Itaú BBA - Copom minutes in focus

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Copom minutes in focus

Maio 12, 2020

We will publish an in-depth report on the minutes later today

Our LatAm Macro Monthly report was published yesterday, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru and the global economy. ** Full story here.

Talk of the Day


The Brazilian Central Bank's Monetary Policy Committee (Copom) has just published the minutes of its latest monetary policy meeting. We will publish an in-depth report on the minutes later today.

The BCB released yesterday its weekly survey with market participants (Focus). The median of 2020 GDP growth expectations fell for the 13th consecutive week, receding by 35 bps (to -4.11%) and accumulating a 641-bp drop during such period. The median of GDP growth expectations for 2021 and 2022 remained at 3.20% and 2.50%, respectively. The median of IPCA inflation expectations for 2020 declined to 1.76% (from 1.97%), accumulating a 144-bps decline over nine consecutive weeks. Inflation expectations for 2021 receded 5 bps to 3.25%, and remained stable at 3.50% for 2022. The median of year-end Selic rate expectations receded to 2.50% for 2020 (from 2.75%) and to 3.50% for 2021 (from 3.75%) for 2021. For 2022, the Selic rate expectations remained at 5.50%. Finally, the median of exchange rate expectations did not change for 2020 (at BRL 5.00/USD), while it has oscillated to BRL 4.83/USD for 2021 (from 4.75) and to BRL 4.54/USD for 2022 (from 4.50).

The BCB intervened in the FX market yesterday by selling USD 500 million in swap contracts. The BRL ended the session at 5.82 per dollar, a 1.4% depreciation from Friday, after reaching 5.84 per dollar in the intraday high.

Our Daily Activity Index decreased 23% between the first half of March and the last data available (Friday, May 8th). The index has decreased 2.3 p.p. in the last available day (to 77.0), while the 7-day moving average increased 0.2 p.p., to 72.9.

Macro Scenario: We changed our primary deficit estimates to 10.2% of GDP from 8.0% for 2020 (due to the stronger-than-expected impact on public accounts of the measures implemented to address the COVID-19 crisis), and to 2.2% of GDP from 0.8% for 2021 (due to larger social expenditures, that will be partly offset by higher taxes). We reduced our GDP growth forecasts to -4.5% from -2.5% for 2020 and to +3.5% from +4.7% for 2021, on declining global growth forecasts, the persistent spread of COVID-19 in Brazil, and rising fiscal uncertainties creating harsher financial conditions that provide less stimulus to the economic activity. We revised our exchange rate forecasts due to the risk of further fiscal deterioration, a sharper contraction in economic activity and lower interest rates. We now estimate the BRL at 5.75/USD for 2020 and BRL 4.50/USD for 2021 (from 4.60 and 4.15, respectively). We also anticipate a heftier adjustment of the current account. We lowered our inflation forecasts to 2.0% from 2.7% for this year, and to 3.0% from 3.3% for 2021. Monetary policy: although the environment warrants caution, we believe that the recent widening of the output gap will allow an additional interest rate cut. We see the Selic benchmark rate at 2.25% p.a. by year-end (2.50% p.a. previously). ** Full story here.

Coronavirus update: the latest official information from the Ministry of Health is that Brazil has 168,331 confirmed cases (up by 5,632 vs 6,760 yesterday), with 11,519 confirmed deaths (up by 396, vs 496 yesterday).

Day Ahead: March’s service sector revenue survey (PMS) will be released at 9:00 AM (SP time), for which we expect a 16.0% mom/sa decline. Other than that, local news indicate that the package of financial aid for states and municipalities may be sanctioned by president Bolsonaro today. The president has indicated that he will veto the article of the bill that allows pay increases for some categories of civil servants before 2021.


Macro Scenario: Fiscal response to the COVID-19 health crisis has been restrained relative to other LatAm countries, with only moderate stimulus to mitigate the negative impact on the economy. PEMEX’s rating is now below investment grade (IG) at two of the three major rating agencies. In turn, Mexico’s sovereign rating was also downgraded (despite the fiscal austerity), in part due to PEMEX’s financial troubles. We now expect a significantly sharper contraction of activity this year (-8.1%, compared with a 3.7% fall in our previous scenario). Given the widening output gap and lower inflation, we expect Banxico to ease its policy stance further. We now expect the policy rate at 4.00% before the end of 2020 (4.50% in our previous scenario). ** Full story here.


Macro Scenario: Social distancing measures underway to confront the novel coronavirus will have a significant impact on activity, while higher unemployment, a deterioration of private sector balance sheets and persisting health concerns could mean the expected recovery underwhelms. We now expect a 3.7% GDP contraction this year. The central bank will continue to reiterate its low-for-long rates message (we see rates at 0.5% throughout the year), while remaining ready to upscale its QE and liquidity measures if the economic distress escalates. As fiscal authorities raise spending and ease taxes to soften the blow from the global shock, debt metrics will deteriorate more rapidly and raise the risk of a ratings downgrade in coming months (but to still-high rating levels). ** Full story here.

Day Ahead: The central bank will publish the results from its monthly economist survey at 9:30 AM (SP time). Analysts probably lowered inflation expectations to below 3% for 2020 (3.2% expected last month), reported a deeper activity contraction (2.2% drop seen as of last month for this year) and continued to signal stable rates at 0.5% for a significant period.


Macro Scenario: The Colombian economy is on the receiving end of two shocks, one from the effects of the coronavirus and the other from developments in the oil market. With the government imposing a countrywide lockdown for nearly two months, the impact on domestic demand will be significant. We see activity shrinking 4.7% this year (+3.3% last year). Low growth and oil prices will bring the fiscal deficit to above 6% (2.5% last year). The rapid worsening of fiscal metrics increases the risk of Colombia losing investment grade status, also considering only a slight correction to the current account deficit. Despite worsening fundamentals, inflation is set to end this year below the 3% target. We now see rates reaching 2.0% before the end of this year (currently 3.25% and 2.75% in our previous scenario). ** Full story here.


Macro Scenario: President Fernández’s image improved thanks to successful control of the spread of the coronavirus, achieved through a comprehensive and early lockdown. Still, COVID-19 and the associated social distancing measures will have a significant negative impact on an already weak economy. We now forecast a GDP contraction of 8.3% this year. A deal with foreign creditors is even more difficult, given that fiscal accounts are set to weaken. In turn, failing to reach an agreement would further darken the medium-term prospects for the economy. ** Full story here.


Macro Scenario: Peru’s government has implemented strict social distancing measures since March, but the coronavirus outbreak is still far from contained. The government and the Central Bank of Peru (BCRP) responded with a bold fiscal and monetary stimulus, respectively, to mitigate the economic hit. We now expect economic activity to contract 3.7% (compared with a 1.3% fall in our previous scenario). The widening of the output gap will put downward pressure on inflation, which will allow the BCRP to keep its policy rate at 0.25% (an all-time low) throughout 2020. ** Full story here.

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