S&P downgrades Brazil to BB- from BB, with stable outlook

The agency highlighted the difficulties related to the fiscal reform agenda and the perspective of higher political uncertainties.

Talk of the Day
Our LatAm Macro Monthly report will hit your mailboxes today, featuring scenarios for Brazil, Mexico, Argentina, Chile, Colombia, Peru, the global economy and commodities.

Yesterday, Standard & Poor’s downgraded Brazil’s sovereign credit rating to BB- from BB and changed the outlook to stable (from negative). The agency highlighted the difficulties related to the fiscal reform agenda and the perspective of higher political uncertainties throughout 2018.
The Serasa Experian Index for retail activity fell 1.6% mom/sa in December (our seasonal adjustment), following three months rising above 1%. The index is 3.6% up year over year. The breakdown shows declines in four out of six categories: supermarkets (-1.2%), furniture & appliances (-2.5%), apparel (-9.5%) and construction material (-3%). The decline in both “furniture & appliances” and “apparel” may reflect a payback from the Black Friday effect in the previous month. Combining with other indicators, our preliminary forecasts for December core and broad retail sales stand at 0.6% and 0.6% mom/sa, respectively.
The Service Sector Survey (PMS) will be published today at 9:00 AM (SP time). We expect the headline to fall 1.3% year-over-year (consensus: -1%).

The Central Bank of Peru (BCRP) decided to cut the reference rate by 25bps (to 3%) at the first meeting of the year, in line with our call and that of the majority of analysts (only 4 out of 13 firms, surveyed by Bloomberg, expected no action). The decision came amid consistent downward surprises in inflation and board members expressing their concerns about the potential effects of the political uncertainty on the growth outlook. Annual headline inflation ended 2017 at the lowest level in almost eight years (1.4%), below the BCRP’s 2% target, while inflation at the margin points to further disinflation in coming months (seasonally-adjusted 3-month annualized variations for the CPI and core indexes running at -1.7% and 1.5%, respectively). On inflation, the board highlighted that core inflation measures continue decreasing and are expected to stay close to the 2% target during 2018 (rather than “within the 1pp tolerance range around the target”, as mentioned in December’s statement). Regarding economic activity, board members stated that public investment disappointed in 4Q17 (an important development, considering that the fiscal stimulus is a critical assumption for the economic recovery). Also importantly, the statement mentioned that business confidence moderated in December.

Low inflation coupled with a new downside growth risk (stemming from the political uncertainty) will likely push the board to cut rates again in 1H18. We expect the reference rate to end 2018 at 2.75%. The ex-ante real reference rate is now standing at 0.7%, below BCRP’s estimate of the neutral level (1.8%, according to the updated calculation shown in the quarterly inflation report published in September 2017). Therefore, monetary policy is also expected to stimulate activity, although in lesser degree than higher metal prices and fiscal stimulus. For 2019, we expect a moderate tightening of monetary policy, which would take the reference rate back to 3.25%, assuming that inflation firms up and the economic recovery consolidates.


Consumer prices rose 3.1% from November to December, exceeding market expectations of 2.5% (according to a Bloomberg survey). The reading showed a marked acceleration from the previous two months (1.4% MoM in November and 1.5% in October), mostly due to a 17.8% MoM increase in the gas, electricity, housing and fuel components. Annual inflation ended 2017 at 24.8%, and thus the central bank missed the official 12-17% target for 2017 by 7.8%. Core items rose by 1.7% MoM and 21.1% YoY, above the 1.3% reading for November.

The price behavior in December is a warning against an aggressive monetary easing cycle. The central bank cut its benchmark interest rate by 75bps, to 28%, noting that the upward revision of the inflation target for 2018, to 15% (from 10±2%) is consistent with lower interest rates. We note, however, that the central bank also stated it will be cautious in adjusting the monetary policy to the new targeted disinflation path, indicating that interest rate cuts will likely be contingent on a better evolution of inflation. The probability of an additional cut in the reference rate following the latest reading has therefore diminished. ** Full Story here.

Mexico’s industrial production performed poorly in November, with a particularly conspicuous deterioration of construction activity (which reflects the weakness of investment). Industrial production fell 1.5% year-over-year, closer to our forecast than to median market expectations (contractions of 1.7% and 1%, respectively, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), the fall was slightly larger (1.7% year-over-year), pulling down the three-month moving average contraction rate to 1.3% year-over-year in November (from 0.8% in October). Looking at the same metric, we note that mining output remained deeply in negative territory (-11.3% year-over-year, from -11.4% in October), construction took a turn for the worse (-2.5% year-over-year, -1.2% previously), and manufacturing slowed down moderately (2.6% year-over-year, 3.1% previously).

We expect a gradual acceleration of industrial production – both in sequential and year-over-year terms – in coming quarters, mainly driven by the positive effects of firmer U.S. activity on Mexico’s manufacturing exports and a stabilization of oil output. In fact, the U.S. ISM manufacturing index is hovering at strong levels, and U.S. industrial production (deeply interconnected with Mexico’s manufacturing sector) is gaining traction. Moreover, the U.S. tax reform could give a further boost to these positive developments in the U.S. industrial sector by spurring investment. Also importantly, Mexico’s fiscal consolidation process – which has had negative effects on both oil output (through the reduction of the state-owned oil company’s Capex) and construction activity – will be smaller in 2018 than in the previous two years. Two important risks, however, are the growing uncertainty about NAFTA and the presidential elections, which are already discouraging investment decisions. ** Full Story here.

Scenario Review: Resuming the tightening cycle. Banxico resumed the tightening cycle in December (hiking 25bps, to 7.25%), after staying on hold for the past three meetings. The guidance in the statement suggests another rate hike in February is likely. We expect the policy rate to peak at 7.5%. Moreover, given the recent supply shocks in non-core prices and stronger-than-expected inertia, we have revised our inflation forecast for 2018 to 3.7%, from 3.3%. Still, our forecast remains consistent with a meaningful disinflation (from 6.8% in 2017), driven by lower exchange-rate pressure (we see the peso at 18.5/USD by the end of this year) and normalization of non-core inflation (energy and non-processed food). ** Full Story here.

INEGI will publish October’s gross fixed investment today at 12:00 PM (SP time). We estimate that gross fixed investment expanded 0.1% year-over-year (consensus: -0.1%).


Scenario Review: Turning the page. Activity likely closed 2017 on a strong footing, with the non-mining component showing improvement. The improved carry-over effect and upwardly revised copper prices, combined with the expectation that confidence will continue to rise, have led us to expect growth of 3.0% this year (from 2.7% in our previous scenario and an estimated 1.5% last year). The consolidation of the investment- and export-driven recovery will see growth rise to 3.5% next year. The recent strengthening of the CLP can be mostly explained by the performance of copper. The persistence of current exchange-rate levels in the short run will lead to less tradable inflation, and we now see inflation for 2018 at 2.5% (2.8% previously). With low inflation and a still-negative output gap, we expect the central bank to keep its policy rate steady at 2.5% this year. A normalization process would start next year, taking the rate to 3.5% before year-end. ** Full story here.


Commodities Monthly Review : Higher oil prices in 2018. WTI prices rose 8% to USD 61/bbl last month, due to a larger-than-expected decline in US inventories and renewed geopolitical risks. We estimate that oil prices in the range of USD 45-55/bbl may stabilize U.S. rig investment and help balance supply and demand this year. Given the recent decline in inventories, we have revised our year-end forecasts to USD 52/bbl (from USD 45/bbl) for WTI and to USD 55/bbl (from USD 47/bbl) for Brent, on the higher end of this range. ** Full story here.

Fuente: ITAU

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