The government has been negotiating with lawmakers an alternative version to the rapporteur’s (Arthur Maia) proposal.
Talk of the Day
In a short week due to a national holiday on Wednesday, the spotlight will be on the discussions involving the social security reform, as the government has been negotiating with lawmakers an alternative version to the rapporteur’s (Arthur Maia) proposal, in order to secure approval in the Lower House by year-end.There isn’t yet a set date for the voting of the matter, and the news flow may give further indications on it during the week. On economic activity, the key releases for the week will be September’s retail sales on Tuesday and the Service Sector Survey (PMS) on Friday, two important indicators for 3Q17 GDP. We expect a 0.7% (month-over-month, seasonally adjusted) increase in both core and broad retail sales, which includes vehicle sales and construction material. For September’s PMS, we expect the headline to fall 2.4% year-over-year. Also, October’s Caged formal job creation may come through (release date not yet specified), for which we forecast a net creation of 17k jobs (+11k jobs in seasonally adjusted terms, improving the 3-month moving average s.a. from -10k to -3k). ** Read our full week ahead note below.
IPCA climbs 0.42% in October, led by regulated prices. The figure came in below our call (0.50%) and the median of market expectations (0.49%). The index had risen 0.16% in the previous month and 0.26% in October 2016. Year-to-date, the IPCA climbed 2.21%, down significantly from 5.78% in the year-earlier period. Meanwhile, the year-over-year change accelerated to 2.70% from 2.54% in September. Breaking down by product groups, the largest upward contribution during the month came from housing (0.21 p.p.), led by electricity (3.3%) and bottled cooking gas (4.5%), which impacted monthly inflation by 0.12 p.p. and 0.06 p.p., respectively. On the opposite end, household items (-0.02 p.p.) and food and beverages (-0.01 p.p.) posted negative changes.
Our preliminary estimate for the IPCA in November is a 0.50% increase, pushing the year-over-year change up again to 3.0%. Regulated prices will give the biggest upward contribution during the month, due to additional price hikes for electricity, gasoline and bottled cooking gas. For the full year, we forecast a 3.2% advance in the IPCA vs. 6.3% last year.
The minutes of the October monetary policy meeting reaffirm that the 25bp cut was a response to a sequence of negative inflation surprises and an improved inflation outlook. Five board members voted for the decision, while the remaining two favored staying on-hold. The board agreed with the technical team’s view that the probability inflation reaches the 3% inflation target in 2018 has increased. In any case, future rate cuts (we still expect two 25-bp cuts to 4.5% before the cycle ends) will be very much data dependent.
Given the better evolution of inflation and the fact that the economic recovery is still incipient, the risks are tilted to a deeper easing cycle than our 4.5% expectation. Additionally, we cannot rule out a cut at this month’s meeting, as October’s CPI (published after the last policy meeting) came in below expectations and the minutes show some within the majority camp favor a more aggressive monetary policy action.
Activity showed mixed signs in the month of September, with improvements in retail sales while manufacturing remained weak; however, quarterly figures still show a recovery versus 1H17. Retail sales gained 1.4% year over year in September (-1.1% in August), between the market consensus of 1.0% and our 1.9% forecast. Meanwhile, industrial production contracted 1.9% (-2.9% previously), weaker than our -1.5% expectation and the market consensus of a 1.0% drop. However, in the third quarter of the year, activity indicators are consistent with an expected recovery in the 2H17. We expect GDP growth of 2.4% in 3Q17 (to be published November 15), picking up from the 1.3% posted in 2Q17.
We expect activity to improve in 2H17, leading to growth of 1.6% for the year (2.0% last year), and 2.5% for 2018. Higher real wages (as inflation falls) and lower interest rates will likely support a further recovery of consumption, while a favorable external environment aids a manufacturing improvement.
The Week Ahead in LatAm
On Tuesday, the INDEC (the official statistical agency) will publish the National CPI for October. Headline inflation rose by 1.9% month over month in September, accumulating a 17.6% increase between December 2016 and September 2017. Core inflation grew 1.6% and 16.1% year to date. According to private estimates (Elypsis), headline inflation decelerated slightly to 1.7% month over month in October, while the core measure stood at 1.6% month over month. We adjusted recently our 2017 inflation forecast to 23% from 22% previously, above the target range set by the central bank for this year (12-17%).
In a short week due to a national holiday on Wednesday, the spotlight will be on the discussions involving the social security reform, as the government has been negotiating with lawmakers an alternative version to the rapporteur’s (Arthur Maia, PPS-BA) proposal, in order to secure approval in the Lower House by year-end. There isn’t yet a set date for the voting of the matter, and the news flow may give further indications on this next week.
On economic activity, the key releases for the week will be September’s retail sales on Tuesday and the Service Sector Survey (PMS) on Friday, two important indicators for 3Q17 GDP. We expect a 0.7% (month-over-month, seasonally adjusted) increase in both core and broad retail sales, which includes vehicle sales and construction material. For September’s PMS, we expect the headline to fall 2.4% year-over-year. Also, October’s CAGED formal job creation may come through (release date not yet specified), for which we forecast a net creation of 17k jobs (+11k jobs in seasonally adjusted terms, improving the 3-month moving s.a. from -10k to -3k).
On Tuesday, the central bank of Chile will hold its monthly monetary policy meeting. We expect the central bank to hold the policy rate at 2.5%, while retaining an easing bias. The board introduced an easing bias last month after inflation posted a further downside surprise for September. The board highlighted that the surprises came mainly from volatile products, with core measures broadly unaffected, but acknowledged that if this trend continued the trajectory of inflation converging to the 3% target over the relevant 2-year horizon could be compromised and additional easing required. Nevertheless, the October inflation surprise to the upside puts inflation closer to the central bank’s baseline scenario and in this context; rate cuts in the short term are less likely.
The trade balance for the September will be published on Tuesday. In the previous month, a USD 930 million trade deficit led to a mild narrowing of the rolling 12-month deficit to USD 9.2 billion (USD 9.7 billion deficit as of June). The recent narrowing from June is mainly due to a recovery in the energy balance (led by coal). As exports came in at USD 3.3 billion, our expected USD 3.7 billion (CIF) for imports would yield a trade deficit of USD 280 million, compared to the USD 1.0 billion deficit one year before. As a result, the trade deficit in the third quarter of the year would total USD 1.7 billion, down from USD 3.0 billion in 3Q16.
On Wednesday, the national statistics authority will publish the supply-side breakdown of GDP growth for 3Q17. Based on activity indicators for the quarter, we estimate activity increased 1.0% from the previous quarter, resulting in annual growth of 2.4%, an improvement from the 1.3% in 2Q17. In the quarter, we expect mining to remain a principal drag on activity, while some improvement in manufacturing along with robust financial services will support activity.
On Friday, think-tank Fedesarrollo will release the October consumer confidence. In September, consumer confidence completed 21 consecutive months in pessimistic territory (< 0), and remained far from neutral levels. The consumer sentiment index came in at -10.3 points, from the -2.1 points one year before (-15.9 in August). Compared to September 2016, there was a deterioration in both divisions (expectations and current economic conditions). Looking forward, elevated oil prices, higher global growth, lower inflation and reduced interest rates could aid a sentiment pickup.
The statistics institute (INEI) will announce September’s GDP proxy on Wednesday. We expect a 3.2% year-over-year growth rate (from 2.3% in August), driven by the pick-up of construction (up by 8.9% year-over-year in September, according to INEI’s coincident indicators report). Notably, construction activity is being boosted by the fiscal stimulus and higher metal prices. Moreover, mining & hydrocarbons output expanded at a strong 7.1% year-over-year in September, as metallic mining firms are being incentivized to produce more in the higher-price environment. On the negative side, the contraction of fishing output and primary manufacturing (mainly the processing of fishing goods) dragged GDP.
At the same time, INEI will also publish October’s unemployment rate. We expect the unemployment rate to come in at 6%, below the level recorded in the same month of last year (6.2%). We note that employment growth has accelerated over the past months, amid an improvement in the growth rate of non-natural resource sectors (the most labor-intensive sectors in the economy).