Stronger than expected industrial production in Brazil

Industrial production expanded 2.5% in 2017, marking the best annual result since 2010, when it soared 10.2%.

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Industrial production advanced 2.8% mom/sa in December, above the median of market estimates (2.0%) and our call (2.4%). Compared with December 2016, industrial output climbed 4.3%. However, the higher-than-expected monthly result ought to be read carefully. The recent recession changed the composition of the manufacturing sector, reducing the importance of cyclical segments (which have a seasonal tendency to decline more in December). Hence, the statistical filter that corrects the series for seasonal factors probably adjusted the production level (upward) by more than would be consistent with the manufacturing sector’s new composition.

Notwithstanding this caveat for December’s reading, industrial production expanded 2.5% in 2017, marking the best annual result since 2010, when it soared 10.2%. After that, the indicator printed at 0.4% in 2011, -2.3% in 2012, 2.1% in 2013, -3.0% in 2014, -8.2% in 2015, and -6.4% in 2016. The breakdown by economic category showed gains in durable goods (5.9%), intermediate goods (1.7%), and semi-durable and non-durable consumer goods (3.0%). Production of capital goods was stable at the margin, following seven consecutive months of increases. Our preliminary estimate for industrial production in January is for a drop of 2.1% mom/sa that would still be consistent with an upward trend. ** Full story here.

The trade surplus reached USD 2.8 billion in January, in line with our expectation (USD 2.8 billion) and market consensus (USD 2.9 billion). Over 12 months, the trade surplus remained stable, at USD 67 billion. The seasonally-adjusted annualized quarterly moving average remains around USD 62 billion, reflecting stability of the trade balance at the margin. Exports totaled USD 17.0 billion, rising 5.2% mom/sa. Meanwhile, imports were virtually stable on a monthly basis, at USD 14.2 billion. Compared to January 2017, exports increased 13.8% and imports climbed 16.4%. We maintain our expectation of smaller trade results in 2018 and in the following years, in line with a recovery in imports due to the rebound in economic activity. ** Full story here.

According to Fenabrave, vehicle sales reached 181k in January, rising 3.6% mom/sa after falling 6.3% between September and December (our seasonal adjustment). Despite the sequential increase, vehicle sales maintain the negative trend shown in 4Q17: the three-month moving average declined 0.6% (sa.) in January. Our forecast for January’s auto production (Anfavea, to be released on February 6) is 220k (26.1% yoy, -1.5% mom/sa).

Copom Cockpit: Pace reduction to a 25-bp cut. 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. Copom’s inflation forecasts will likely show the same levels for 2018, 2019 and 2020 as those reported in the most recent Inflation Report and monetary policy meeting. We expect the Copom to announce a 25-bp rate cut after its meeting on February 6 and 7. The March decision will probably be left open, but we believe that, even in the case of frustration of expectations regarding the approval of the pension reform at the beginning of the year, the authorities may consider additional stimulus appropriate, given the magnitude of estimated economic slack, the balance of risks around the baseline scenario (which may be influenced by the recent appreciation of the BRL) and the slow pace of convergence of inflation to the target. Thus, we maintain our view that the end of the cycle will only come in March, with a final cut of 25bps, taking the Selic rate to 6.5%. ** Full story here.


In line with market consensus, the central bank of Chile held the policy rate at 2.5%. The revamped communication, which now allows the board to further explain its assessment of the evolvement of the economy, shows the decision had the full support of the board. Still only four members took part of the meeting as a replacement for Sebastian Claro is yet to be finalized. Overall, the decision is in line with the central bank’s baseline scenario (outlined in the December Inflation Report, IPoM) of rates on hold for most of this year. Additionally, the press release retained an easing bias, as expected.

We expect the policy rate to remain stable at 2.5% during 2018 as inflation stays low and the activity recovery unfolds. While more easing is still a possibility (especially due to the behavior of tradable inflation), the central bank’s messaging appears to be gradually moving away from an easing bias on the back of firmer activity.

Day Ahead: The national statistics agency (INE) will publish the private consumption activity indicators for December. We expect the commercial activity index to have increased 4.4% from last year, with retail sales growing 3.5% (consensus: 4.1%).


Peru’s disinflation has been driven by unwind of supply shocks, but the more recent decrease of core inflation indicates the negative output gap and the stronger PEN are also exerting downward pressure. The CPI posted a modest monthly variation of 0.13% in January, in line with our forecast and below median market expectations (0.2%, as per Bloomberg). The result undershot its 10-year median by 7bps. Similarly, core prices (excluding food and energy) fell by 0.13%. Annual headline inflation is moving further below the Central Bank’s 2 percent target, with lower diffusion indexes showing that disinflation is generalized across the CPI basket. The 12-month rolling average of goods and services that recorded positive monthly inflation fell to 58.5% in January (from 59.3% in December 2017 and 69.2% in December 2016), while the measure that tracks the percentage of items with annual inflation above the 2% target posted 32.1% in January (unchanged from December 2017 but half of the 64.2% print recorded one year before).

Against a backdrop of broad-based disinflation and disappointing growth in 4Q17 we believe the Central Bank will deliver another 25-bp rate cut in February. We expect annual headline inflation to continue decreasing until the end of 1Q18, and then firm up to 2.2% by the end of 2018 (revised from our previous forecast of 2.3%). In the short-term, annual inflation will likely fall below 1% in March (due to a base effect associated to El Niño, which made food prices spike in March 2017). Nevertheless, we expect annual inflation to increase gradually during the rest of the year when base effects will play in the opposite direction.
** Full story here.

Based on coincident data, we believe that activity weakened in December dragged by the delay of the fishing season and the detrimental effects of the political uncertainty over public investment. The statistics institute (INEI) published the full set of coincident indicators for economic activity. On the bright side, mining & hydrocarbons output grew at a strong pace (5.6% year-over-year in December, from 3.6% in November) – led by metallic mining (6.6% year-over-year) as the higher metal price environment incentivizes firms to produce more – and cement consumption accelerated (6.7% year-over-year, from 4.1%) which bodes well for construction activity. The acceleration of construction, nevertheless, was likely contained by a slowdown of public investment (which weakened in the second half of December, when the impeachment proceedings raised uncertainty in the public sector). On the negative side, the plunge of fishing output (-66.9% year-over-year) due to the delay of the fishing season (postponed to January 2018, from November 2017) likely had a big negative impact on manufacturing output through the processing of fishing goods. Finally, given the weakness of the labor market, we expect subdued growth for sectors linked to private consumption (eg. commerce and other services).

All things considered, we estimate that the GDP proxy expanded 1.4% year-over-year in December, which implies GDP growth of 2% year-over-year in 4Q17 (and 2.3% for the full year 2017, below our previous forecast of 2.7%).


The Central Bank of Mexico (Banxico) published January’s expectations survey, which shows an increase of short-term inflation expectations and consensus of a 25-bp rate hike in the first monetary policy meeting of the year. Median inflation expectations increased for 2018 (4.06%, from 3.85% in the previous survey) and next 12 months (4.02%, from 3.85%). However, inflation expectations decreased for longer tenors; namely, expectations for 2019 fell to 3.52% (from 3.59%), for 2020 came at 3.49% (from 3.50%) and the average of next 5-8 years dropped to 3.40% (from 3.50%). The increase of inflation expectations, in our view, responds to the upward inflationary surprises observed in November and December, while inflation showed more benign dynamics in the first half of January. Turning to the exchange rate, median USDMXN expectations increased a bit for year-en ds 2018 (18.85/USD, 18.66/USD previously) and 2019 (18.50/USD, 18.25/USD previously), and 2020 (18.70/USD, 18.38 previously) amid looming risks (NAFTA renegotiation, elections, tightening of monetary policy in the US, and US tax reform). Moving on to economic activity, median GDP growth expectations were broadly unchanged for 2017 (2.1%, unchanged), 2018 (2.28%, from 2.30%), 2019 (2.35, from 2.40%), and the average of the next 10 years (2.55%, from 2.60%). Finally, on monetary policy, median reference rate expectations for 2018 increased to 7.50% (from 7.25%) indicating that most economists now expect a 25-bp rate hike in February (the rate is currently at 7.25%). The median reference rate expectation for 2019 increased to 6.75% (from 6%).

Fuente: ITAU

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