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LatAm markets rocked by oil price slump

Março 9, 2020

This decision is strongly impacting markets worldwide and LatAm is set to follow the same path

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

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The discussions between OPEC members and Russia on oil production reached an unexpected end as Saudi Arabia reduced oil prices by20%, and stated that it will increase its daily production to more than 10 million barrels (currently at 9.7 million). This decision is strongly impacting markets worldwide and LatAm is set to follow the same path. In Brazil, for example, crude oil and derivatives represent about 13% of exports and 10% of imports. The evening edition of this report will feature a note with more details on the expected impacts in the region.


The BCB intervened in the FX market for the third consecutive day on Friday, with an offer of 40,000 swap contracts (USD 2 billion). A new intervention is scheduled for this morning, where the BCB will auction USD 3 billion in the spot market at 9:10 (SP Time).

According to Anfavea, auto production reached 204.2k in February, slightly below our forecast (210k). In seasonally adjusted terms (our estimates), production dropped 1.1% (-20.8% yoy). From a demand standpoint, both exports and domestic sales advanced (+9.3% and +19.3% mom/sa, respectively). Production didn’t follow the sharp increase in sales in February due to high inventories, which dropped 12.8% in the month. The production breakdown shows that light vehicles segment was responsible for the negative figures in February (-1.7% mom/sa), partially offset by the growth in trucks and buses segment (+13.6% mom/sa). Employment in auto production sector decreased 3.8% mom/sa. Our preliminary forecast for February industrial production remained at -0.7% mom/sa. 

Coronavirus update: There are now 25 confirmed cases of coronavirus in Brazil, now reaching 7 states. 


Inflation increased further in February, as prices advanced 0.4% in the month, 0.2p.p. above market consensus. A higher-than-expected rise in transportation division (particularly new vehicles and airfares, both affected by exchange rate depreciation and interurban bus fares) explains the bulk of the surprise to us, while rising food, apparel and housing related expenses also lifted inflation. As a result, annual inflation picked up to 3.9% (3.5% in January), the highest since mid-2016, while core inflation was a still-low 2.7% (up a milder 0.2pp).

The move by the Fed to ease monetary policy amid global economic slowdown makes our call for 50 bps of further easing (to 1.25%) likely. Inflation pass-through pressures are being felt and will keep inflation elevated for the coming months until weakened internal demand, along with anchored inflation expectations and lower oil prices, support a disinflation process. We see a yearend rate of 3.3%, but risks are tilted to a higher print given the recent upside surprises.


The monthly GFI declined 3.0% yoy in December, virtually in line with market expectations (-2.9%). Using figures adjusted by working days, GFI contracted 3.7% yoy (from -3.3% in November), taking the 4Q19 annual growth rate to -5.4% (from -6.8% in 3Q19). The breakdown shows that construction investment fell by 5.5% yoy in 4Q19 (from -4.8% in 3Q19), with both residential and non-residential construction investment contracting, while machinery & equipment investment decreased by 5.2% (from -9.5%).

We expect economic activity to expand 0.7% in 2020. The figures show internal demand in Mexico was weak in 2019. Going forward, we expect internal demand to recover softly in 2020, supported by the fading effect of the government transition on fiscal spending and lower uncertainty after the approval of the USMCA in the U.S. Congress. Still, domestic uncertainties will likely act to curb growth.

Day Ahead: INEGI (the statistics institute) will publish CPI corresponding to the full-month of February. We expect headline and core prices to increase 0.30% MoM (from -0.03% a year ago) and 0.38% (from 0.43% a year ago). Assuming our forecast is correct, headline and core CPI would grow 3.58% YoY (from 3.24% in January) and 3.67% (from 3.73%), respectively. 

The Week Ahead in LatAm


On Thursday, the INDEC (the official statistical agency) will publish the national CPI for February 2020. Elypsis consulting estimated a 1.7% month over-month increase for consumer prices. If this estimation is correct, annual inflation will decelerate to 49.8% in February, from 52.9% in January and 53.8% in December 2019.


February’s IPCA inflation will be released on Wednesday. We forecast a 0.17% monthly increase, leading the 12-month reading to 3.92% (from 4.19% in January). We expect all core inflation measures to remain on a benign path, while food items and electricity bills will likely post the largest downward contribution in the month.

On economic activity, this week’s highlight will be January’s industrial production (on Tuesday), for which we forecast a 0.8% mom/sa increase. Traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for February may also come out this week, without a specified date.


The February trade balance will be released today. Still falling imports along with accelerating mining exports led to a large trade surplus of USD 1.2 billion in January (similar to last year). As a result, a USD 4.3 billion trade surplus was registered in the year ending in January (USD 4.2 billion in 2019 and USD 4.7 billion in 2018). For February, we will likely see the effects of trade disruption (amid the coronavirus spread). While both exports and imports are expected to drop sharply, indications are that the impact from lower fuel prices and weakened consumer goods imports (on the back of a CLP depreciation) would outweigh hampered mining sales and lead to another large trade surplus of USD 1.0 billion (USD 0.2 billion one year earlier).


On Friday, activity indicators for the month of January will be released. Activity growth in the final month of 2019 improved from the protest-hit month of November. Retail sales increased 7.1% yoy (4.4% previously). Meanwhile, manufacturing rebounded to 3.2% yoy (-1.5% previously), partly aided by a low base of comparison and a favorable calendar effect. Overall, consumption-related activity, supported by credit growth, drove activity last year, while manufacturing failed to capitalize on a weaker COP (partly due to a softer global demand). We expect still upbeat retail sales growth of 7.8% over twelve months, aided by a car sales rebound and a low base of comparison, while our call for manufacturing is mild growth of 1.2%.


Ending the week, the Statistics Institute (INEGI) will publish January’s industrial production.  We estimate industrial production fell by 1.8% YoY (from -1.0% in December). We expect the mining sector to recover, associated to some stabilization in the oil output.  Likewise, we also expect manufacturing sector to improve somewhat, in line with the expansion of January’s manufacturing exports. In contrast, we expect construction output remained weak (public capital expenditure execution contracted 15.2% year over year in real terms). 


On Thursday, the Central Bank of Peru (BCRP) will publish its March’s monetary policy meeting. We expect the BCRP to cut its policy rate by 25-bps (reaching a rate of 2.00%). Soft economic activity, amid rising downside risks for global economic activity, below-target inflation and the recent rate cut by the Fed, increases the odds of the BCRP easing monetary policy further.

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