Itaú BBA - Evening Edition - Formal job creation remains at a good pace in Brazil

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Evening Edition - Formal job creation remains at a good pace in Brazil

Janeiro 24, 2020

The seasonally-adjusted 3-month-moving average stands at 78k

See our Week Ahead full note at the end of this report.
 

Talk of the Day

Brazil

CAGED formal job creation data registered a net destruction of 307k in December (our call: -332k; mkt: -324k), reflecting the typical seasonality of the month. In seasonally-adjusted terms (our estimate), formal job creation reached 60k in the month, below the strong 109k print of November, but still a good pace. The seasonally-adjusted 3-month-moving average stands at 78k, consistent with a GDP growth of 2.7% in annualized terms. The sectorial breakdown shows job creation accelerating in retail, construction and at a softer pace in manufacturing. In turn, job creation at the service sector lost some steam after strong results in previous months. The gap between dismissal and hiring wages has increased slightly over the last few months, indicating that there is no sign of pressure in the job market. In all, we continue to see economic activity in a gradual acceleration trend, despite weaker hard data in November and December. Our forecast points to a 2.2% GDP growth in 2020.

According to FGV’s monthly survey, consumer confidence decreased 1.2 p.p. to 90.4 in January. The breakdown shows that both the current conditions (-0.9 p.p, to 78.7) and the expectations component (-1.4 p.p, to 98.9) deteriorated in the month. The report published by FGV suggests that these figures were probably influenced by the pressure in food prices observed recently, which negatively impacted the intent to buy durable goods. 

Argentina

The trade balance posted a USD 2.2 billion surplus in December, above market expectations of USD 2.1 billion. The trade surplus for 2019 consequently reached USD 16.0 billion, beating our forecast of a USD 15.5 billion surplus, and marking the highest reading since 2009. At the margin, the annualized surplus adjusted for seasonality reached USD 26.2 billion in 4Q19. This result was influenced by an increase of 6.7% yoy in total exports, which were boosted by soy and corn shipments. Total imports declined by 20.1% yoy in 4Q19, led by a strong decrease in Consumer goods imports (24.4%), which were affected by a weaker currency and lower real income. Looking ahead, we expect the trade surplus to remain wide in 2020. Our forecast points to a USD 14.5 billion trade surplus for 2020, leading to a current account surplus of 0.4% of GDP, from an estimated deficit of 0.6% of GDP for 2019. ** Full story here.

The EMAE (official monthly GDP proxy) decreased by 1.9% yoy, missing both our expectation and the market consensus of a 0.8% decline. On sequential basis, the EMAE fell 1.7% mom/sa in November, after a temporary rebound in the previous month (+2.0% mom/sa). We forecast a 2% decline in GDP this year, following a 2.9% contraction in 2019. Some improvement in real wages and the high dollarization of savings can lead to consumption rebound, but they are unlikely to offset the effects of uncertainty and controls on investment. Furthermore, a lack of external financing also stands in the way of an internal demand recovery. ** Full story here.

Mexico

Mexico’s monthly GDP proxy (IGAE) contracted 1.2% year-over-year in November (from -0.7% in October), below our forecast of -0.6% and market expectations. According to calendar adjusted figures, monthly GDP contracted at a softer pace (0.8% year-over-year in November, virtually unchanged relative to October), taking the annual quarterly growth rate to -0.6%. The breakdown shows that the annual quarterly rate of the industrial sector kept contracting (2.3% in November, from -2.0% in October), with mining output improving to -1.5% (from -3.0%), while manufacturing and construction sectors deteriorated to -1.2% (from -0.2%) and -7.1% (from -6.9%), respectively. Looking ahead, we expect economic activity to decline 0.1% in 2019 and recover gradually to 1.1% in 2020. The fading effect of the government transition on fiscal spending and the recent approval of the USMCA in the U.S. Congress (reducing uncertainty) should support some recovery this year. On the external front, easing trade tensions will likely benefit Mexico’s exports. Finally, if the recent stabilization of oil output lasts, the mining sector would also contribute to a GDP growth improvement in 2020. ** Full story here.

Chile

The Central Bank’s trader survey ahead of next week’s monetary policy meeting (January 28-29) shows an unchanged outlook of stable rates for the time being. All the respondents expect the policy rate to be maintained at 1.75% next week (as do we), and to be held at that level for at least one year, before reaching 2% in two years’ time (scenario unchanged from earlier this month). Meanwhile, both the one and two year inflation expectations remain anchored at the 3% target. A January monthly CPI variation of 0.4% is in line with our view. Overall, we believe stable rates for the time being are likely as the board would want to see how the currency performs without additional intervention (in the face of lingering domestic risks) and the impact of fiscal stimulus on internal demand. Given that we expect inflation to remain under control in the central bank’s relevant policy horizon and the negative output gap to widen, we believe lower rates ahead are a possibility.

The Week Ahead in LatAm 

Brazil

On economic activity, the highlight is the national unemployment rate for December, to be released on Friday. We forecast the rate to reach 11.2% (stable at 11.8%, seasonally-adjusted). FGV’s business confidence surveys for January on retail, construction, industry (final release), services and the aggregate business confidence index will also be released throughout the week.

January’s IGP-M inflation will be released on Thursday. We forecast a 0.54% monthly increase, leading the 12-month reading to 7.88% (from 7.30% in the previous month). On Friday, ANEEL announces the tariff flag on electricity bills for February, which we expect to change to green mode (from yellow in January).

On external accounts, we expect the current account (Monday) to post a USD 4.2 billion deficit in December, better than the USD 6.0 billion deficit observed in the same month of the previous year. Despite the slightly weaker trade balance, income and services deficits also contracted in the annual comparison. With this result, the current account deficit in 2019 would add up to USD 49.2 billion, or 2.7% of GDP (from USD 42 billion in 2018). Direct investment in the country will likely amount to USD 12 billion in December, ending the year with the 12-month reading at USD 81.1 billion, or 4.4% of GDP. 

Regarding the fiscal front, December’s primary budget balance for the central government and the consolidated public sector will be released on Wednesday and Friday, respectively. We expect the central government to post a BRL 8.4 billion deficit in the period, while the consolidated public sector will likely post a BRL 24.6 billion deficit.

Finally, on Wednesday, the Central Bank publishes its credit report for December.

Chile

The central bank holds the first monetary policy meeting of 2020. In December, the board opted to keep the policy rate stable at 1.75% in a unanimous decision. Meanwhile, the easing bias was dropped as the board signaled stable rates during the coming months “in a context of exchange rate intervention and fiscal stimulus”. Since the meeting, the Chilean peso appreciated and volatility moderated, resulting in the central bank pausing additional intervention operations. Meanwhile, protests lost momentum, but there remains significant uncertainty regarding how persistent the effect on confidence will be (affecting the pace of the activity recovery). We expect the central bank to hold the policy rate at 1.75% as the board bides it is time to review how uncertainty, volatility and inflation evolve.

The national institute of statistics (INE) releases activity indicators for December on Friday. In November, industrial production (1.8% yoy drop) was dragged down by mining, while manufacturing rebounded from the protest-affected October. Meanwhile, retail sales posted another near double-digit decline, in line with downtrodden confidence. For December, accelerating electricity generation in the month hints at continued manufacturing momentum at yearend, but a higher base of comparison would result in milder growth of 2.2% (3.2% in November). Meanwhile, retail sales would moderate its decline to 5.5% (9.8% drop in November) partly driven by a milder contraction of vehicle sales in the month.

On the same day, INE releases the national unemployment rate for the final quarter of 2019. The data would incorporate the full impact of protest activity that started in October. To date, the statistical agency’s labor market data has yet to reflect a significant loosening of the labor market despite the Labor Ministry reporting a loss of over 170 thousand jobs due to business necessity in the final quarter of the year. In the quarter ending in November, the national unemployment rate only ticked up 0.1pp over twelve months to 6.9% as employment growth improved to 1.4% yoy (from 1.2% in October), while the labor force expanded 1.5% (1.2% one month before). We expect the unemployment rate to come in at 7.6%, up nearly a percentage point from 4Q18, resulting in an unemployment rate of 7.2% for 2019 (7.0% in 2018).

Colombia

On Friday, the institute of statistics will release the unemployment rate for December. November's national unemployment rate of 9.3% was above the 8.8% recorded one year earlier, explained by higher urban unemployment. The urban unemployment rate increased to 10.4% from 9.8% one year earlier. However, on a positive note, total employment grew 1.8% yoy, following seven consecutive months of drops, leading to the first participation rate increase since March 2019. We expect the urban unemployment rate in December to come in at 10.3% (10.7% one year ago), leading to a 10.6% total unemployment rate for 2019 (9.7% in 2018). 

On Friday, the central bank of Colombia will hold its monetary policy meeting. In the December meeting, the board unanimously decided to keep the monetary policy rate at 4.25%, as widely expected. The decision extended the period of stable rates to 20 months, while the tone of the press conference and communiqué remained neutral as board members hint at stable rates for the time being. We expect another stable rates decision this month. As inflation is expected to gradually converge towards the 3% target and the activity recovery slowly consolidates, a policy rate near neutral levels provides the board with sufficient flexibility to respond to significant deviations from its baseline scenario.

Mexico

Beginning the week, the statistics institute (INEGI) will announce November’s retail sales, which we estimate to grow at a soft pace: 1.1% yoy (from 0.4% in October). While the real wage bill (5.2% yoy in November, from 5.2% in October), an important determinant of private consumption, stood resilient (despite the weakening of employment), other private consumption determinants decelerated: consumption credit (5.6%, from 5.9%) and remittances in pesos (-6.8%, from 4.2%).

On Tuesday INEGI will announce December’s trade balance, which we expect to post a deficit of USD 0.6 billion, reaching an annual surplus of USD 2.1 billion in 2019. Weakness in non-oil imports supported the trade surplus in 2019, while manufacturing exports decelerated in the final months of 2019.  

On Thursday, the statistics institute (INEGI) will publish the flash estimate of Q4’s GDP, which we expect to contract 0.6% yoy (from -0.3% in 3Q19). We expect industrial production remained weak in 4Q19, dragged by construction and manufacturing output, while mining production improved (associated to some stabilization of the oil output).  Meanwhile, we expect services sector likely grew at a soft pace. Using seasonally adjusted figures, we expect 4Q19 GDP to contract 0.1% qoq (from 0.0% in 3Q19). Assuming our forecast is correct, GDP contracted 0.1% in 2019.

On the same day, the Ministry of Finance (MoF) will publish the reports on economic activity, public finances and public debt for 2019. We expect fiscal balances stood close to the MoF estimates: a primary surplus and nominal fiscal deficit of 1.0 and 1.9% of GDP, respectively. We expect the weakness in fiscal revenues (due to weakness in economic activity) were compensated by the use of the stabilization fund and a weak expenditure execution (associated to the administration transition effect).

Peru

On Sunday, Peru’s Congress elections will take place, after the constitutional court ruled the executive decision to dissolve Congress as legal.  The newly elected Congress will serve until the end of the current administration term in July 2021. Legislative elections will probably result in a fragmented Congress. The latest IPSOS poll shows that Congress voting intentions continued to be dispersed across parties, indicating the population’s discontent with the political class, with a high 34% stating that they would not vote for any of the existing parties.

On Saturday, the statistics institute (INEI) will announce January’s CPI inflation, which we forecast at 0.15% MoM. A gradual closing of the output gap and a well-behaved currency will likely keep inflation at the target this year. Assuming our forecast is correct, headline inflation would post a 2.0% YoY in January (from 1.90% in December).



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