (mainly large copper projects). June’s unemployment rate came in at 7%, in line with expectations. In all, Peru’s index is underperforming due to previous negative results, as the month of July constituted of mostly positive surprises. The country is likely to lead the region’s growth in 2016.

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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