Itaú BBA - Evening Edition – Inflation falls amid labor market loosening in Chile

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Evening Edition – Inflation falls amid labor market loosening in Chile

Junho 5, 2020

Weakened demand, along with still low oil prices and some CLP appreciation, will likely keep inflation below the target this year

Talk of the Day


Consumer prices dropped 0.05% from April to May (from +0.6% last year and below our call and the market consensus, both at 0.0%), leading the headline inflation to fall 0.6 p.p. to 2.8% yoy, as a swiftly loosening labor market and low oil prices reduce inflationary pressures. In line with the social mobility restrictions and still low global oil prices, inflationary pressures in the month were dragged down by transportation prices (-8bps contribution) and services such as hotels and restaurants (-4bps). Lifting prices in the month were household furniture and equipment (3bps), as long stay-at-home periods likely increased demand for appliances, along with some food products (meat in particular: 4bps) and cigarettes (3bps). While tradable inflation remains above headline inflation following the previous CLP depreciation, it has slowed significantly. Meanwhile, core inflation dropped to its lowest rate in one year. Inflationary pressures are set to remain under control, ending the year at 2.6% (3% last year). Weakened demand, along with still low oil prices and some CLP appreciation, will likely keep inflation below the target this year. ** Full story here.

Macro Scenario: The spread of the coronavirus accelerated in May, leading to a more comprehensive lockdown of Santiago (the nation’s economic hub) as the healthcare system neared full capacity. The swift and significant loosening of the labor market hints that the policy response may need to be stronger in order to prevent a transitory shock from resulting in more permanent economic damage. We have reduced our growth forecast for this year to a 4.5% drop, as lockdown measures will likely be extended further. A recovery next year remains likely once authorities move to reopen the economy in 2H20. ** Full story here.


Itaú Daily Activity Index: Our Daily Activity Index increased by 5.7 p.p., to 82.1 (on Tuesday June 2nd, the latest available data) – the highest level since March 20th (87.8). The 7-day moving average also went up, by 1.3 p.p., to 75.5. The index is up 48% from the bottom seen on March 28th, and is now 18% below the Mid-March level, when the series started. See our report here.

Auto production (Anfavea) reached 43.1k in May (-84.4% yoy), after an all-time low in April (1.8k).  In seasonally adjusted terms (our estimates), production rose by 2118.9% mom/sa, a large variation due to the very low comparison base in April. Despite the increase observed in the month, the current level of the index is still very low when compared to its historical levels. The average production for May from 2016 to 2019, for instance, was 234.7k vehicles. From a demand standpoint, exports continued to decrease in May (-49.9% mom/sa;-90.8% yoy), following a sharp contraction in April. On the other hand, domestic sales rebounded slightly (+13.4% mom/sa; -74.7% yoy). 

Macro Scenario: There are incipient signs that the spread of the virus is stabilizing, although uncertainties remain. Nevertheless, the decline in the number of new cases/deaths is likely to be slow, and the reopening of the economy is expected to be gradual. In theory, easing social distancing measures in some states favors the resumption of economic activity, but it also increases the risk of worsening the pandemic. We maintained our GDP estimates at -4.5% for this year and 3.5% for 2021. Preliminary data indicate that economic activity may have reached its low in April. We expect primary deficits of 10.2% of GDP in 2020 and 2.2% of GDP in 2021. Next year's deficit includes an increase in social spending, to be partially offset by tax hikes. We forecast the exchange rate at BRL 5.75/USD in 2020 and BRL 4.50/USD in 2021. The adjustment in the current account is set to continue. We revised our estimates for the consumer price index IPCA to 1.8% from 2.0% for 2020 and to 2.8% from 3.0% for 2021. The inflation scenario remains benign, and this year's low inflation is expected to spread going forward. The National Monetary Council (CMN) will likely set the 2023 inflation target at 3.25% or 3.00%, reaffirming its commitment to the convergence of inflation to levels that are more compatible with those seen in other emerging markets. We maintained our call for the Selic rate at 2.25% p.a. for 2020 and 3.0% p.a. for 2021. ** Full story here.


Macro Scenario: After two months of a strict lockdown, the Colombian authorities extended the quarantine for another month but allowed several activities to restart and relaxed mobility restrictions. The first signs of the impact from the coronavirus shock on the economy are becoming evident in data, with a significant worsening of the labor market and historic activity declines that, given the fallout, would likely require additional response from both fiscal and monetary authorities. In particular, we expect the policy rate to reach 2.0% before the end of this year (from 2.75% currently). ** Full story here.


Macro Scenario: The administration announced the gradual reopening of the economy, but the lack of reliable statistics to track the outbreak may end up leading to a new tightening of social distancing measures. On the policy side, the central bank of Mexico continued the easing cycle with an expected 50-bp rate cut (to 5.5%), despite higher short-term inflation forecasts. As in previous decisions, the board is not providing forward guidance to the market on future rate moves. Despite the more challenging scenario, the current administration introduced new limits to private participation in the energy sector, diminishing business confidence. Given weaker-than-expected activity data we now expect a GDP contraction for 2020 of 8.5% (from -8.1% in our previous scenario). In this context, the policy rate will likely end this year at 4.0%. ** Full story here.

The Week Ahead in LatAm


On Thursday, the INDEC (the official statistical agency) will publish the National CPI for May 2020. The CPI decelerated to 1.5% mom in April from 3.3% mom in March, driven by services, imposition of maximum prices for some items, and frozen tariffs and despite a persistent rise in some food prices. According to the average of several price-tracker consultancies, consumer prices rose 1.4% month-over-month in May. If this estimation is correct, annual inflation will decelerate to 43.3% in May, from 45.7% in April.


May’s IPCA inflation will be released on Wednesday. We forecast a 0.46% monthly decrease, leading the 12-month reading to 1.80% (from 2.40% in April). Fuels and airfare tickets will likely post the largest downward contribution in the month, and we expect all core inflation measures to remain decelerating.

On economic activity, data for May – traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO), both without scheduled dates – will provide additional signals as to whether or not economic activity is improving from April to May. Data already released such as energy consumption, vehicles sales and production, level of capacity utilization in the industrial and construction sectors, as well as our daily activity indicator, point to some recovery in the period.

Finally, the evolution of the coronavirus outbreak and resulting policy measures, such as potential announcements by regional governments regarding isolation rules, will continue to be closely monitored. On the political front, the Senate may vote the MP 936, which addresses formal employment measures such as the Emergency Employment and Income Maintenance Program. It is important to keep an eye on whether the payroll tax exemption will continue in 2021, an on-going discussion within the MP 936.


The May trade balance will be released on Monday. A large USD 1.2 billion trade surplus was registered in April, 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 accounts. Exports also fell, but at a much milder rate as mining exports haven’t been significantly affected. As coronavirus control measures remain in place, private sentiment dropped to record lows and the labor market loosened, leading to import dynamics remaining weak. As a result, we expect another USD 1.2 billion trade surplus (USD 0.2 billion last year), dragged by consumer goods imports and still weak energy imports on the back of low oil prices.

On Tuesday, the central bank will publish the results from its monthly economist survey. Last month, analysts registered a notable drop in short-term inflation expectations as the activity outlook deteriorated further. As a result, rates were seen staying low-for-long (0.5% for at least one year). Inflation for 2020 dropped 50bps to 2.7%, but medium-term expectations remained anchored at the 3% target. Activity was seen contracting 2.7% this year, worsening from the 2.2% drop expected previously. Some likely changes for this month could be a further downgrade of economic activity. Later in the week (Thursday), the financial operators survey will also be released, likely reaffirming low inflation and rate expectations.


On Monday, think-tank Fedesarrollo will release the consumer confidence indicator for May. Consumer confidence sunk to a record low of -41.3% (0 = neutral) in April, as the nationwide lockdown to confront the coronavirus crisis along with a downbeat economic outlook hampered sentiment. The index reading was 31.7pp lower than last year (-23.8% in March). The deterioration was primarily due to the significant decline in economic conditions. The continued extension of the nationwide quarantine suggests that a fast confidence recovery is not forthcoming and that the Colombian economy will be hard hit by the current crisis.

On Friday, activity indicators for the month of April will be released. Economic data in March reflected the sudden deterioration of activity following the onset of the coronavirus and oil shock. Retail sales fell 4.8% yoy in March (+13.2% previously). The weakness comes as business operations closed in the final week of the month due to the mandatory quarantine. Meanwhile, manufacturing underwhelmed with a contraction of 8.9% yoy (+4.5% previously). With the strict lockdown persisting throughout the month of April, the activity decline is set to deepen in April. Car sales were close to nil in the month (down 98.7% yoy) and the labor market loosened quickly. As a result, we expect retail sales to contract 22% yoy. Meanwhile, with energy demand shrinking 19%, we see manufacturing retreating also 19% yoy.


On Tuesday, INEGI (the statistics institute) will publish CPI inflation figures corresponding to the full-month of May. We expect headline and core inflation at 0.55% MoM (from -0.29% a year ago) and 0.44% (from 0.16% a year ago), respectively. We expect pressure from core food prices, non-core agro prices and a recovery in gasoline prices to more than offset a decline in electricity prices due to seasonal “summer” subsidies on electricity tariffs. Assuming our forecast is correct, headline and core CPI would grow 3.01% YoY in May (from 2.14% in April) and 3.79% (from 3.50%), respectively.  

On Thursday, the Statistics Institute (INEGI) will publish April’s industrial production, which we estimate at -19.6% yoy (from -5.0% in March). April’s industrial production will reflect a sharp deterioration due to a full month lockdown amid the outbreak, with construction, mining and manufacturing activities on hold. 


The central bank will publish its monthly GDP proxy (IMAEP) for April on Thursday. The IMAEP fell 8.5% mom/sa in March (-1.1% yoy), reflecting the first effects of the lockdown. We forecast a 10% mom/sa drop in April due to the impact of the measures taken to prevent the spread of the COVID-19 pandemic. On a year-over-year basis, we expect a 10.6% drop. 


On Thursday, the Central Bank of Peru (BCRP) will hold its June’s monetary policy meeting. We expect the BCRP to keep its policy rate at 0.25%. In the latest monetary policy decision, the BCRP pledged that it will continue to monitor inflation and its determinants, and, if necessary, ease the monetary policy stance through “different methods”.

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