Brazilian annual inflation touches the lower bound around the target in June

Brazil

June’s IPCA consumer inflation will be released today at 9:00 AM (SP time).We forecast a 0.17% monthly decrease, with year-over-year inflation slowing to 3.1% from 3.6%.

According to Anfavea, auto production reached 212k in June, below our forecasts (221k). May production was revised upward to 251k from 237k in the first release. We estimate auto production fell 5.3% mom/sa in June following a 15.9% increase in the previous month. Despite the seasonally adjusted decline, the result is not a clear signal that the sector performance was already affected by the recent increase in political uncertainty, given the strong increase in May and the high volatility in the monthly series. Also, the production breakdown shows the decline was driven by light vehicles (-9.7%), while trucks and buses rose 3%, up for the fifth consecutive month. Exports rose 0.3% mom/sa and 49.8% yoy, while domestic sales rose 2.8% mom/sa and 13.5% yoy over the same period. The strong year-over-year figures highlight the improvement from 1H16, yet the sector activity level remains well below the levels of 2011-13. Inventories remain low, not only in absolute terms but also relative to sales. Finally, employment in the auto sector fell to 121.6k in June from 121.9k in the revised May figure. The strong gain in employment shown in the previous release for May was erased in the revision. Along with other economic activity indicators (such as energy consumption, imports and capacity utilization) our preliminary forecast for industrial production in June is -0.8% mom/sa.

Why the spending ceiling won’t be a problem next year? Some investors are worried with the possibility that the constitutional spending ceiling is breached by 2018. We see problems to comply with the ceiling starting only in 2019 if no measure is taken whatsoever. Also, we highlight that concerns could be postponed by around two years if the government manages to approve the end of the annual bonus (which also usually comes out on the media as being studied, but needs a constitutional amendment to be implemented) and of the payroll tax exemption (which is already being discussed – at least partially – in Congress through an ordinary law) in the meantime. From 2021 onwards, complying with the ceiling becomes harder and needs a deep reform in public primary expenditure.

Fuente: ITAU

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