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Brazilian cabinet changes on the spotlight

Novembro 14, 2017

President Temer stated that the government is indeed implementing a cabinet reform, to be concluded next month.

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Yesterday, Cities Minister Bruno Araújo resigned. Markets are watching for signs of a cabinet reshuffle and accompanying negotiations over the pension reform. In an official note, President Temer stated that the government is indeed implementing a cabinet reform, and it will be concluded until mid-December.

Inflation expectations for 2018 slightly increased to 4.04%. According to the Focus survey, IPCA inflation expectations slightly increased for 2017 to 3.09% (+1bp) and for 2018 to 4.04% (+2bps), while it remained flat at 4.25% for 2019. Year-end Selic expectations also remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations did not change for 2017 (at 0.73%), and also remained flat for 2018 (at 2.50%), while it has increased 5bps for 2019 (to 2.55%). Finally, the BRL remained flat for the three years horizon: at 3.20/USD for 2017; at 3.30/USD for 2017; and at 3.33/USD for 2019.

September’s retail sales will be released today at 9:00 AM (SP time). We expect the broad index to increase 0.7% mom/sa (consensus: 0.9%), and forecast core sales, which excludes vehicle sales and construction material, to also grow 0.7% mom/sa  (consensus: 0.3%).


Mexico's supermarket & department store (ANTAD) same-store-sales slowed down in October, mainly dragged by the fall of real wages, less dynamic consumer credit, and softer growth of remittances converted into Pesos. ANTAD sales expanded 2.1% year-over-year in October, below median market expectations (3.9%, as per Bloomberg), pulling down the three-month moving average growth rate to 3.9% year-over-year (from 4.5% in September). On balance, the fundamental determinants of private consumption have deteriorated in 2017. Even though annual inflation peaked in August (at 6.7% year-over-year), the latest data point for real wages still shows a contraction (down by 1.3% year-over-year in September) like in the previous eight months. Considering that inflation stood broadly unchanged in October (at 6.4% year-over-year), real wages were unlikely more supportive in October than in September. Moreover, according to INEGI’s data, consumer credit continued slowing down in September (to 4.5% year-over-year, from 5% in August and 12% at the beginning of 2017) amid higher domestic interest rates. We also highlight that remittances converted in pesos have turned less supportive for consumers. In fact, remittances converted into pesos recorded their first contraction in more than four years in September (down by 8% year-over-year, with the three-month moving average growth rate standing close to zero) dragged by a contraction of remittances in USD and year-over-year MXN appreciation. On the positive side, however, we highlight that the main buffer for consumers is the labor market; with the unemployment rate (3.3% seasonally-adjusted in September) hovering around the lowest level in eleven years and formal employment expanding consistently above 4% year-over-year throughout the first nine months of 2017. By the way, formal employment and nominal wages data for October will be published next Wednesday (November 15). Finally, it is important not to overlook the fact that consumer confidence is recovering gradually (3-month moving average growth rate up by 4% year-over-year in October) after hitting an historic-low in January (when domestic gasoline prices spiked and Donald Trump assumed the presidency of the U.S.).

Looking ahead, we expect ANTAD sales – and private consumption in general – to improve in the coming quarters, both in sequential and year-over-year terms, driven by an acceleration of the real wage bill. This acceleration of the real wage bill is likely to materialize, in our view, because inflation will fall. We forecast annual inflation of 5.9% and 3.3% by the end of 2017 and 2018, respectively, from the 6.4% level recorded in October. After 60% depreciation between 2014 and 2016, the MXN has appreciated 8% year-to-date, which is already helping to bring down inflation for tradables. A very large base effect in January 2018 (payback from “gasolinazo”) and the correction of abnormally high non-core food inflation will also exert downward pressure. Thus, we foresee the growth rate of real wages coming out of negative terrain as early as January 2018. On the employment side, we believe the acceleration of the U.S. economy (particularly industrial production) will boost Mexico’s manufacturing exports and, thus, support the Mexican labor market.


Today the central bank of Chile will hold its monthly monetary policy meeting at 19:00 PM (SP time). We expect the central bank to hold the policy rate at 2.5%, while retaining an easing bias. The board introduced an easing bias last month after inflation posted a further downside surprise for September. The board highlighted that the surprises came mainly from volatile products, with core measures broadly unaffected, but acknowledged that if this trend continued the trajectory of inflation converging to the 3% target over the relevant 2-year horizon could be compromised and additional easing required. Nevertheless, the October inflation surprise to the upside puts inflation closer to the central bank’s baseline scenario and in this context; rate cuts in the short term are less likely.

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