The government won in the most important provinces, including the Province of Buenos Aires.

Talk of the day 

Argentina

Argentines voted in mid-term elections across the country on Sunday, with half of the seats in the lower chamber being contested. In addition there were elections in eight provinces for three Senate seats per province, which totals one-third of the Senate.

The ruling coalition Cambiemos had an impressive performance at the national level (42% of total votes for representatives), improving the results obtained in the August primaries and leading to an increased representation of the government in Congress. Still, the government falls short of having a majority in either of the two chambers. The government is likely to get 107 representatives in the Lower House out of 257 (but up from the current 87 seats) according to preliminary estimates. In the Senate, Cambiemos will likely have 24 seats (out of 72).

The government won in the most important provinces, including the Province of Buenos Aires. Esteban Bullrich’s list (Cambiemos) won the Senatorial race in the Province of Buenos Aires with 41% of the votes, ahead of former President Cristina Kirchner’s (Unidad Ciudadana) with 37%. We note that the winners will get two of the three contested Senate seats, while the third seat will go to the runner-up. Cambiemos representatives in the Province of Buenos Aires also won the most votes. In addition, President Macri’s party not only obtained victories in the City of Buenos Aires and the Provinces of Córdoba, Mendoza and Santa Fe but also in some provinces ruled by the Peronist party.

With strong political power, the government will push to accelerate fiscal reforms. The fragmentation of the Peronist party will likely facilitate the pass of legislation (federal budget, cap on provincial and federal primary expenditure, and tax reform).

Brazil

Copom Cockpit: gradual slowdown. According to recent communication from the monetary authority, we expect the Copom to reduce the easing pace to 0.75pp, which would represent a moderate pace reduction from the 1.00pp cuts implemented in the last four meetings. This decision would be consistent with the committee’s recent signaling, considering the evolution within expectations of the baseline scenario and the current stage of the easing cycle. In the post-meeting statement, we expect the committee will continue signaling the continuity of the easing cycle and further reduction of the easing pace at the December meeting, if the conditions described in the baseline scenario are maintained. ** Full story here.

IPCA-15 climbed 0.34% in October, in line with expectations. The result virtually matched our estimate and the median of market expectations (both at 0.35%). The index rose 0.11% in the previous month and 0.19% in October 2016. The IPCA-15 is up by 2.25% year-to-date, the lowest result for the period since 2006, according to census bureau IBGE (and down substantially from 6.11% in the year-earlier period). The year-over-year change picked up to 2.71% (from 2.56% in September). Breaking down by product groups, the largest upward contributions during the month came from transportation (0.11 p.p.) and housing (0.10 p.p.). On the opposite end, food and beverages (-0.04 p.p.) and household items (-0.01 p.p.) provided negative contributions. October marked the fifth consecutive month of deflation in the food group.

Based on the IPCA-15 report and other current information, our preliminary forecast for the headline IPCA in October is 0.48%, lifting the year-over-year change to 2.8%. The largest upward contribution to the IPCA will come from the housing group (0.20 p.p.), pressured by bottled cooking gas and electricity tariffs. The food group is likely to post a positive result after five months of deflation. ** Full story here.

The week’s highlight will be the Central Bank’s Monetary Policy Committee (Copom) meeting on Wednesday. Recent data show an environment of still falling underlying inflation and anchored expectations, with signs of a still gradual but increasingly broader recovery of economic activity. Copom’s inflation forecast is likely to remain stable for 2017 and decline slightly for 2018, relative to what was presented in the latest inflation report. We expect the Copom to reduce the easing pace to 0.75pp, which would represent a moderate pace reduction from the 1.00pp cuts implemented in the last four meetings. We maintain our call for a 0.75pp cut this week, followed by two 0.50pp reductions in the December and February meetings, bringing the Selic rate to the final level of 6.5%. On fiscal accounts, the central government result for September will come through on Thursday, we expect a BRL 26.4 billion deficit. Onto the balance of payments report (Thursday), we expect a USD 0.6 billion current account deficit in September. We expect direct investment in the country (DIC) to register inflows of USD 6.5 billion in September – if confirmed, DIC will amount to USD 84 billion over 12 months.

On the political front, the charges against President Temer are expected to be voted in the Lower House floor on Wednesday, after clearing the Constitution and Justice Committee last week. After the charges, focus will shift again to the fiscal reform agenda. The market will be particularly interested on the chances of social security reform approval. ** Read our full week ahead note below.

The Week Ahead in LatAm 

Argentina

On Tuesday, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate. During the presentation of the monetary policy report held recently, Governor Federico Sturzenegger recognized the persistence of core inflation and acknowledged a “credibility gap” to meet the targets for the coming years. Still, he argued that as inflation continued to decline in 3Q17 relative to previous quarters, the disinflation process remains on track. In addition, Sturzenegger showed that according to high-frequency indicators, consumer prices were well-behaved in the first half of October, likely due to lagged effect of the monetary policy tightening that occurred after March. We expect the central bank to hold off on raising the policy rate, but the probability of higher interest rates is increasing.

The trade balance for September will also come out on Tuesday. The trade balance registered a USD 1.1 billion deficit in August; bringing the 12-month trade deficit to USD 4.1 billion (down from a surplus of USD 2.1 billion in 2016). We expect a trade deficit of USD 363 million in September.
On Tuesday, the INDEC will publish the EMAE (official monthly GDP proxy) for August. We expect activity to grow 3.9% year-over-year (0.2% mom/sa) after gaining 4.9% in July (0.7% adjusted by seasonality).

Brazil 

The Brazilian Central Bank’s Monetary Policy Committee (Copom) will meet again next week. Recent data show an environment of still falling underlying inflation and anchored expectations, with signs of a still gradual but increasingly broader recovery of economic activity. Copom’s inflation forecast is likely to remain stable for 2017 and decline slightly for 2018, relative to what was presented in the latest inflation report. We expect the Copom to reduce the easing pace to 0.75pp, which would represent a moderate pace reduction from the 1.00pp cuts implemented in the last four meetings. This decision would be consistent with the committee’s recent signaling, considering the evolution within expectations of the baseline scenario and the stage of the easing cycle. In the post-meeting statement, we expect the committee to continue to signal continuity of the easing cycle and further reduction of the easing pace at the December meeting, if the conditions described in the baseline scenario are maintained. We maintain our call for a 0.75pp cut next week, followed by two 0.50pp reductions in the December and February meetings, bringing the Selic rate to the final level of 6.5%.

The charges against President Temer are expected to be voted in the Lower House floor on Wednesday, after clearing the Constitution and Justice Committee this week. After the charges, focus will shift again to the fiscal reform agenda. The market will be particularly interested on the chances of social security reform approval.

On economic activity, FGV will release its industrial business confidence preview for October on Tuesday. We expect a slight improvement in comparison with September, marking a fourth consecutive monthly increase. Confidence indicators for consumer, retail and construction, also from FGV, will be released throughout the week.

On fiscal accounts, the central government result for September will come through on Thursday, we expect a BRL 26.4 billion deficit.

Onto the balance of payments report (Thu.), we expect a USD 0.6 billion current account deficit in September, below last year’s deficit of USD 0.5 billion for the same month. The trade surplus will contribute positively, but the deficit on the income and service accounts will keep the current account under pressure. Over twelve months, the current account deficit should sum to USD 13.5 billion (0.7% of GDP). We expect direct investment in the country (DIC) to register inflows of USD 6.5 billion in September – if confirmed, DIC will amount to USD 84 billion over 12 months.

Colombia

The national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of August on Monday. The July reading showed an activity improvement with the calendar-adjusted activity series expanding 3.0% yoy (1.4% in June). Growth in the quarter ending in July improved to 2.1% (1.7% in 2Q17 and 0.5% in 1Q17). Sequentially, activity improved to 4.4% qoq/saar, from 2.3% in 2Q17 and -1.8% in 1Q17. With activity indicators in the month moderating somewhat, we expect the coincident indicator to post growth of 1.3% yoy (adjusted for calendar effects).

On Wednesday, think-tank Fedesarrollo will release the September Industrial and Retail confidence indices. In August, industrial and retail confidence remained below the levels recorded one year prior. Industrial confidence came in at -1.9% (0 = neutral), below the +7.9% recorded one year earlier. Corrected for seasonal factors, industrial confidence remains in negative territory but inched up from July. Meanwhile, retail confidence remains in optimistic territory, but is worse than one year ago (17.5% from 30.1% one year ago). The decline is mainly due to the worsening of the current performance, but falling expectations for the next six months added to the decline as well. The lack of a significant recovery in confidence is in line our out expectation of a mild recovery in 2H16.

On Friday, the central bank of Colombia holds its monthly monetary policy meeting. At the recent IMF meetings, Governor Juan Jose Echavarría signaled that policy makers are likely to hold interest rates at their current level for “a while”, as they gauge whether inflation is falling toward its target. Inflation has accelerated in the last few months – due largely to a low base of comparison – but at a slower pace than expected by the market. This development, along with disappointing August activity, will likely lead Finance Minister Cárdenas to pursue his call for rate cuts (already expressed in the media). However, having taken the policy rate down to a neutral level, it remains likely that the majority of the board will opt to extend the pause (policy rate at 5.25%) in the easing cycle as it evaluates the inflation trend.

Mexico

On Tuesday, the statistics institute (INEGI) will publish CPI inflation figures for the first half of October. We expect bi-weekly inflation to post 0.64%, driven by the seasonality of electricity prices (which are always hiked in October and November, because of the price-setting behavior of the CFE) and the increase of gasoline prices. Conversely, we expect the lagged effects of MXN appreciation to exert downward pressure. Assuming our forecast is correct, inflation would increase to 6.32% year-over-year (from 6.17% in the second half of September).

At the same time, INEGI will publish August’s monthly GDP proxy (IGAE), whose growth we expect to accelerate to 1.4% year-over-year (after growing 1% in July). We already know that the contraction of industrial production moderated in August (to 0.5% year-over-year, from a 1.4% fall in July). Moreover, robust formal employment likely continued providing support to service sectors.

INEGI will announce August’s retail sales on Wednesday. We estimate that retail sales’ growth deteriorated to 0.3% year-over-year, after posting 0.4% year-over-year in July. Notably, in August real wages fell at a sharper pace (because that was the month when inflation peaked) and consumer credit slowed down further (amid higher domestic interest rates). Robust formal employment, however, continued providing a cushion to retail sales.

Finally, INEGI will announce September’s trade balance on Thursday. We expect the trade deficit to narrow. In our view, the improvement of the non-energy balance, driven by firmer manufacturing exports (reflecting the impulse from stronger industrial production in the U.S.), probably more than offset the deterioration of the energy balance.