Based on current information, our preliminary forecast for the headline IPCA in March is a 0.13% increase (2.72% yoy).
Talk of the Day
The IPCA-15 result in March (0.10%) printed in line with our estimate (0.12%) and the median of market expectations (0.11%). The index rose 0.38% in the previous month and 0.15% in March 2017. The IPCA-15 went up 0.87% in 1Q18, down from 1.00% in 1Q17. The year-over-year change slid to 2.80% from 2.86% in February. According to census bureau IBGE, this was the lowest March reading since 2000. Market-set prices moved 0.02% in March and the year-over-year change remained at 1.4%. Regulated prices climbed 0.35% during the month and the year-over-year change slid to 7.2% from 7.4% in February. Breaking down by product groups, the largest upward contributions during the month came from healthcare and personal care (0.07 p.p.) followed by housing (0.02 p.p.). In the former group, the biggest upward contribution came from health insurance premiums (0.04 p .p.). In contrast, food and beverages (-0.02 p.p.) and communication (-0.01 p.p.) posted negative contributions.
Based on the IPCA-15 report and other current information, our preliminary forecast for the headline IPCA in March is a 0.13% increase, with the year-over-year rate slowing down to 2.72%. The biggest upward contributions will come from healthcare and personal care, and housing. For the full year, our estimate for the IPCA remains at 3.5%. ** Full Story here.
The current account posted a $283 million surplus in February, narrower than our estimate ($2.0 billion) and below market consensus ($475 million). Over 12 months, the current account deficit receded to $7.8 billion or 0.4% of GDP. The seasonally-adjusted annualized three-month moving average declined to $6.5 billion in February from $15 billion in January. The trade balance posted a $4.6 billion surplus, increasing somewhat from $4.4 billion in February 2017.
In the financial account, direct investment in the country (DIC) added up to $4.7 billion, slightly above our estimate and market consensus (both at $4.5 billion). Equity capital transactions totaled $4.1 billion and accounted for 87% of total DIC. DIC accumulated over 12 months was stable at $65 billion (3.1% of GDP), and remains the main source of financing for the current account deficit. Preliminary data published by the Central Bank show $3.5 billion DIC inflows as of March 21.
All in all, the current account deficit remains low thanks to the good performance of the trade balance and favorable results in the profit and dividends account in the past two months. Despite a good headline at the margin, we do not expect the current account deficit to remain so low throughout the year. The stock of foreign investments in Brazil will pressure the profits and dividends line in 2018, while the rebound in activity tends to shrink trade surpluses. We anticipate weaker results in the next few years, but not to the point of jeopardizing the sustainability of external accounts. In terms of financing, DIC is easily covering the current account deficit. Portfolio flows (to fixed income and stocks) were negative during most of 2017, but now post inflows over 12 months. ** Full Story here.
Tax collection came at BRL 105.1 billion in February, a little above our call (BRL 103.4 billion) and in line with market expectations (BRL 105.5 billion). Tax collection increased 10.7% yoy in real terms in the month. The recovery in tax collection reflects the improving economic activity, but is also influenced by higher fuel taxes. Excluding revenues from the REFIS/PRT tax amnesty regime, tax collection keeps a good pace. Real revenues increased 10.0% y/y in real terms in the month, with the 3-mma going to 5.2% from 3.8% in January. In 2018, tax collection should keep growing above GDP (1.25 elasticity), especially due to outperforming revenues that depend on consumption (PIS/COFINS, IPI) compared to more modest gains in revenues related to the wage bill (IRPF, social security) given the slower recovery in formal job market.
According to data anticipated by local newspapers, CAGED formal job creation came in at 61.2k in February, below our call and the market’s (both at +110k). According to our seasonal adjustment, net job closings reached 6k, the first negative print since September, 2017, taking the 3-month moving average to +33k (from +42k). As the months of December through February are those of more pronounced and unstable seasonality, the next prints will be key to monitor whether the results of January and February were noise (our view) or signs of interruption of the formal employment gradual improvement. Importantly, our scenario considers that monthly job creation will reach approximately +100k formal jobs still in the first half of the year, as we continue to expect the economic recovery to further impact the formal labor market positively in the coming months.
According to FGV’s monthly consumer survey, consumer confidence rose 5.3% mom/sa in March to 92.0, reaching the highest level since September 2014 and resuming the upward trend shown since 1Q16. The current condition index rose 4.5% and expectations rose 5.2%. Expectations are still well above current conditions. Intention to purchase durable goods rose 6.3% and reached the highest level since October 2014. The component of expected inflation fell further and continues to test new lows. The percentage of people reporting that jobs are hard to get fell 2.1 p.p. to 91.6%.
Day Ahead: The Central Bank announced a FX swap rollover auction of up to 14,000 contracts for today.
Week Ahead: The Copom minutes (on Tuesday) and the BCB Inflation Report (on Thursday) will likely shed more light on the authorities’ flight plan for monetary policy. We revised our end-cycle call to 6.25% pa, and we will wait for the policy meeting minutes for extra clues on the authorities’ thinking. The national unemployment rate will be released on Thursday – we expect it to increase 0.4 p.p. to 12.6% (declining 0.1 p.p. in seasonally adjusted terms). The central government´s result will be released on Tuesday. Our forecast is a BRL 20.0 billion primary deficit. The consolidated public sector result will be released on Wednesday, for which we expect a BRL 17.2 billion deficit. ** Read our full week ahead note below.
Mexico’s GDP growth slowed down to 2% in 2017 (from 2.9%) and the GDP proxy began 2018 growing around the same pace. The GDP proxy (IGAE) expanded 2.2% year-over-year in January, above our forecast and median market expectations (both 2%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was lower (1.2%) but the three-month moving average growth rate picked to 1.7% year-over-year (from 1.6% in December). Looking at the same metric (3-month moving average calendar-adjusted), services output accelerated slightly (to 2.6% year-over-year, from 2.5%), industrial output moderated its contraction (to -0.5% year-over-year, from -0.8%), and the volatile primary sectors (mostly agriculture) slowed down (3.5% year-over-year, from 4.9%).
We expect GDP growth to slow down to 1.8% in 2018, from 2% in 2017, mainly dragged by falling investment (which, on the supply-side, should be reflected on weaker construction). The factors playing against activity are the uncertainties associated to NAFTA and elections (which put investment decisions on hold) and tight macro policies (both fiscal and monetary). On the buffer side, however, the acceleration of the U.S. will likely boost Mexican manufacturing exports, falling inflation will support real wages (and probably prevent a further slowdown of consumption), and smaller budget cuts (relative to 2017) will imply a smaller fiscal drag on the economy. ** Full Story here.
Day Ahead: The statistics institute (INEGI) will announce January’s retail sales at 11:00 AM (AP Time). We estimate that retail sales accelerated to 2% year-over-year.
Week Ahead: INEGI will announce February’s trade balance on Tuesday. We expect the trade deficit to narrow. At the same time, INEGI will announce February’s unemployment rate. We expect the unemployment rate to post 3.2%. On Wednesday, the Ministry of Finance (Hacienda) will announce February’s fiscal balance. We expect the fiscal deficit indicators to continue narrowing, as the fiscal consolidation plan enters its final year (aiming at an ambitious 0.9% of GDP primary surplus). ** Read our full week ahead note below.
Week Ahead: On Tuesday, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate. We do not expect changes during the next meeting, given the challenging inflation environment amid wage negotiations. Statistics institute (INDEC) will publish, on Wednesday, the EMAE (official monthly GDP proxy) for January 2018 – for which we expect activity to grow 2.5% year-over-year (0.2% mom/sa) – and manufacturing and construction data for February. ** Read our full week ahead note below.
Week Ahead: On Thursday, the national statistics agency (INE) will publish the industrial activity indicators for February. We expect manufacturing production to recover to 6.0% year over year (5.7% previously). Also on Thursday, INE will release the national unemployment rate for the quarter ending in February. We see the unemployment rate reaching 6.5% in the quarter, with eyes focused on private salaried employment growth. ** Read our full week ahead note below.
Week Ahead: On Wednesday, the institute of statistics (DANE) will release the unemployment rate for February. We expect the urban unemployment rate to come in at 10.8% in February from 11.0% recorded in the same month of 2017, resulting in a national unemployment rate of 10.4% (10.5% one year prior). ** Read our full week ahead note below.
The Week Ahead in LatAm
On Tuesday, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate. The central bank left its benchmark interest rate (7-day repo rate) unchanged at 27.25%, for the third consecutive time at its first monetary policy meeting held in March. The tone of the latest statement was once again cautious, signaling no willingness to cut interest rates in the short term. We do not expect changes in the next meeting given the challenging inflation environment, amid wage negotiations.
On the activity front, the INDEC will publish several indicators on Wednesday. The most important is the EMAE (official monthly GDP proxy) for January 2018. We expect activity to grow 2.5% year-over-year (0.2% mom/sa) after gaining 2.0% in December (0.6% adjusted by seasonality). Also, manufacturing and construction data for February will see the light. According to the IPI (a private index released by OJF consulting firm), manufacturing rose 8.5% year over year in February, while construction activity continued rising according to private indicators.
Next week, the Copom minutes (Tuesday), and the BCB inflation report (Thursday) will likely shed more light on the authorities’ flight plan for monetary policy. In its last meeting, the Copom delivered, unanimously, the expected 25-bp rate cut, taking the Selic to an unprecedented 6.5%pa level. The committee indicated that its base case, as of now, is an additional rate cut in its next meeting, to 6.25%pa, with a view towards mitigating the risk of a slower than anticipated convergence to the target. We revised our end-cycle call to 6.25%pa, and we will wait for the policy meeting minutes for extra clues on the authorities’ thinking.
On economic activity, the highlight will be February’s job market data. The national unemployment rate will be released on Thursday – we expect it to increase 0.4 p.p. to 12.6% (declining 0.1 p.p. in seasonally adjusted terms). FGV’s business confidence surveys for March on construction, commerce, industry (the preview was released a few days ago), and services, as well as the economic uncertainty indicator, also for March, will be released through the week.
Finally, on fiscal accounts relative to February, the central government´s result will be released on Tuesday, our forecast is BRL 20.0 bn primary deficit. The consolidated public sector result will be released on Wednesday for which we expect a BRL 17.2 bn déficit.
On Thursday, the national statistics agency (INE) will publish the industrial activity indicators for February. The Manufacturing and mining components started 2018 with vigor. In February, mining will remain a clear driving force as copper prices stayed elevated and production encountered a very low base of comparison given the extended labor strike at a principal mine last year. Meanwhile, signs of recovering internal demand and strengthening global growth will aid a manufacturing improvement. Available data for the month shows electricity generation expanded 5.5% year over year (3.7% previously). We expect manufacturing production to recover to 6.0% year over year (5.7% previously).
Also on Thursday, INE will release the national unemployment rate for the quarter ending in February. The labor market statistics for quarter ending in January showed employment growth continues to pick up, although remained inferior to the labor force increase. Public employment remains the job driver, and while the formal private sector is still weak, there are some signs of improvement. The unemployment rate came in at 6.5%, 0.3 percentage points above that recorded one year ago. We see the unemployment rate reaching 6.5% in the quarter, up 0.1pp from one year ago, with eyes focused on private salaried employment growth.
On Wednesday, the institute of statistics (DANE) will release the unemployment rate for February. The January national unemployment rate of 11.8% was stable from one year earlier. The urban unemployment rate was a steady 13.4%, but falling urban participation and job destruction continue to reflect a loosening labor market that could hamper the expected consumption recovery ahead. We expect the urban unemployment rate to come in at 10.8% in February from 11.0% recorded in the same month of 2017, resulting in a national unemployment rate of 10.4% (10.5% one year prior).
The statistics institute (INEGI) will announce January’s retail sales on Monday. We estimate that retail sales accelerated to 2% year-over-year, after contracting by 2% year-over-year in December. Annual inflation fell substantially in January, supporting real wages, while formal employment growth picked up (to 4.5% year-over-year, from 4.3% in December). Moreover, the year-over-year growth rate of retail sales will likely rebound in January because of a base affect (associated to the looting of retail stores in January 2017, right after the “gasolinazo”).
INEGI will announce February’s trade balance on Tuesday. We expect the trade deficit to narrow. The non-energy surplus likely improved, amid firmer activity in the US (which boosts Mexico’s manufacturing exports). On the energy side, we expect a slightly smaller deficit, considering the gradual normalization of oil output (and oil exports) after the natural disasters.
At the same time, INEGI will announce February’s unemployment rate. We expect the unemployment rate to post 3.2%, standing 0.2pp below the level recorded in the same month of last year. Notably, labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment grew at a robust pace in February (4.5% year-over-year, same as in January).
On Wednesday, the Ministry of Finance (Hacienda) will announce February’s fiscal balance. We expect the fiscal deficit indicators to continue narrowing, as the fiscal consolidation plan enters its final year (aiming at an ambitious 0.9% of GDP primary surplus). Moreover, higher oil prices likely boosted government revenues in February (in year-over-year terms).