Brazil’s unemployment reaches 12.6% in February

We see the unemployment rate (seasonally adjusted) to recede to 11.7% by YE18, as formal jobs provide a growing contribution.

Talk of the Day 

Brazil

The nation-wide unemployment rate climbed to 12.6% in February, from 12.2% in January, in line with the median of market estimates and our call. Notice that these readings were still deeply affected by seasonality in layoffs. The unemployment rate is 0.6 p.p. lower than in February 2017. Using our seasonal adjustment, unemployment slid 0.1 p.p. to 12.4%. The labor force shrank 0.2% in the quarter ended in February compared to the September-November period, but expanded 1.6% yoy. The participation rate (ratio of the labor force to the working-age population) dropped to 61.7% from 61.8%, explaining the seasonally-adjusted decline in unemployment. Nevertheless, the participation rate remains much higher than its historical average (61.3%). Using models that contemplate the sensitivities of different kinds of occupations to the pace of economic activity and our GDP scenario (3.0% in 2018 and 3.7% in 2019), we expect the unemployment rate (using our seasonal adjustment) to recede to 11.7% by YE18 and 10.7% by YE19, as formal jobs provide a growing contribution. Our forecasts for the average unemployment rate are 12.0% in 2018 and 11.0% in 2019 (2017: 12.7%). ** Full Story here.

The BCB’s inflation report shows inflation forecasts at 3.8% in 2018 and 4.1% in 2019 in the active scenario, with interest and exchange rates forecasts in line with market expectations (according to the Focus report), which currently assumes Selic rate stable at 6.50% until the end of 2018, rising to 8.0% in 2019. The inflation forecasts below targets (4.5% for 2018 and 4.25% for 2019) reinforce the BCB’s recent communication, maintained in the report, that the base-case for now is one more 25-bp cut in May, taking the Selic rate to 6.25%. In the hybrid scenario, with a constant exchange rate and interest rates following market expectations, inflation forecasts are lower, at 3.6% for 2018 and 3.9% in 2019.

Given the forecasts and the central bank’s communication we stick to the view that the Copom will cut the Selic by another 25bps to 6.25% in May. The Copom believes this additional cut mitigates the risk of a slower-than-anticipated convergence of inflation to the target. But the authorities also highlight that this assessment can change if it becomes clear that this mitigation of risks is no longer required, leading to the interruption of the easing cycle already in May. For meetings after the next one, that is, from June onwards, the Copom states that, with the economy evolving as expected, it would be proper to interrupt the monetary easing process.
** Full Story here.

Week Ahead: On economic activity, February’s industrial production will be released on Tuesday. We forecast a 0.6% mom/sa increase. Coincident indicators for March’s industrial production will also be released throughout the week: auto sales (Fenabrave) on Monday, auto production (Anfavea) on Wednesday, paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR) without a specified date. On the external accounts, we expect the trade balance (Wed.) to post a USD 6.4 billion surplus in March. On the political side, the Supreme Court is expected to analyze former President Lula’s habeas corpus request on Wednesday. In addition, the deadline for those joining the Presidential race to leave executive positions and join parties is on Saturday (April 7). ** Read our full week ahead note below.

Chile

The unemployment rate picked up more than expected in February, nevertheless, the breakdown shows some promising signs. The unemployment rate came in at 6.7%, 0.3 percentage points above that recorded one year ago, and above market expectations of 6.6% and our 6.5% call. The surprise partly comes from a faster increase in the labor force, growing 3.0% (the highest rate since 2011), a possible sign of the improved private sentiment and expectation of finding jobs. Overall, the participation rate increased 0.7 percentage points from one year ago. Public employment remains the main job driver, but the formal private sector is consolidating signs of improvement.

Although below the rise in the labor force, employment grew 2.7% year over year (+218 thousand jobs), the fastest pace since the quarter ending in February 2014. Salaried posts grew 3.8% year over year (1.7% in 4Q17), still led by the 16% rise in public jobs (+136 thousand). The public sector posts created (public administration, health and education posts) accounted for 1.7 percentage points of the total job growth. However, private salaried jobs grew 1.6% (+77 thousand jobs; -0.7% in 4Q17) and accounted for 0.9 percentage points of total job growth. Meanwhile, self-employment fell 0.2% from one year ago, shedding 3 thousand jobs (the first negative figure since 2Q15). The positive signs from the improvement in private employment bodes well for consumption. As the economy advances on its recovery path, a re-composition from self-employment and public posts towards the formal private sector would occur. We expect the unemployment rate to remain broadly stable at 6.7% rate this year. ** Full Story here.

As expected, mining led industrial production in the month of February. Mining encountered a low base of comparison given the extensive labor strike early last year (a feature that will persist for the coming months). Nevertheless, mining production picked up at the margin for a second consecutive month, boosted by elevated copper prices. Manufacturing grew firmly but came in below market expectations, dragged down by the paper production component. Signs of recovering internal demand and strengthening global growth will likely aid a manufacturing improvement ahead. Industrial production – which aggregates mining, manufacturing and utilities – grew 8.9% year over year in February (5.2% in January). Mining rose 16.9%, following on from the 5.8% at the start of the year, while manufacturing increased 3.7% (5.7% in January). The latter came in below the Bloomberg market consensus of 5.9% and our call of 6.0%. Manufacturing and utilities together contributed 2.1 percentage points to the total industrial production variation (8.9%), while mining production dominated in the month.

We expect strong external demand, high copper prices, low interest rates and low inflation amid increased confidence to support an activity recovery this year. The 1H18 will be led by elevated mining growth rates. Overall, we see GDP growth of 3.6% this year, more than doubling the 1.5% posted last year. ** Full Story here.

Week Ahead: On Tuesday, the national statistics agency (INE) will publish the private consumption activity indicators for February. We expect the commercial activity index to have increased 6.5% from last year, with retail sales growing 5.3% (3.8% previously). On Thursday, the central bank will publish the GDP proxy (Imacec) for the month of February. We expect the GDP proxy Imacec to increase 0.1% (SA) from January, leading to annual growth of 4.5% year over year. On Thursday, the central bank of Chile will publish the minutes of the March decision to hold the policy rate at 2.5%. The minutes of the unanimous decision will be a summarized version of the Inflation Report released the day following the meeting and reflect that the central bank is in no rush to begin a tightening cycle. Later on Thursday, INE will publish nominal wag e growth for February. As the labor market remains weak and inflation low, nominal wage growth would remain contained. Inflation for the month of March will be released on Friday. We expect consumer prices to gain 0.3% from February (0.4% one year earlier), leading to an annual inflation of 1.9% in the month (2.0% in February). ** Read our full week ahead note below.

Mexico

Week Ahead: The statistics institute (INEGI) will publish January’s gross fixed investment on Thursday. We estimate that gross fixed investment accelerated to 3% year-over-year, which implies an improvement with respect to the sharp contraction observed in December (-0.4% year-over-year). ** Read our full week ahead note below.

Argentina

Week Ahead: Tax collection for March will see the light on Tuesday. We expect tax collection to increase 12.2% yoy to ARS 238.2 billion in March. Excluding tax amnesty revenues, we expect taxes to gain 35% yoy. On Wednesday, the central bank will release its monthly expectations survey. On Thursday, the car-makers association (ADEFA) will release March data on production, exports and domestic sales to car dealers. We expect an increase in car production this year due to an expected higher demand from Brazil and the beginning of operations of new plants. ** Read our full week ahead note below.

Colombia

Week Ahead: On Tuesday, statistics institute (DANE) will publish exports for the month of February. We expect exports to come in at USD 3.056 million, a 12.63% annual expansion, with the slowdown driven by lower oil volume exports. On Thursday, the National Institute of Statistics will release inflation for March. We expect consumer prices to gain 0.45% from February, keeping annual inflation broadly stable at 3.36%, near to the central bank’s 3% target. On Friday, the central bank of Colombia will publish the minutes of the decision to hold the policy rate at 4.5%. The decision had the support of 6 of the 7 board members, with the remaining vote opting for a 25-bp rate cut. The statement held a neutral tone, in spite of weak growth and lower inflation, even though the sentence introduced in the previous statement saying that “under current conditions the easing cycle has concluded” was removed. The minutes will provide some indication as to how reluctant the board is to further easing. ** Read our full week ahead note below.

 

The Week Ahead in LatAm

Argentina

Tax collection for March will see the light on Tuesday. Argentina’s tax revenue totaled ARS 235.7 billion in February, marking a 36.8% year-over-year nominal expansion (9% in real terms). The year-over-year growth in March will be affected by a base of comparison effect (the collection of penalties related to the tax amnesty in March 2017). We expect tax collection to increase 12.2% yoy to ARS 238.2 billion in March. Excluding tax amnesty revenues, we expect taxes to gain 35% yoy.

On Wednesday, the central bank will release its monthly expectations survey. In the latest publication, analysts raised their inflation forecasts for 2018 (to 19.9% from 19.4%) and for 2019 (to 14.0% from 13.5%).

On Thursday, the car-makers association (ADEFA) will release March data on production, exports and domestic sales to car dealers. In February, auto production rose by 62.6% year over year, while exports grew 48.8% year over year and domestic sales expanded by 13.0% year over year in the same period. We expect an increase in car production this year due to an expected higher demand from Brazil and the beginning of operations of new plants.

Brazil

On economic activity, February’s industrial production will be next week’s highlight, to be released on Tuesday. We forecast a 0.6% mom/sa increase, after a 2.4% drop in January, which we believe was just a weak print amid a rising trend. Coincident indicators for March’s industrial production will also be released through the week: auto sales (Fenabrave) on Monday, auto production (Anfavea) on Wednesday, paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR) without a specified date.

On the external accounts, we expect the trade balance (Wed.) to post a USD 6.4 bn surplus in March, virtually flat in comparison with the USD 6.5 bn posted in the same month of last year. In month over month terms (seasonally adjusted), both the exports and imports are set to decrease (2.1% and 2.4% respectively). Over 12 months, we expect the trade surplus to remain nearly stable at USD 67 bn, but the 3-month seasonally-adjusted and annualized result will likely reach USD 75 bn reflecting stronger-than-expected exports (especially oil and manufacturing) in the first quarter of the year.

On the political side, the Supreme Court is expected to analyze former President Lula’s habeas corpus request on Wednesday. In addition, the deadline for those joining the Presidential race to leave executive positions and join parties is on Saturday (April 7th).

Chile

On Tuesday, the national statistics agency (INE) will publish the private consumption activity indicators for February. The commercial activity index – which aggregates retail activity, wholesale and vehicle sales – grew 7.3% year over year in January (3.1% in December), with car sales remaining robust, while wholesale trade posted a notable improvement. Available data for February shows car sales registered a record trade (+23.6% yoy), continuing to lead activity. We expect the commercial activity index to have increased 6.5% from last year, with retail sales growing 5.3% (3.8% previously).

On Thursday, the central bank will publish the GDP proxy (Imacec) for the month of February. In the month, mining production increased 16.9%, manufacturing rose 3.7%, while we expect retail activity to remain robust. We expect the GDP proxy IMACEC to increase 0.1% (SA) from January, leading to annual growth of 4.5% year over year (3.5% in January). Mining will drive activity in 1H18, partly as it encounters a favorable base of comparison given the extensive mining strike early last year.

On Thursday, the central bank of Chile will publish the minutes of the March decision to hold the policy rate at 2.5%. The minutes of the unanimous decision will be a summarized version of the Inflation Report released the day following the meeting and reflect that the central bank is in no rush to begin a tightening cycle.

Later on Thursday, INE will publish nominal wage growth for February. In January, nominal wage growth continued to slow as inflation stabilized at low levels. According to the historically merged series, wage growth slowed to 3.3%, from 4.0% in December (4.2% in 2017). As the labor market remains weak and inflation low, nominal wage growth would remain contained.

Inflation for the month of March will be released on Friday. Consumer price inflation was muted in the month of February. The strong performance of the Chilean peso and a still wide output gap kept inflationary pressures contained with annual inflation coming in at 2%, from 2.2% in January, reaching the lower end of the central bank’s 2%-4% target range. Price tracking for the month shows that some fruit and vegetable along with the annual education adjustment will lift consumer prices in the month. This rise would be partly countered by falling transportation and apparel prices. We expect consumer prices to gain 0.3% from February (0.4% one year earlier), leading to an annual inflation of 1.9% in the month (2.0% in February).

Colombia

On Tuesday, DANE will publish exports for the month of February. Total export growth picked up to 14.6% year over year in January, from 13.8% in December, with coal exports remaining robust. We expect exports to come in at USD 3.056 million, a 12.63% annual expansion, with the slowdown driven by lower oil volume exports.

On Thursday, the National Institute of Statistics will release inflation for March. In February, the disinflation process advanced, with annual inflation slowing to 3.37% (from 3.68% in January), led by food and tradable prices, but the sticker non-tradable inflation is moderating too. We expect consumer prices to gain 0.45% from February (0.47% one year ago), keeping annual inflation broadly stable at 3.36%, near to the central bank’s 3% target. Food and health prices will lift inflation in the month.

To end the week, the central bank of Colombia will publish the minutes of the decision to hold the policy rate at 4.5%. The decision had the support of 6 of the 7 board members, with the remaining vote opting for a 25-bp rate cut. The statement held a neutral tone, in spite of weak growth and lower inflation, even though the sentence introduced in the previous statement saying that “under current conditions the easing cycle has concluded” was removed. The minutes will provide some indication as to how reluctant the board is to further easing.

Mexico

Starting the week, the Central Bank of Mexico (Banxico) will publish March’s Expectations Survey. We believe inflation expectations for 2018 might move down a bit, considering the more benign inflationary conditions observed in January, February, and the first half of March. GDP growth, exchange rate, and policy rate expectations are unlikely to show meaningful changes.

The statistics institute (INEGI) will publish January’s gross fixed investment on Thursday. We estimate that gross fixed investment accelerated to 3% year-over-year, which implies an improvement with respect to the sharp contraction observed in December (-0.4% year-over-year). Notably, coincident indicators such as construction activity (4% year-over-year, from 3.6% in December) and imports of capital goods (18.8% year-over-year, from 4.7% in December) picked up in January.

Peru

The statistics institute (INEI) will announce March’s CPI inflation on Sunday. We forecast a 0.65% month-over-month inflation rate, driven by an increase of food prices (fish, an important staple, has shot up by 30% month-over-month), education fees (given the beginning of the school year), and the seasonality of the Easter holidays (which mainly puts upward pressure on interprovincial bus fares).  Assuming our forecast is correct, annual inflation would decrease to 0.53% year-over-year in March (from 1.18% in February). We note that annual inflation will likely decrease, in spite of the high month-over-month print, because of a favorable base effect (as El Niño caused a huge spike of food prices in March 2017).

INEI will publish the full set of coincident indicators for February’s economic activity on Monday. We expect an improvement. On the positive side, we already know that public investment and banking credit picked up in February. Moreover, fishing output likely grew at an extraordinary high pace considering the backload of the fishing season (and the low comparison base in February 2017). However, on the negative side, labor market data remained soft.

 

Fuente: Itaú

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