Itaú BBA - Lower-than-expected mid-month inflation in Brazil

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Lower-than-expected mid-month inflation in Brazil

Maio 27, 2020

We expect deflation of 0.42% in May and a 0.19% increase in June. For 2020, we expect the IPCA to advance 2.0% and 3.0% in 2021

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The mid-month consumer price index IPCA-15 showed a 0.59% deflation in May, printing close to our estimate (-0.56%) and below market expectations (-0.48%).  Drops in fuel prices (-8.5%) and airfares (-27.1%) were worthy of note. Core inflation measures remain low and are slowing down at the margin. Underlying inflation in industrial items fell 0.09%, while the year-over-year change slid to 0.5% from 0.8%. Underlying service inflation also decelerated to 2.8% from 3.2% using the same metric. The next readings for the headline IPCA will likely remain low. We expect deflation of 0.42% in May and a 0.19% increase in June. For 2020, we expect the IPCA to advance 2.0% and 3.0% in 2021. **Full story here.

According to FGV’s monthly survey, industrial confidence advanced 3.2 p.p. in May (to 61.4), after declining 39.3 p.p. in April. This result was slightly better than last week’s preview (+2.4 p.p.), and better than that from the special survey conducted by FGV two weeks ago (-1.2 p.p.). The breakdown shows that this positive result was driven by the expectations component, which increased 5.3 p.p. (to 54.9) after plummeting 46.6 p.p. last month, while the current conditions component increased by 1.2, to 68.6, after registering a 31.4 loss in April. The survey was conducted between May 1st and May 26th, with 974 companies. It is worth mentioning that retail (+6.2 p.p.), consumer (+3.9 p.p.) and construction (+3.0 p.p.) confidence indicators also showed positive results in the month, but are still at a very weak level.

The current account posted a USD 3.8 billion surplus in April, above our forecast (USD 3.2 bn) and market expectations (USD 3.0 bn). The main surprise was the service account, which posted a USD 1.2 bn deficit (from USD 3.3 bn in the year-earlier period). The current account deficit over 12 months narrowed to USD 44.4 bn or 2.6% of GDP (from USD 50.1 bn or 2.9% of GDP). Slower economic activity, a weaker exchange rate and increased social isolation impacted the current account, with strong declines in deficits related to international travel, and profits and dividends. We expect new declines in the current account deficit in the coming months. We forecast a near-zero balance in the next years. **Full story here.

Itaú Daily Activity Index: Our Daily Activity Index has decreased 7.1 p.p. in the last available day (to 66.2), while the 7-day moving average dropped 0.4p.p., to 73.2. The index is down 34% when comparing the latest data available (Saturday, May 23rd) with the first half of March. See our report here.

COVID-19 update: the latest official information from the Ministry of Health is that Brazil has 391,222 confirmed cases (up by 16,324 vs 11,687 from the day before), with 24,512 confirmed deaths (up 1,039, compared to the 807 increase in the day before), which implies a 6.3% mortality rate. There are now 158,593 recovered cases (up by 4,760 vs 3,922). Regarding the ICU occupation, in São Paulo, the rate of beds for COVID-19 patients stands at 88% in the capital (stable) and 75% in the state (from 74%).

Day Ahead: The Economy Ministry announced yesterday that the formal job creation (CAGED) figures from January to April will be released at 10:00 AM (SP time). Other than that, today is the last day for President Bolsonaro to sanction the financial aid package for states and municipalities. Finally, governor of São Paulo state, João Doria, will speak in a press conference at 12:00 PM (SP time), where he will probably provide more details on the new social distancing measures that may be adopted in the state from June 1st onwards.


GDP in 1Q20 was revised to the upside (compared to the flash GDP). Monthly GDP proxy (IGAE) contracted 2.3% yoy in March (from -0.6% in February), above our forecast of -3.1% and market expectations of -3.5% – which implied a GDP contraction of 1.4% yoy in 1Q20 (revised up from the flash estimate of -1.6%, announced by the Statistics Institute four weeks ago, and from -0.7% in 4Q19). The revision came mainly from the industrial (-2.9%, previously: -3.2%) and service (-0.7%, previously: -0.9%) sectors. On an annual basis, these two sectors started showing the negative effects from COVID-19. Using calendar adjusted figures (published by the Statistics Institute), GDP contracted at a sharper pace in 1Q20 (-2.3% yoy, from -0.7% in 4Q19). We expect GDP to contract 8.1% in 2020, dragged down by a deep negative shock in 1H20 and some recovery in 2H20 amid a modest fiscal stimulus. Prevailing uncertainties over the administration’s policy direction is also a drag to the economic outlook. **Full story here.

Day Ahead: The Central Bank of Mexico (Banxico) will publish the quarterly inflation report (4Q19). In this document, Banxico will provide an update of its macro outlook on the Mexican economy. The Central Bank will probably lower their GDP growth forecasts significantly, reflecting the negative shock from the outbreak. It will be key to monitor the changes for the inflation outlook, amid shocks to consumer prices in opposing directions.


The results of the central bank’s financial operator survey show that rates are seen remaining low for longer amid contained inflationary pressures. The one-year inflation outlook ticked up from 1.85% last month to 2.0%, likely reflecting methodology announcements by the statistics agency that pose an upside bias for prices of goods that cannot be satisfactorily measured under current circumstances (through the utilization of a three year geometric average). Nevertheless, the two-year inflation outlook dipped further from 2.77% last month to 2.6%, likely reflecting expectations that the effect of the coronavirus shock to domestic demand would be more enduring than initially expected. In this context, the normalization process for monetary policy is seen to be even more gradual. Rates are expected to remain at 0.5% for the next year, while only reaching 1.0% in two years’ time (1.25% previously). We also see the policy rate on hold for the remainder of the year, and reaching only 1% by the close of 2021 as significant monetary stimulus is required to aid an economic recovery and support the convergence of inflation to the 3% target.


Day Ahead: The trade balance for April will come out at 4:00 PM. We expect to see a full impact of the lockdowns due to the coronavirus, leading to a year-over-year drop in both exports and imports. We forecast a surplus of USD 1.0 billion in April (down from USD 1.2 billion surplus registered in the same month of 2019). If our forecast is correct, the trade surplus accumulated over the last 12 months will fall to USD 17.2 billion from USD 17.3 billion in March 2020.


Day Ahead: The think-tank Fedesarrollo will publish the business confidence indicators for the month of April, which should reflect a continued deterioration of private sentiment. During the month of March, business confidence dropped to historical lows as the Colombian economy shut down amid the Covid-19 crisis. Industrial confidence came in at -35.0% (0 = neutral), 38 p.p. lower than one year ago (+9.8% in February). The previous low was recorded in March 1999. Meanwhile, retail confidence deteriorated pointedly to -30.8% (+27.5% in March 2019 and +28.3% in February), as the outlook for the economic situation in the upcoming semester collapsed.

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