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Central bank interrupts the easing cycle in Brazil

Fevereiro 6, 2020

We´ll learn more about the Copom´s views with the release of the meeting minutes on Tuesday, February 11, at 08:00 AM

Talk of the Day


The Copom delivered the widely expected 25-bp rate cut, taking the Selic rate to 4.25% pa, and stated, clearly, that given the lagged effects of the easing cycle, it would be warranted to interrupt the process. We thus expect the authorities to leave the base rate unchanged at 4.25% until year-end. Coming decisions will be, as always, data dependent. It should be noted that, in their wording, the authorities’ opted for “interrupt” rather than “end”, which signals they may eventually, under appropriate circumstances, revisit the issue. The text suggests that easing might only resume if the inflation forecasts for 2021 begin to deviate from the 3.75% target. We´ll learn more about the Copom´s views with the release of the meeting minutes on Tuesday, February 11, at 08:00 AM.

Day Ahead: Anfavea will release January’s vehicle production data throughout the day. This data is an important coincident indicator for the industrial production.


In January, prices gained 0.42% from December (0.60% one year before), coming in below the median of Bloomberg expectations (0.57%) and our forecast of 0.53%. The main contributor to the monthly price gain was the 0.76% increase of food and non-alcoholic beverages prices (contributing 0.12pp) and the 0.70% rise in transportation division, explaining 0.09pp of the headline gain. Meanwhile, low education and housing expenses gains (0.0% mom and 0.05% respectively) contained inflationary pressures. Annual inflation moderated to 3.62% from 3.80% in December, dragged by still low durable goods (1.87% yoy vs. 1.48% last month), while energy prices moderated to the slowest pace since December 2015 (3.10% yoy from 4.0% in December), partly explaining the the downside surprise to us. Inflation excluding food and energy prices remained broadly stable at 3.37% (3.40% previously) while non-durable goods drove inflation gain despite moderating to 4.24% from 4.68%. We expect inflation to end the year at 3.3%. Food price normalization, after the last year supply shocks, broadly anchored inflation expectations, and a still-negative output gap would contain inflationary pressures ahead.


According to the central bank’s 4Q Business Perception Report, significant uncertainty has led to the postponement of investment projects. While respondents reflected on the negative impact during the month of October and November to activity (particularly tourism, hospitality, commerce and construction), most sectors acknowledged some improvement during the final month of 2019 (in line with the surprise acceleration of the GDP proxy, Imacec). The sectors that were virtually unaffected by the protest activity were mining and aquaculture. Business is hesitant as to whether episodes of violence and disruption reemerge in the months of March and April amid the constitution referendum. Given this scenario, a large proportion of respondents froze their investment plans. Progress in mining, forestry and salmon investment are unaffected, and cost-reduction investments continue to advance. In the labor market, most firms are not hiring, while layoffs are unfolding in some sectors. Input prices have been broadly stable, but some upside pressures are evident from imported components (followed the accumulated CLP depreciation) and have been passed through (in some cases) to final consumer prices. With varying intensity, respondents highlighted the current legislation under consideration would lead to increased labor costs (labor bill reducing workweek, pension reform increasing employer contributions). A marked tightening of financing conditions was reported with rising interest rates and more comprehensive background checks for credit approval. With private sentiment downbeat and uncertainty still elevated, consumption and investment dynamics would remain under strain, hence, we expect another low growth year (1.2%, similar to 2019).

Day Ahead: Nominal wage growth for December will be released at 9:00 AM (SP time). Nominal wages expanded 4.1% YoY in November, the slowest rise since January last year, resulting in a real wage growth moderating to 1.2% (1.7% previously) as inflation ticked up. With the labor market gradually loosening, wage dynamism is likely to keep losing steam.


Manufacturing rose 1.2% yoy in December but fell 2.0% yoy in 4Q19. Output fell 6.4% yoy IN 2019, with most sectors registering declines throughout the year. According to the survey on the expected evolution of internal demand during 1Q20, 46% of those surveyed do not foresee changes, 33% expect a reduction and 21% project an increase. INDEC also reported that construction activity dropped in December, relative to the same month of 2018. Construction fell 6.4% yoy in December and 7.1% in 4Q19. Employment in the sector contracted 9.2% yoy, for a cumulative drop of 4.4% during the first eleven months of the year. According to the qualitative survey, 54% of the companies involved in public works expect activity to decrease in 1Q20, compared with 37% for the companies involved in private works.

On a separate note, the latest central bank survey shows that inflation expectations for 2020 ticked down in January. Market participants forecast inflation at 41.7% for this year, from 42.3% in the previous survey. For 1Q20, the average monthly-expected headline inflation was also revised down to 3.2% from 3.5% in the previous survey. The expected yield of Badlar rate fell to 28.0% by yearend, from 39.4% in the end of 2019. Analysts also revised down their exchange-rate forecasts for December 2020 to ARS/USD 78.7 (from ARS/USD 80.5 in the previous survey). Finally, pundits expect a 1.5% GDP contraction for this year.

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