Itaú BBA - Evening Edition – Inflation declines sharply in Mexico

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Evening Edition – Inflation declines sharply in Mexico

Maio 7, 2020

Looking ahead, we expect inflation at 2.9% this year

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CPI in April was in line with market expectations. Consumer prices fell by 1.01% in the month, slightly below our forecast of -0.97% and in line with market expectations. The headline figure was dragged mainly by a fall in gasoline prices (-17.35% month-over-month). In turn, core CPI printed at 0.36% month-over month, below our forecast of 0.40% and above market expectations of 0.33%. In year-over-year terms, headline inflation receded to 2.15% in April (from 3.25% in March), pressured by non-core energy prices which fell 15.20%. Core inflation decelerated to 3.50% (from 3.60%), with tradables accelerating to 4.11% (from 3.83%) mainly due to food items which is likely related to shortages of some products amid distancing measures, while services decelerated to 2.84% (from 3.35%) mainly due to the fall in tourism services (-21.0%) and airfare prices (-11.4%). Looking ahead, we expect inflation at 2.9% this year. The widening of output gap and low energy prices will put downward pressure on inflation, offsetting the effect on prices from the depreciation of the currency. ** Full story here.

Tomorrow’s Agenda: The Statistics Institute (INEGI) will announce February’s gross fixed investment at 8:00 AM (SP time), which we expect to decrease 9.1% YoY (from -8.8% in January).


A USD 1.2 billion trade surplus was registered in April, USD 0.2 billion above our call, and far larger than the USD 0.4 billion registered last year as poor domestic demand and lower global oil prices aid a swift correction of external imbalances. Exports also fell, but at a much milder rate as mining exports haven’t been significantly affected. As a result, the rolling 12-month trade surplus increased to USD 6.5 billion, from USD 4.2 billion last year. At the margin, the trade surplus in the quarter is at an even wider USD 12.0 billion (annualized according to our SA adjustment; USD 10.1 billion in 1Q20 and USD 5.5 billion in 4Q19). As coronavirus control measures remain in place, private sentiment drops to record lows and the labor market loosens, import dynamics are set to remain weak going forward. We expect the current account deficit to narrow swiftly this year to 0.5% of GDP, from 3.9% last year, with risks tilted to an even more significant correction. A weaker Chilean peso, shrinking internal demand growth, and lower oil prices outweigh weaker global demand. ** Full story here.

Wages bill moderated in 1Q20. According to the National Institute of Statistics (INE), nominal wages grew 4.6% YoY in March (4.4% in February), while real wages ticked up to 0.8%, but remained below the 1.6% recorded at the close of last year. In the first quarter of 2020, nominal wage growth remained dynamic at 4.6% (4.4% in 4Q19), but real wages moderated to 0.9% (from 1.5% in the previous quarter) given higher inflation. Both the real earnings and the employment slowdown are limiting the real wage bill growth. Considering only formal employment, the real wage bill grew 3.7% in 1Q20 (4.3% in 4Q20), while the gauge considering total employment decelerated further (to 1.6% from 3.5%). As the incidence of the coronavirus affects activity, we expect to see further signs of deterioration in the labor market, with the average unemployment rate coming in at 9.0% this year (7.2% in 2019).

Tomorrow’s Agenda: The institute of statistics (INE) releases inflation for April at 9:00 AM (SP time). We expect consumer prices to fall 0.1% from March (+0.3% last year), dragged down by lower fuel prices and the suspension of stamp and seals taxes. As a result, annual inflation would drop to 3.4%. 


Think-tank Fedesarrollo’s consumer sentiment dropped to an historical low in April as the nationwide lockdown to confront the coronavirus crisis along with a downbeat economic outlook hamper sentiment. Consumer confidence came in at -41.3% (0 = neutral), 31.7pp lower than last year (-23.8% in March). The  deterioration from April last year was primarily due to the significant decline in economic conditions, moving from -14.9% to -73.0% (-39.8% in March). Overall, consumers do not believe it is an opportune time to purchase appliances and household goods (falling nearly 70pp from last year), as households’ economic situation worsens (in line with a loosening labor market). Meanwhile, the expectations sub-index moved further into negative territory to reach -20.1%, from -6.0% in April 2019 (-13.1% in March), as the economic outlook over the next year took worsened drastically. The recent extension of the nationwide quarantine by a further two weeks to May 25, suggests that a swift confidence recovery is not forthcoming and that the Colombian economy will be hard hit by the current crisis.


The Senate approved the package of financial aid to states and municipalities, which will now head to the presidential sanction. According to our estimates, the package represents up to BRL 127 bn of financial relief to states and municipalities, which includes direct transfers of some BRL 60 bn, as well as up to BRL 67 bn in debt relief and renegotiation (BRL 50 bn to the federal government and public sector banks, BRL 11  bn related to multilateral organizations, and BRL 6 bn from the suspension of social security debt payments by municipalities). As a compensation for the increase in federal expenditure, the national and sub-national governments were forbidden to increase wages to some categories of public servants in the next 18 months. However, after negotiations in Congress, a number of categories (related to health, security and education sectors) were exempted from this salary freeze.

According to government estimates, the savings coming from preventing wage increases for some classes of civil servants are worth BRL 43 bn, while our own estimate for these savings is BRL 8 billion (compared to R$ 30 billion if no exemptions were given). A possible reason for the differing numbers (the government did not disclose details of its calculations) is that we compare against an alternative scenario of granting wage increases similar to inflation rates (about 3%) while the government could be comparing against a higher wage growth scenario. In the case there were no exemptions, savings would be 3% (inflation) * BRL 1 trillion (public servants total wage bill) = BRL 30 billion. With the exemptions approved yesterday, savings would be 3% (inflation) * BRL 250 billion = BRL 8 billion. After yesterday´s approval, local news reported today that president Bolsonaro declared he intends to veto the exemptions to public servants wage freeze. It will be important to closely monitor new developments on this front as its fiscal impact may change due to the president’s decision, as the estimates in the previous paragraph show.

The BCB intervened in the FX market again today by selling USD 1 billion in swap contracts. The BRL closed the day at 5.84 per dollar, a 2.4% depreciation from yesterday, after reaching 5.87 in the intraday high.

Tomorrow’s Agenda: April’s IPCA inflation will be released at 9:00 AM (SP time). We forecast a 0.26% monthly deflation, leading the 12-month reading to 2.5% (from 3.3% in March). Food prices are likely to pressure upwards, while industrial items (such as vehicles and appliances) and fuel prices are likely to post sharp drops in the month. As has been the case in recent IPCA readings, we expect all core inflation measures to remain on a benign path.


The Central Bank will announce its monetary policy decision tonigt. We expect the BCRP to keep its policy rate at 0.25%. In the last monetary policy decision, the BCRP didn’t mention the possibility of cutting further the policy rate. However, they will continue to monitor inflation and its determinants to relax further the monetary policy stance using different tools.

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