Argentine Central Bank pauses easing cycle

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Argentina’s central bank left its benchmark interest rate (7-day repo rate) unchanged at 27.25% at its first monetary policy meeting in February. The decision, which was in line with our call and that of most of the market (according to Bloomberg, only 2 out of 25 analysts expected a cut in the reference rate), followed a 150-bp cut in January (75bps at each of the two monthly meetings). In the press release accompanying the monetary decision, the central bank cited the inflation in the city of Buenos Aires and the increase in inflation expectations. The central bank also noted that it must be cautious in the accommodation of the monetary policy rate given the mixed signals from consumer prices in the first weeks of the year.

We expect no change at the next monetary policy meeting, given the rising inflation expectations and the likely unfavorable upcoming CPI readings. ** Full Story here.

Day Ahead: The INDEC (official statistical agency) will publish the National CPI for January at 5:00 PM (SP Time). We and the market consensus expect headline inflation to print at 1.9% month over month in January (2.1% month over month for the core).


Retail sales fell in 2017 for the first time since the global financial crisis, with car sales being a key drag for a third consecutive year. In the month of December, total retail sales dropped 3.8% yoy (-1.2% previously), below the Bloomberg market consensus of a 1.6% drop and our -0.5% forecast. In 4Q17, total retail sales dropped 2.1% yoy (+1.0% in 3Q17), leading to a decline of 0.9% in 2017 (vs. +1.6% in 2016). The high base of comparison can partly explain weaker growth numbers in 4Q17 as consumers brought forward purchases (to 4Q16) in anticipation of the VAT hike in early 2017.

Despite improving terms-of-trade, weak internal demand led to falling industrial production in 2017, the weakest performance since 2013. The 0.8% decrease in the month of December (+0.2% previously) was milder than expected (Bloomberg consensus: -2.3%; Itaú: -1.2%), but reveals a frail industrial sector. In the final quarter of 2017, industrial production contracted 0.3%, down from the +0.2% in 3Q17. During 2017, industrial production contracted 0.6% from the previous year, inferior to the 3.7% expansion recorded in 2016.

We expect to see a mild activity recover this year to 2.5% from 1.5% estimated for 2017. The improvement in real wage growth (as disinflation advances), an expansionary monetary policy and, more importantly, favorable external conditions (supporting oil prices) would aid to the acceleration. Meanwhile, a weak labor market and uncertainty around the political cycle could hamper growth this year. While the central bank has communicated the end of its easing cycle given current data, we see the frail activity and a swift disinflation process to lead to additional rate cuts (to 4.0%). ** Full Story here.

A USD 485 million trade surplus was recorded at the close of 2017, the first surplus since August 2014 as recovering commodity prices aid exports. The trade balance was higher than the Bloomberg market consensus of a USD 340 million surplus and closer to our USD 446 million surplus forecast, and was an improvement versus the USD 384 million deficit one year earlier. As a result, a USD 6.2 billion trade deficit was registered in 2017, narrowing from USD 11.1 billion in 2016, and the best outcome since the USD 2.2 billion surplus recorded in 2013. The improvement in the energy balance continues to explain the bulk of the narrowing in the trade deficit, while the non-energy balance has been broadly stable since the end of 2016. At the margin, our own seasonal adjustment shows the trade deficit narrowed further to USD 1.4 billion in the quarter, from USD 5.1 billion in 3Q17 and USD 10.1 billion in 2Q17.

Imports remained weak, as they posted the largest annual drop since October 2016. The 10.3% year over year fall in imports recorded in December led to a 2.2% contraction in 4Q17, after expanding 1.4% in the previous quarter. The 2.6% growth of imports in 2017 – the first expansion since 2014 – was led by intermediate goods (+2.9%) and capital goods (+4.6%), while consumer goods (-0.2%) pulled growth down in the year. At the margin, imports fell 7.7% qoq/saar in 4Q17, less than the 22.7% contraction in the previous quarter, as fuels and capital goods imports remained a drag. With internal demand likely to remain subdued, the terms of trade improvement will continue to favor the correction of Colombia’s external imbalances. Risks are tilted towards a smaller current account deficit than the 3.5% forecasted by us for 2017 (4.3% in 2016). ** Full Story here.

Day Ahead: The national statistics authority will publish the supply-side breakdown of GDP growth for 4Q17 at 2:00 PM (SP Time). We estimate activity increased 0.6% (market consensus: 0.7%) from the previous quarter, resulting in annual growth of 1.7% (market consensus: 1.8%). Overall, growth for 2017 would come in at 1.5%. The national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of December at 5:00 PM (SP Time). With activity indicators in the month still weak, we expect the coincident indicator to post growth of 2.3%, yoy adjusted for calendar effects (market consensus: 1.6%).


According to Focus survey, the IPCA inflation expectation for 2018 fell to 3.84% from 3.94%, while the median of IPCA forecasts for 2019 and 2020 stood at 4.25% and 4.00%, respectively. GDP growth expectations remained at 2.70% for 2018, and were also unchanged for 2019 (at 3.00%). Median GDP growth expectations for 2020 rose a tad to 2.69% (from 2.50%). Year-end Selic expectations did not change for the three years horizon (2018-2020): at 6.75% for 2018, and 8.00% for 2019 and 2020.

The Copom minutes was just released; we will publish a report on the central bank’s document still today.


Day Ahead: INEI will announce December’s GDP proxy at 5:00 PM (SP Time). We estimate that the GDP proxy expanded 1.4% year-over-year (market consensus: 2.0%). At the same time, INEI will announce GDP growth for 4Q17. Assuming our forecast for December’s GDP proxy is correct, we estimate growth of 2% year-over-year in 4Q17 (consensus:2.3%). On the same day, INEI will also publish January’s unemployment rate. We and the consensus expect the unemployment rate to come in at 7.4%.

Fuente: ITAU

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