Itaú BBA - Evening Edition - Brazilian Central Bank cuts 50bps and indicates a 25-bp cut in February

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Evening Edition - Brazilian Central Bank cuts 50bps and indicates a 25-bp cut in February

December 6, 2017

The Copom delivered the widely expected outcome, a 50bps rate cut, taking the Selic to 7.0%, an unprecedented low.

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The Copom delivered the widely expected outcome, a 50bps rate cut, taking the Selic to 7.0%, an unprecedented low. The committee signaled, quite clearly, that unless the economy surprises in a major way it will cut the Selic by 25bps, to 6.75% in its next policy meeting, in February 2018. It hints that we are pretty close to the end of the cycle. We will know more about the thinking of the monetary authority with the release of the minutes, next Tuesday, at 8:00 AM (SP time). 

For now we stick with the view that the Copom will cut the Selic to 6.5%, in two 25bps increments, in February and March, rather than in a single 50bps move. But we reckon that absence of progress on the fiscal adjustment and reform agenda would make the second 25bps cut less likely, and hence increase the likelihood that the cycle ends with the Selic at 6.75%. 

According to Anfavea, auto production reached 249k in November, slightly above our forecasts (247k) and down 0.3% mom/sa (our estimates).The 3-month moving average fell 0.4% (s.a.), so the upward trend in auto production is losing steam in 4Q17, following a steep increase since mid-2016. The production breakdown shows the decline was driven by light vehicles (-0.4% mom/sa), while trucks and buses rose 1.8% mom/sa. Both series are highly positive in year-over-year terms (light vehicles: 14.3%; trucks and buses: 10.5%). Exports rose 12.7% mom/sa, while domestic sales fell 3.6% and were down for the second month in a row. The positive figures for exports (28.8% yoy) and domestic sales (14.6% yoy) highlight the improvement since 2016, yet the sector activity level remains well below 2011-2013. Also, inventories (relative to sales) remain in line with the historical average. Our preliminary forecast for industrial production in November rose to -0.4% mom/sa from -0.5%.

The Serasa Experian Index for Retail Activity rose 1.0% mom/sa in November (our seasonal adjustment), extending gains from previous months. The index is up 7.2% year-to-date (seasonally-adjusted), following stable figures throughout 2016 and a steep decline in 2015. The breakdown shows the increase was driven by “supermarkets, hypermarkets, food and beverage” (up 2.3% mom/sa), while the other components posted mixed results. IBGE will release retail sales for October (so the reference is one month earlier than the Serasa index just released) on December 13 – our preliminary forecasts are flat figures for both core and broad retail sales (0.1% mom/sa and - 0.1% respectively). Combining with other indicators, our preliminary forecasts for November core and broad retail sales stand at 1.4% mom/sa and 2.0%, respectively. It’s worth mentioning that the seasonal adjustment for November may still not be capturing the entire “Black Friday” effect of recent years.

The BCB placed the full offering of 14,000 FX swaps. After closing, the central bank announced another roll over auction of up to 14,000 contracts (USD 700 million) on December 7.


Inflation remained close to the upper bound of the central bank’s 2%-4% target range. In November, prices gained 0.18% from the previous month (0.11% one year before), with food prices still dragging inflation down. The monthly gain came in slightly above Bloomberg market consensus and our forecast of 0.12%. The resulting annual inflation tick up to 4.12%, from 4.05% in October, partly affected by unfavorable base effects. Non-tradable inflation (excluding food and regulated prices) has remained broadly stable for nine months at 5.3%, reflecting that in spite of weak internal demand, the inflation slowdown is been restricted by the inertia prevalent in the Colombian economy. Given the higher-than-expected CPI and sticky core prices at the margin, we think the central bank will likely pause the easing cycle in December, resuming interest rate cuts early in 2018.

Given a negative output gap, moderate currency depreciation and less inertia, we see inflation falling in the months ahead, reaching 3.4% in 2018. ** Full Story here.

The central bank of Colombia will publish the minutes of the November monetary policy decision at 5:00 PM (SP time). In the last meeting, the central bank cut the reference rate by 25-bp (to 4.75%). The minutes will likely disclose that the board is convinced that the inflation outlook has improved, while activity is still a concern, thus justifying further easing. A discussion about entering into expansionary monetary policy territory could also appear.


Private consumption slowed down in 3Q17, but still expanded at a solid pace. Tellingly, the print for September was quite strong, in spite of the natural hazards (which led many retail businesses in the affected states to shut down their doors for a few days). The monthly proxy for private consumption grew 3% year-over-year in September, which implies a growth rate of 3% in 3Q17 (from 3.2% in 2Q17). According to calendar-adjusted data reported by the statistics institute, growth was a bit higher in September (3.5% year-over-year) and 3Q17 (3.2% year-over-year, from 4.1% in 2Q17), compared to the headline numbers, but the slowdown was more pronounced with respect to the previous quarter. During 3Q17, lower real wage growth (on a year-over-year basis), less dynamic consumer credit, and softer remittances converted into pesos were drags on consumption.

We expect consumption to continue growing at a solid pace in coming quarters. On a sequential basis, there is an improvement of the real wage bill. Moreover, consumer confidence has shown a sustained improvement (seasonally-adjusted up by 1% month-over-month and 5.6% year-over-year in November, after hitting an all-time low in January). Also, remittances are improving on the back of a solid US economy. On the negative side, consumer credit will likely continue slowing down (4% year-over-year in October, from 4.5% in September and 11.8% at the beginning of the year), due to higher domestic interest rates.
** Full Story here.

INEGI will announce November’s CPI inflation tomorrow at 12:00 PM (SP time). We expect a 1% month-over-month variation (consensus: 1.01%), pressured by energy prices, FX-sensitive services (air tickets and tourism), and non-core food prices, consistent with available data for the first half of the month.


In November, Icare’s business confidence index completed 44 consecutive months in pessimistic territory. Nevertheless, there was a 6 point gain over twelve months (6.2 points in October), indicating that sentiment is on the mend. Total confidence came in at 47.0, the highest November recording since 2013 (49.3). The mining sub-index remains in optimistic territory, but showed a significant deterioration in the month (down to 50.7 from 62.2 in October), in spite of broadly stable copper prices in the month. The confidence index excluding mining is at 46.2, the highest since March 2014. Commercial confidence is still in optimistic territory at 53.9 points (from 50.4 one year ago and 51.8 in the previous month). Meanwhile, industrial confidence increased 5.6 points over the twelve-month period to 45.5 points (46.8 in October) and construction confidence rose 15.8 points to 37.0 points. Part of the basis for our recovery outlook to 2.7% next year (from 1.5% this year) is a confidence improvement that is reflected in an investment recovery. Policy uncertainty ahead poses risks to this baseline scenario.

Inflation for the month of November will be released tomorrow 9:00 AM (SP time). We expect consumer prices to be flat from October (Bloomberg market consensus: 0.1%), leading to an annual inflation of 1.8% in the month. Then, the central bank will publish the trade balance for the month of November at 9:30 AM (SP time). We expect a trade surplus of USD 740 million – slightly higher than the median of market forecasts of a USD 700 million surplus – once again boosted by mining exports.


Auto production fell in November after six consecutive gains. Automotive output fell by 3.7% yoy in November, to 45,228 units. According to our seasonal adjustment output fell 3.0% mom, after dropping 2.0% mom in October. External sales fell by 11.2% yoy in November, to 19,122 units (also after six consecutive gains). Total sales in the domestic market grew 26.0% yoy to 78,631 units, led by imported automobiles. During the first eleven months of the year, auto production rose 1.4% yoy, exports grew by 11.8% and total sales expanded 22.2%.


The Central Bank will publish November’s expectations survey tomorrow. Given the substantial fall of annual CPI inflation in October and November (to 2% and 1.5%, respectively, from 2.9% in September), we believe inflation expectations will adjust downwards. We do not expect significant changes in GDP growth, exchange rate, and monetary policy rate expectations.

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