Itaú BBA - Evening Edition – Weaker-than-expected industrial production in Brazil

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Evening Edition – Weaker-than-expected industrial production in Brazil

Janeiro 8, 2019

Our preliminary forecast for December is a 1.0% increase at the margin

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Industrial production increased 0.1% mom/sa in November – weaker than our call and the market’s (both at 0.2%). Compared to the same month in 2017, output dropped 0.9%, printing 0.5 p.p. below market expectations. The gross reading for October was revised downward by 0.3 p.p. In our view, recent weakness in industrial production was driven by lagged effects of tightening financial conditions in 3Q18 combined with slowing global growth – particularly in countries that are large consumers of Brazil’s manufactured items. Our preliminary forecast for December is a 1.0% increase at the margin. Improving financial conditions since October, employment gains and credit recovery should boost industrial production growth going forward.
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Auto production reached 177.7k in December according to Anfavea, below our forecast (190k). In seasonally adjusted terms (our estimates), production decreased 5.7% mom/sa (-16.8% yoy). While domestic sales decreased 1.7%, exports extended its downward trend declining 3.0%, and stand 49% below the average of 1Q18. In addition, the production breakdown shows a 6.1% decrease in light vehicles and a 1.9% decline in trucks and buses. Also, inventories (measured as days of sales) remained virtually stable in 25.2, above the historical average (23.5). 


Inflation expectedly dipped further at the end of 2018 as fuel and fresh fruit and vegetable prices moderate. Consumer prices fell 0.1% from November to December (+0.1% in December 2017), in line with market expectations. As a result, annual inflation fell 0.2 pp, ending 2018 at 2.6%, a mild increase from the 2.3% in 2017 but still below the central bank’ 3% target. Despite lower headline numbers, core measures ticked up and our diffusion index shows a moderation in downward inflationary pressures. In all, the gradual increase in core inflation, alongside stable nominal wage growth (4.1% yoy in November) and still robust activity in 4Q18 will likely consolidate the case for a rate hike in January. Going forward, we expect the trajectory towards neutrality (rates expected to reach 4.0%-4.5% in 1H20) to remain data dependent.

Inflation will likely remain under control this year. Low inflation readings at the end of 2018 put a downside bias on our 3% inflation forecast for the end of 2019, due to inertia. Nevertheless, a pick up from 2018 is likely, given the expected consolidation of activity (narrowing the output gap) and higher tradable inflation. Next month, the institute of statistics (INE) will present the first inflation data using the new 2018 CPI basket. Revised weights given changes in consumption patterns (relative to 2013, when the current basket was defined), as well as other methodological changes, will likely have an impact on inflation behavior going forward. The new basket will include fewer goods relative to the current version of the index (303 vs. 321).
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Tomorrow’s agenda: INEGI (the statistics institute) will publish CPI inflation for the month of December, which we expect to come in at 0.86% mom. December’s figure is expected to be pressured by tourism-related services and airfares and non-core fruits and vegetables.  Assuming our forecast is correct, headline inflation would increase from 4.71% yoy in November to 5.00% in December.

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