The IPCA increased 0.16% m/m in September, above the median of analysts’ forecasts (0.09%).
Talk of the Day
September’s IPCA consumer inflation will be released today at 9:00 AM (SP time). We forecast a 0.10% monthly increase, with year-over-year inflation stable at 2.5%. The transport group will have the major positive contribution to the headline (+16 bps), due to an increase on fuel and airfare prices. Food and beverage and housing groups will have the main negative contribution (-12 bps and -6 bps respectively).
According to Anfavea, auto production reached 237k in September, slightly above our forecasts (233k) and up 5.9% mom/sa (our estimate). Strong gains in both August and September have resumed the upward trend in auto production, briefly interrupted in the June-July period. The production breakdown shows light vehicles (6.6% mom/sa) drove growth, while trucks and buses lost steam (-5.3%) after a strong 1H17. Domestic sales rose further (4.8%), while exports have been stable for two months in a row (+1.1% in August followed by -0.8% in September). The positive year-over-year figures for exports (52.2%) and domestic sales (24.5%) highlight the improvement since 2016, yet the sector activity level remains substantially below the 2011-2013 highs. Inventories (relative to sales) fell and are now slightly below the historical average. We revised upward our preliminary forecast for September industrial production to 0.8% mom/sa (previously: 0.7%).
The monthly proxy for private consumption was solid in July, decoupling from retail sales (which weakened during the same month); the former indicator is broader than the latter, and correlates better to consumption in GDP. The monthly proxy for private consumption grew 2.9% year-over-year in July. According to calendar-adjusted data reported by the statistics institute, growth was slightly higher (3.1% year-over-year), with the three-month moving average growth rate standing at 3.6% year-over-year (from 4.2% in June).
Although a temporary drop is likely in September due to the disruptions caused by the earthquakes, we expect private consumption growth to recover quickly and stay robust, underpinned by the acceleration of the real wage bill and the recent improvement of consumer confidence. A recent survey conducted by the statistics institute estimated that 40% of businesses (from the states affected by the quakes) closed their doors for at least one day (and 16% of businesses in Mexico City shut down for more than three days). Therefore, it is highly likely that September will be a bad month. Nevertheless, looking beyond this temporary headwind, the growth of consumption will be supported by the acceleration of the real wage bill. In fact, inflation is already falling, and we expect employment growth to remain robust (as the acceleration of the U.S. economy supports job creation in Mexico). The presidential elections (July 2018), however, pose a risk for consumer sentiment. ** Full story here.
After hitting an all-time low in January, Mexico’s consumer confidence has been recovering gradually over the course of 2017, with a significant improvement in September. For the past months, we have argued that the recovery has been modest – considering that the level of consumer confidence was not far from the average of 2009 (80.5, when the Mexican economy was undergoing recession) – but the improvement has been sustained. In September, consumer confidence increased by 1% mom/sa, reaching the level of 88.8 (now further above the depressed levels of 2009). In year-over-year terms, seasonally-adjusted consumer confidence was up by 6% (from an average decline of 11% in 1H17). We attribute the improvement of consumer confidence to the tightness of labor market conditions, with solid formal employment, which has offset the negative effect of rising inflation. Looking ahead, we believe consumer confidence will show a more substantial improvement only in 2018, when inflation falls significantly and NAFTA renegotiation attains an acceptable compromise for all parties.
Growth momentum is improving in the third quarter of the year. The Imacec (monthly proxy for GDP) grew 2.4% year over year in August (2.8% in July), in line with our forecast (just below the Bloomberg market consensus of 2.7%). Once corrected for seasonal and calendar effects, growth in August was somewhat lower at 2.2% (2.5% in July). At the margin, the temporary boost in mining lifted overall growth to 7.5% qoq/saar from 3.2% in 2Q17 and 0.5% in 1Q17. Mining production accelerated to 60.6% qoq/saar (+26.0% in 2Q17 and -24.7% in 1Q17). Moreover, non-mining activity is growing at 3.9% qoq/saar, up from 1.5% in 2Q17 and 2.9% 1Q17.
The mining bounce back and improved non-mining activity led us to revise our growth forecast to 1.7% for this year (1.3% previously), broadly in line with the 1.6% last year. We also now forecast growth of 2.7% for 2018 (2.5% previously). A favorable global environment is boosting copper prices, while monetary policy in Chile remains expansionary. We note the outcome of the presidential election and the debate over the reform agenda next year could have an impact on confidence and investment, and consequently on growth. Meanwhile, the improved outlook for growth is in line with our updated baseline scenario that no longer includes additional monetary easing; rather, stable rates at the low 2.5% for a prolonged period. ** Full story here.
Real wage growth remained above 2.0% in August, still favoring the private consumption performance. Nominal wages increased 4.2% year-over-year in August (according to the historically merged series), versus 4.5% in July and 4.3% in 1H17. As inflation picked up to 1.9% in the month, real wage growth slowed to 2.3% year-over-year (2.7% in July and 1.7% in 1H17). The real wage bill growth picked up to 4.9% in the quarter ending in August (3.9% in 2Q17 and 3% in 1Q17), when total employment growth is considered. Meanwhile, when only salaried employment is included, growth of the real wage bill in the quarter came in at 4.0% year over year (3.5% in 2Q17 and 1.0% in 1Q17), boosted by rising public salaried employment. Real wage growth will likely stay elevated ahead as inflationary pressures remain contained.
Consumer price inflation came in lower than expected in September. Prices gained just 0.04% in the month (-0.05% in September 2016), below both our +0.18% forecast and the +0.17% Bloomberg market consensus. Thus, 12-month inflation picked up to 3.97% (3.87% in the previous month), but remained below the 4.0% upper bound of the target range (while both the market and us expected inflation to exceed this limit). Once again, food prices (-0.40% month-over-month; -0.12pp contribution to the headline figure) drove the low print in the month, while entertainment (-0.32%) was also a drag. Meanwhile, the increase in housing related prices (0.34% month-over-month) led the gain in the month (+0.11 pp contribution), as was the case in the previous month. The moderation in the core measure excluding food was more subtle (+0.22% from +0.32% one year ago), while regulated prices (excluding food items) continue to reflect inertia in price gains (+0.49% in the month, compared to +0.40% one year prior). The lowest gain in the month happened within tradable goods, excluding food and regulated prices (+0.09% month-over-month, +0.41% 12 months earlier), while non-tradable remained stable (+0.19% versus +0.20% in 2016). Despite falling in the month, food price prices continued to pick up in annual terms to 2.22% (+1.90% in the previous month) aided by a low base of comparison. Excluding food prices, inflation inched down to 4.71% (from 4.81%) and remains above the upper bound of the 3-4% target range. Non-tradable inflation (excluding food and regulated prices) was also stable from last month at 5.21%, while tradable goods prices (also excluding food and regulated prices) continued to slow down (to 3.41% after a 3.75% in August).
In spite of the downside surprise to inflation, prices are set to pick up by yearend aided by a low base of comparison. Hence, we continue to see the central bank leaving the policy rate on hold at 5.25% until yearend
Global Monetary Policy Monitor: Rate cuts in Latin America have become less widespread. In September, there were monetary policy decisions in 29 of the 33 countries we monitor, with rate reductions in 4 emerging economies and a rate hike in Canada. The number of central banks reducing interest rates remained above the number of central banks increasing the policy rate. In October, we expect the ECB to announce a reduction in the pace of QE purchases from EUR 60 billion to 40 billion per month in the first half of 2018. In Latin America, well-behaved exchange rates and spare capacity still leave room for monetary easing. In Brazil, we expect a moderate reduction in the easing pace, from 100-bp in September to 75-bp in October, in line with the BCB’s recent communication. We also expect an additional 25-bp rate cut in Peru, ending the easing cycle. In Argentina, Chile and Colombia, we expect the central banks to maintain the policy rate. ** Full story here.