Brazilian Central Bank minutes: near the end

The minutes outline a flight path for the Selic to remain stable at the current 6.75% throughout this year.

Talk of the Day  


According to the Copom, the batch of economic data released since the last policy meeting shows a “consistent” economic recovery, a stronger view compared to the description of a gradual recovery in previous meetings. This update had already been communicated in the meeting statement. The economy is still working with ample slack, as shown by capacity utilization indices and, specially, the unemployment rate. The external scenario is still deemed to be favorable, as the recovery in economic activity becomes global and supports risk appetite in emerging economies, despite the recent volatility of financial conditions in advanced economies. Inflation is still considered to have behaved to a large extent as expected. Price dynamics have remained favorable, with several core measures at comfortable or low levels, including in components more sensitive to the economic cycle and monetary policy. This message was already present in previous communication, and hints that inflation may be a tad lower than what is envisaged in its expected convergence path towards the target.

The minutes outline a flight path for the Selic to remain stable at the current 6.75% throughout this year.However, if local inflation keeps surprising to the downside, and there is less concern about the outlook for monetary policy in the U.S., the Copom might opt for adding more stimulus. Since we do not count, for now, on this scenario materializing, we stick to the view that 6.75% pa is the resting place of the Selic at the end of this cycle – and we expect the rate to remain at said level until at least the end of the year. We need to monitor high frequency inflation data in Brazil (and the US), the extent to which these figures impact expectations and the prospective scenario, in order to check whether the Copom might implement another 25-bp cut. ** Full Story here.

The Serasa Experian index for retail activity fell 0.1% mom/sa in January (our seasonal adjustment), leading the 3-month moving average to decline 0.2%. The index is up 6.0% yoy. The breakdown shows month-over-month (seasonally adjusted) declines in 4 out of 6 categories: supermarkets (-0.8%), furniture & appliances (-0.8%), vehicles & parts (-2.5%) and construction material (-3.0%). Meanwhile, apparel rose 9.1% mom/sa, partially offsetting the steep decline in the previous month. Combining with other indicators, our preliminary forecasts for January core and broad retail sales stand at 0.5% and 0.0% mom/sa, respectively.

Day Ahead: December’s Service Sector Survey (PMS) will be released at 9:00 AM (SP Time). We expect the headline to increase 0.3% year-over-year (market consensus: -0.4%). The Central Bank announced another FX swap rollover auction, tendering up to 9,500 contracts (USD 575 million).


Inflation started the year on a bad note. Consumer prices rose 1.8% from December to January, slightly below market expectations of 1.9% (according to a Bloomberg survey). The reading showed a deceleration from the previous month, when increasing regulated prices led the index to gain 3.1% MoM, but remained above rates seen in the same month one year prior (1.6% MoM) and similar to the monthly average registered in 2017 (1.9%). As a consequence, the annual reading jumped to 25% in January, from 24.8% in December 2017. The core rose by 1.5% MoM (21.1% YoY), below the 1.7% reading for December 2017, but above the 1.3% reading registered in November and October 2017.

The evolution of inflation and inflation expectations in the coming months will remain key factors in decisions to resume interest rate cuts. We expect no change in the monetary policy meeting in the very near term, given that the upcoming CPI reading for February will likely be unfavorable due to tariff adjustments amid the wage negotiation season. ** Full Story here.


Activity in 2017 was the weakest since the global financial crisis, but data revisions led to an upside surprise. Activity in the final quarter of 2017 came in line with our 1.6% yoy expectation (Bloomberg market consensus: 1.8%). It was a slowdown from the upwardly revised 2.3% in 3Q17 (2.0% previously). Despite posting a third consecutive quarter of growth at the margin, activity slowed down at the close of the year. GDP decelerated to 1.1% qoq/saar in 4Q17 (3.1% in 3Q17; 2.6% in 2Q17), pulled down by agriculture, mining and transport, while utilities, financial and social services commerce were drivers. GDP growth was 1.8% last year (above our 1.5% forecast), a slowdown from the 2.0% in 2016 and similar to the 1.7% recorded in 2009. Widespread revisions to activity, in particular to mining, commerce and social services, lifted accumulated growth in the first three quarters of the year by 0.3 percentage points, to 1.5%. The growth slowdown in 2017 is mainly explained by weaker manufacturing (a 1% fall vs. +3.4% in 2016), construction (-0.7% vs. +4.5% previously), commerce (+1.2% from 2.6% in 2016) and financial services (3.8% vs. 4.4% one year earlier). Mining activity contracted for a third year in the last four, but moderated its drag on activity with a fall of 3.6% (vs. the 7.0% drop in 2016).

We expect activity to post some recovery this year. Growth of around 2.5% would come amid an improvement in real wage growth (with the advancement of disinflation), an expansionary monetary policy and, more importantly, favorable external conditions (supporting oil prices). Risks to our scenario include a weak labor market and uncertainty around the political cycle, which could limit a recovery of investment. While growth for the year exceeded the central bank’s 1.6% forecast, risks to the expected recovery this year leave the door open to additional easing.
** Full Story here.

Consumer confidence started 2018 still in pessimistic territory, but the recent improvement persists.Consumer confidence completed 25 months in pessimistic territory (0 is neutral), but is at the least pessimistic level since November 2016 and registered a 25 point improvement over twelve months. Think-tank Fedesarrollo’s consumer sentiment index came in at -5.4 points, from the -30.2 points one year before (the most pessimistic print in this cycle) and similar to the -6.0 in the previous month. Explaining most of the improvement from January 2017 is the sub-index that covers economic conditions (to -6.6 points from -33.1 one year ago and -7.3 in December), and in particular the sub-index covering the economic well-being of a household versus a year prior. Meanwhile, consumers’ economic expectations improved to -4.6 points from the -28.3 one year earlier (-5.1 in December). We believe a number of factors will result in a continued consumer confidence improvement. Real wage growth progress (as disinflation unfolds) and an expansionary monetary policy (easing cycle ending at 4%) will support this confidence recovery. Additionally, strengthening external demand (supporting higher average oil prices) will likely drive an activity rebound.

Inflation expectations are broadly anchored to the 3.0% target. According to the central bank’s monthly survey, the 2018 inflation expectation edged down to 3.40% (3.46% previously; Itaú: 3.3%), while the 1-year horizon outlook inched to 3.36% (3.40% previously). The 2-year horizon inflation expectation remained low at 3.11% (3.12% in January). Expectations for core inflation measures (excluding food prices) are at 3.3% for a 1-year horizon (3.4% previously), while ticking up to 3.2% for the 2-year horizon. Despite the announcement by the central bank the easing cycle is over, analysts still see room for one additional 25-bp cut to 4.25% (Itaú: 4.0% cycle end), expected in May (a month when the board is scheduled not to make a policy rate move as it moves to 8 decision meetings per year). The policy rate is seen staying at 4.25% until at least January 2019. We believe that more easing will come as a negative output gap and a stronger currency will likely contribute to target-bound disinflation. Additionally, the uncertainty around the political cycle could hamper investment and further dampen the still-sluggish economic growth. Furthermore, the current account deficit is narrowing more rapidly now.


The economic recovery stumbled in 4Q17, dragged by the delay of the fishing season (the beginning of which was postponed to January 2018, from November 2017) and, to lesser extent, the uncertainty triggered by the impeachment vote (which affected public investment in the last two weeks of the year).The GDP proxy expanded 1.3% year-over-year in December, closer to our forecast (1.4%) than to median market expectations (2%, as per Bloomberg). According to our numbers, this implies growth of 2% year-over-year in 4Q17 (from 2.5% in 3Q17) and 2.3% for the full-year 2017 (from 4% in 2016). However, the statistics institute (INEI) has also announced that GDP growth in 2017 was 2.5%, which means that the GDP time series (not available yet) was revised backwards. At the margin, momentum also weakened in 4Q17. The seasonally-adjusted GDP proxy, as per the statistics institute’s (INEI) report, gained 0.7% from the previous month.

In spite of the poor performance in 4Q17 – mainly attributable to one-off effects – we still expect a significant acceleration of GDP growth in 2018 (to 4%). Our expectation is based on the positive effects of higher terms of trade (driven by metal prices), expansionary macroeconomic policies (mostly fiscal, but also monetary), and – to lesser extent – some rebound in infrastructure investment (mainly Line 2 of Lima’s subway, Lima’s airport expansion, and the Majes Siguas II irrigation project). Domestic political uncertainty, nevertheless, is a relevant risk (as it will likely curb the growth of investment to some extent).
** Full Story here.

Fuente: ITAU

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