Brazilian services sector real revenue disappoints

The year-over-year growth came at -1.3%, well below consensus and our forecasts (0.9% and 2.0% yoy, respectively).

Talk of the Day

Brazil

According to the IBGE’s monthly services survey (PMS), services sector real revenue fell 1.9% mom/sa in January. The year-over-year growth came at -1.3%, well below consensus and our forecasts (0.9% and 2.0% yoy, respectively). The breakdown shows mom/sa declines in 4 out of 5 sectors, meaning the weakness was disseminated. It is worth mentioning that the survey encompasses approximately 34% of the services GDP, so it should not be seen as an indicator for the whole services sector.

Copom Cockpit: one more stimulus. The Brazilian Central Bank’s Monetary Policy Committee (Copom) meets again this week. Recent data continue to show an environment of low inflation and anchored expectations, in a context of consistent recovery of economic activity, which is becoming increasingly widespread. Copom’s inflation forecasts will likely recede for 2018 and 2019 compared to those reported in the last meeting. We expect a 25-bp cut after its meeting on March 20 and 21. This reduction is compatible with the surprises relative to the central bank’s inflation expectation for 2018 disclosed at the last monetary policy meeting. In our view, data released since then appear to compose enough of a surprise to lead the Copom to deviate from its original flight plan and add one more stimulus at the next meeting. While weaker inflation and economic activity data justify this cut, we do not expect the monetary policy rate to fall below 6.5%, as the Copom continues to see convergence of inflation towards the target in 2019. The recovery of economic activity, the lagged effects of monetary policy – which will likely continue to bring additional momentum to the economy – and the balance of risks in the international scenario – which has become less favorable recently due to the outlook of further monetary tightening in the US – also point in this direction. ** Full Story here.

Itaú Unibanco monthly GDP declines 0.4% in January. In the quarter ended in January, our indicator expanded 0.4% (compared to the quarter ended in October). Breaking down by components, 8 out of 13 indicators that form the monthly index posted declines. For February, based on already released coincident indicators, we forecast, for the time being, an increase of 1.2% mom/sa in PM-Itaú. ** Full Story here.

Macro Vision: Itaú Activity Index for Brazilian States. This report launches an economic activity index for each Brazilian state. Series are available on a monthly basis, until December 2017. With these indexes, analysis of the level of economic activity can be broken down by state after 2015 (the most recent year for which official data for states were published) and with greater frequency than that provided by the official indicator calculated by census bureau IBGE. The recovery in activity in 2017 was more pronounced in Mato Grosso, Amazonas, Pará, Roraima and Pernambuco. Five states have not yet signaled a recovery: Alagoas, Paraíba, Mato Grosso do Sul, Rio de Janeiro and Espírito Santo. ** Full Story here.

Day Ahead: The central bank will release January’s monthly activity index (IBC-Br) at 8:30 AM (SP Time). We forecast a 1.0% monthly decline, which translates into a 2.5% year-over-year increase.  The Central Bank also announced a FX swap rollover auction of up to 14,000 contracts.

Week Ahead:  Besides Brazilian Central Bank’s Monetary Policy Committee (Copom) meeting, the key release will be March’s IPCA-15 on Friday. We forecast a 0.12% monthly increase, with the year-over-year reading reaching 2.82% coming from 2.86% in February. February balance of payments data will also come through on Friday. We forecast a current account surplus of USD 2.0 billion. Foreign direct investment (FDI) will likely amount to USD 4.5 billion in February. Additionally, February’s CAGED formal job creation may come through during the week (release date not yet specified), for which we forecast a net creation of 110k jobs. ** Read our full week ahead note below.

Argentina

Control of primary expenditures and a strong revenue performance led to a new year-over-year drop in the primary fiscal deficit in February. The treasury posted a primary deficit of ARS 20.2 billion in February, from ARS 26.7 billion deficit in the same month one year before. As a consequence, the 12-month rolling primary balance posted a deficit of ARS 397.3 billion, from ARS 403.8 billion in January. We estimate a decline in the primary deficit as a percentage of GDP to 3.7% from 3.9% in the previous month. Total revenues grew 26.7% yoy (1% in real terms) in February thanks to strong tax revenues. Primary expenditures rose 18.4% yoy as cuts in energy subsidies (-30.5%) and capital expenditures (-15.0%) partially offset higher pension payments (34.3%), and wages increased (16.3%). In this way, real primary expenditures fell by 5.7% yoy.

The government is on course to meet its deficit target for 2018. Last year, the treasury posted a deficit of 3.9% of GDP, 0.3% lower than the official target of 4.2%. The government’s goal is to reduce the primary deficit to 3.2% of GDP this year, which implies a fiscal consolidation of 1.1% of GDP, excluding the extraordinary tax-amnesty revenues collected in 2017. We expect the treasury to meet the target this year due to continued efforts to slash subsidies, higher tax collection with the economic recovery and recent changes in the pension-adjustment formula. ** Full Story here.

Week Ahead: On Tuesday, statistics institute (INDEC) will release the unemployment rate for 4Q17. We expect a year-over-year decline in the unemployment rate to 7.3%. If our forecast is correct, the unemployment rate fell to 8.3% on average in 2017. On Wednesday, the GDP figures for 4Q17 will see the light. We forecast a 2.9% GDP expansion for 2017. The trade balance for February will come out also on Wednesday. We expect a trade deficit of USD 1.0 billion in February. Moreover, INDEC will release the current account balance for 4Q17 on Thursday. We estimate the current account deficit at 5.5% of GDP in 2017. ** Read our full week ahead note below.

Chile

Day Ahead: The central bank will publish the National Accounts data for the final quarter of 2017 at 8:30 AM (SP Time). In line with the monthly GDP proxy, we expect activity gained 0.5% from 3Q17 (1.5% previously), leading to annual GDP growth of 2.9%, and 1.6% growth for 2017. At the same time, the central bank will also publish the 4Q17 current account balance. We expect a USD 500 million deficit.

Week Ahead: On Tuesday, the central bank of Chile will hold its March monetary policy meeting. We expect the board to keep the policy rate at 2.5. In the central bank’s new meeting format, the quarterly Inflation Report will be published on Wednesday morning. We expect the baseline scenario to make an upgrade to growth and a mild downgrade to inflation. Overall, the baseline scenario of stable rates until at least the back-end of the year will likely persist as the board waits for the output gap to narrow. ** Read our full week ahead note below.

Colombia

Week Ahead: The trade balance for the January will be published on Tuesday. As exports came in at USD 3.2 billion in January, our expected USD 3.9 billion (CIF) for imports would yield a trade deficit of USD 540 million. On Tuesday, the board of the central bank will hold its March monetary policy meeting. Having cut the policy rate to 4.5% in January, the central bank communicated the end of the easing cycle given the economic expectations at that point. We expect the central bank to stay on hold this month given the proximity to the congressional election results and some promising signs from January activity data. Nevertheless, we still see room for more easing ahead as a swift disinflation process unfolds, the current account deficit adjustment proceeds and activity concerns have not fully disappeared. On Thursday, the national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of January. With activity indicators in the month coming in mixed (but aided by low base effects), we expect the coincident indicator to post growth of 2.0% yoy/sa. ** Read our full week ahead note below.

Mexico

Week Ahead: On Wednesday, statistics institute (INEGI) will publish Q4’s aggregate supply, whose growth we estimate at 2.9% year-over-year. Also, INEGI will publish CPI inflation figures for the first half of March on Thursday. We expect bi-weekly inflation to post 0.19%. Assuming our forecast is correct, CPI inflation would decrease to 5.07% year-over-year. Lastly, INEGI will publish January’s monthly GDP proxy (IGAE), whose growth we expect to accelerate to 2% year-over-year. ** Read our full week ahead note below.

The Week Ahead in LatAm 

Argentina

On Tuesday, the INDEC will release the unemployment rate for 4Q17. Consistent with the economic growth registered last year, we expect a year-over-year decline in the unemployment rate to 7.3% from 7.6% in 4Q16. If our forecast is correct, the unemployment rate fell to 8.3% on average in 2017, from 8.5% in 2016.

On Wednesday, the GDP figures for 4Q17 will see the light. According to the EMAE (a monthly GDP proxy), activity rose 3.0% year over year in that quarter (+0.3% QoQ/sa), leading to a 2.8% increase last year. We forecast a 2.9% GDP expansion for 2017.

The trade balance for February will come out also on Wednesday. We expect a trade deficit of USD 1.0 billion in February, larger than the USD 217 million deficit registered in the same month of 2017. If our forecast is correct, the rolling 12-month trade deficit will rise to USD 10.2 billion from USD 9.4 billion in January.

The INDEC will release the current account balance for 4Q17 on Thursday. The current account deficit deteriorated to USD 8.6 billion in 3Q17 from USD 2.6 billion in 3Q16. We expect a further deterioration of the current account balance in 4Q17, mainly due to a narrowing trade balance. We estimate the current account deficit at 5.5% of GDP in 2017.

Brazil

The Brazilian Central Bank’s Monetary Policy Committee (Copom) meets again next week. Recent data continue to show an environment of low inflation and anchored expectations, in a context of gradual recovery of economic activity, which is becoming increasingly widespread. This reduction is compatible with the inflation surprises regarding the BCB’s expectation for the IPCA inflation in 2018 disclosed at the most recent monetary policy meeting. We understand that the Copom’s statement and minutes in February signaled the possibility of an additional moderate adjustment if the risk of low inflation intensified, which eventually materialized. In our view, data released since appear to compose enough of a surprise to lead the Copom to deviate from its original flight plan and add one more stimulus at the ne xt meeti ng.

March´s IPCA-15 will be released on Friday. We forecast a 0.12% monthly increase, with the year-over-year reading reaching 2.82% coming from 2.86% in February. The strongest contributions will probably come from health and personal care (+5bps), transportation (+4bps), and housing (+3bps). On the other hand, we see negative contributions from food (-3bps) and communication (-1bp).

On economic activity, February’s CAGED formal job creation may come through next week (release date not yet specified), for which we forecast a net creation of 110k jobs. Our forecast implies a creation of 40k formal jobs on seasonal adjusted terms, improving the 3-month s.a. moving average to 52k from 46k. In addition, the BCB will release January’s monthly activity index (IBC-Br) on Monday, for which we forecast a 1.0% monthly decline, which translates into an 2.5% year-over-year increase. Finally, FGV’s business confidence surveys for March on industry (preview) and consumer will be released on Wednesday and Friday, respectively.

February balance of payments data will come through on Friday. We forecast a current account surplus of USD 2.0 billion, coming from USD 947 million deficit in February last year. This better result is due to (i) the stronger trade surplus that resulted from an oil platform export early in the month and (ii) unusually higher revenues in the profits and dividends account in February (as well as in January). Over 12 months, the current account deficit should reach USD 6.2 billion (0.3% of GDP). Despite the good result at the margin, we do not expect current account surpluses throughout the year. The rebound of economic activity and the amount of foreign investments in Brazil should pressure the profit and dividends account  and also reduce trade surpluses in the coming months. Finally, foreign direct investment will likely amount to USD 4.5 bn in Fe bruary. With that, 12-month FDI is set to retreat to USD 65 bn.

Chile

On Monday, the central bank will publish the National Accounts data for the final quarter of 2017. Activity growth in the quarter is set to be the highest of the year as consumption benefitted from low interest rates, elevated real wage growth (due to low inflation), and mining was favored by elevated copper prices. Investment will improve – after five quarters of contraction – as imports of machinery and equipment continued to rise and the construction index posted some recovery in the quarter. Hence, in line with the monthly GDP proxy, we expect activity gained 0.5% from 3Q17 (1.5% previously), leading to annual GDPgrowth of 2.9%, up from the 2.2% in 3Q17, and 1.6% growth for 2017 (in line with 2016).

The central bank will also publish the 4Q17 current account balance. We expect a USD 500 million deficit, smaller than the USD 700 million deficit one year earlier, mainly on the back of a larger trade surplus (USD 2.2 billion in 4Q17, after USD 1.4 billion in 4Q16) as a mining production recovery and higher commodity prices aided exports.

On Tuesday, the central bank of Chile will hold its March monetary policy meeting. We expect the board to keep the policy rate at 2.5%. Inflation was muted at the start of the year and activity is showing favorable signs of a recovery.

In the central bank’s new meeting format, the quarterly Inflation Report will be published on Wednesday morning. We expect the baseline scenario to make an upgrade to growth and a mild downgrade to inflation. Overall, the baseline scenario of stable rates until at least the back-end of the year will likely persist as the board waits for the output gap to narrow. Of note would be whether the communication drops the easing bias, or retains it in a more cautious approach as the effects from the strengthened exchange rate remain to be evaluated.

Colombia

The trade balance for the January will be published on Tuesday. A USD 485 million trade surplus was recorded at the close of 2017, the first surplus since August 2014 as recovering commodity prices aided exports. As a result, a USD 6.2 billion trade deficit was registered in 2017, narrowing from USD 11.1 billion in 2016, and the best outcome since the USD 2.2 billion surplus recorded in 2013. The improvement in the energy balance continues to explain the bulk of the narrowing in the trade deficit, while the non-energy balance has been broadly stable since the end of 2016. As exports came in at USD 3.2 billion in January, our expected USD 3.9 billion (CIF) for imports would yield a trade deficit of USD 540 million, compared to the USD 754 million deficit one year before.

On Tuesday, the board of the central bank will hold its March monetary policy meeting. Having cut the policy rate to 4.5% in January, the central bank communicated the end of the easing cycle given the economic expectations at that point. We expect the central bank to stay on hold this month given the proximity to the congressional election results and some promising signs from January activity data. Nevertheless, we still see room for more easing ahead as a swift disinflation process unfolds, the current account deficit adjustment proceeds and activity concerns have not fully disappeared.

The national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of January on Thursday. The ISE indicator grew 1.3% in the month of December, in line with the 1.4% recording for 4Q17 (1.9% in 3Q17). With activity indicators in the month coming in mixed (but aided by low base effects), we expect the coincident indicator to post growth of 2.0% yoy (adjusted for calendar effects).

On Thursday, think-tank Fedesarrollo will release the February Industrial and Retail confidence indices. In January, both sub-indexes of business confidence were below levels recorded one year earlier, but some positive signs persist. According to think-tank Fedesarrollo, industrial confidence came in at an indifferent 0%, the first time out of pessimistic ground since January last year (+1.9%). Meanwhile, retail confidence remains in optimistic territory (21.8%) and near the historical January average. Higher real wages (as inflation falls) and lower interest rates, along with a favorable external environment, will likely aid a confidence improvement.

Mexico

In the middle of the week, the statistics institute (INEGI) will publish Q4’s aggregate supply whose growth we estimate at 2.9% year-over-year (up from 2.5% in 3Q17). We already know that real GDP expanded 1.5% year-over-year in 4Q17. Moreover, based on balance of payments data, we estimate that real imports of goods and services expanded 6.9% year-over-year in 4Q17.

INEGI will publish CPI inflation figures for the first half of March on Thursday. We expect bi-weekly inflation to post 0.19%, driven by higher prices for core services and non-core food. Assuming our forecast is correct, CPI inflation would decrease to 5.07% year-over-year (from 5.23% in the second half of February).

Lastly, INEGI will publish January’s monthly GDP proxy (IGAE) whose growth we expect to accelerate to 2% year-over-year (after growing at a poor 1.1% in December). We already know that industrial production picked up to 0.9% year-over-year in January (from -0.7% in December). Moreover, formal employment accelerated and inflation decreased probably bolstering services sectors.

Fuente: ITAU

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