Brazilian Central Bank: Further stimulus ahead

We are revising our end-cycle Selic call to 6.25% pa.

Talk of the Day

The Copom delivered, unanimously, the expected 25-bp rate cut, taking the Selic to an unprecedented 6.5% pa level. The committee indicated that its base case, as of now, is an additional rate cut in its next meeting, to 6.25% pa, with a view towards mitigating the risk of a slower than anticipated convergence to the target. We are revising our end-cycle call to 6.25% pa, and we will wait for the policy meeting minutes, that will be released on Tuesday, March 27 (08:00 SP Time), for extra clues on the authorities’ thinking.

According to FGV’s industry survey preview, business confidence in the industrial sector rose slightly 1.7% in March to 102.1 – the highest level since Jun/13. The increase came from both current conditions (1.0%) and expectations (2.3%). The preview of the capacity utilization (NUCI) rose 0.5 pp to 76.1. The index is 2.4 pp above the low levels seen in 4Q16, suggesting the GDP gap is closing yet remains well below the neutral level (81.5, according to our estimates). The final survey will be released on March 27.

Day Ahead: The Central Bank announced a FX swap rollover auction of up to 14,000 contracts.


After 20 months of serving as President of Peru, Pedro Pablo Kuczynski (PPK) announced his voluntary resignation amid evidence of corruption in his administration and the loss of support from an overwhelming majority of congress members which made the impeachment vote (scheduled for March 22) very likely to result in his ousting. Back in December, as widely argued by political analysts and journalists,  PPK likely survived the impeachment vote because the youngest son of former President Alberto Fujimori – Kenji Fujimori (a member of the majority opposition party, Fuerza Popular) – brokered a deal to garner votes against impeachment in exchange for the liberty of his father. Thus, Kenji, along with other 9 members of Fuerza Popular who abstained from voting, ended up saving PPK as the impeachment attempt fell short of 8 “yes” votes (79 vs. 87 required). A few days later, PPK granted a humanitarian pardon to Alberto Fujimori who was serving a 25-year sentence over human rights crimes. Kenji and his 9 colleagues quit Fuerza Popular (the party led his sister, Keiko Fujimori) and created an independent block (later joined by two more defectors) which stripped Fuerza Popular of 12 seats (down to 59, from 71, out of 130 congress seats) and supported PPK until his last day  in power. PPK’s government will be remembered as one that implemented some pro-market reforms (basically a combination of tax cuts and slashing of red tape to boost private investment) but was tainted by corruption scandals. Notably, what changed between December 2017 and March 2018 is that the amount of incriminatory evidence increased substantially and public opinion shifted in favor of impeachment. 

PPK’s resignation has reduced political uncertainty as it is increasingly clear that the First Vice President, Martín Vizcarra, will become the Interim President in accordance with what is dictated by the Constitution (which implies continuity for economic policies and less confrontation with Congress). In fact, the market reaction over the news of PPK’s resignation was slightly positive. Tonight, Vizcarra tweeted: “I am appalled by the current situation, like the majority of Peruvians. But I have the conviction that together we will demonstrate once again that we can move forward […] Hence, I am returning to Peru to be at the service of the country, respecting the Constitution. Peru is first”Importantly, two weeks ago the leader of the Congress majority party, Keiko Fujimori, said in a TV interview that PPK should step down and that her party (Fuera Popular) would support a government led by Vizcarra. Moreover, today the President of Congress, Luis Galarreta, stated that all of the opposition parties have decided to support the (likely) new interim president. In fact, Congress has clear incentives to back Vizcarra in the future because if he ousted the consequence would be early elections (with congress members losing their jobs). Looking forward, we see a weak Peruvian government (Vizcarra will complete PPK’s 5-year term until 2021) – with little capacity to carry out reforms – but at least free of the political crisis that proved so destabilizing for PPK.


Argentina’s GDP accelerated in 4Q17. GDP grew 3.9% YoY, up from a revised 3.8% in 3Q17 (4.2% before revision) and 3% in 2Q17. Growth was stronger than indicated by the official monthly GDP proxy (EMAE), which showed an expansion of 3.6% in the quarter. On a sequential basis, output increased by 1.0%, following a revised 0.8% gain in the previous quarter (0.9% before revision). As a result, GDP grew 2.9% YoY in 2017, slightly above the 2.8% growth posted by the EMAE. Domestic demand (excluding inventories) grew a solid 7.3% YoY (2.2% adjusted for seasonality), up from 6.1% in 3Q17. Internal demand was led by a hefty 20.7% increase in gross investment, vs. 13.0% in the previous quarter. Private consumption posted a solid 4.8% increase, from 4.2% in 3Q17. Public consumption continued to decelerate, to 1.4% (from 1.8% previously). On a sequential basis, fixed investment expanded by 7.4% and private consumption increased by 1.3%. Exports gained a modest 0.3%, while public consumption ticked down 0.8%.

Consistent with the economic activity performance in 4Q17, the unemployment rate fell to 7.2% (from 7.6% in the same quarter of 2016). The figure was in line with our call and below market expectations of 7.4%, according to the Bloomberg survey. Across regions, the highest unemployment rate was registered in the greater metropolitan region of Buenos Aires (8.4%), which makes up 54% of the work force.

We recently revised our GDP growth forecast for this year down to 2.8%. The expected negative impact of a severe drought will partly offset the benefits of a better global economic outlook (including a recovery in Brazil) and the positive sentiment for investment after the strong result of the government coalition in the midterm elections. ** Full Story here.

The 12-month rolling trade deficit widened further in February. The trade balance showed a deficit of USD 903 million in February 2018, compared with a deficit of USD 217 million in the same month of 2017. The deficit was slightly lower than our forecast (USD 1 billion) and higher than market consensus (Bloomberg: USD 550 million deficit). As a consequence, the 12-month trade balance registered a deficit of USD 10.1 billion, from USD 9.3 billion in January. Imports increased by 26.3% YoY, led by purchases of intermediate goods and parts (37.2%), followed by imports of oil (30.8%), cars (25.1%) and consumer goods (23.3%). Export increased by 10.1% YoY in February, after growing 11.1% in January.

We expect the economic expansion to lead to a wider trade deficit in 2018 relative to 2017. We forecast a deficit of USD 10 billion for this year, with a current-account deficit of 5.5% of GDP. ** Full Story here.

Day Ahead: Statistics institute (INDEC) will release the current account balance for 4Q17 at 4:00 PM (SP Time). We estimate the current account deficit at 5.5% of GDP in 2017.


The first inflation report (IPoM) for 2018 suggests the central bank is in no rush to begin a tightening cycle.The board’s baseline scenario sees rates evolving in line with the results from available surveys; steady at 2.5% until – at least – the start of 4Q18. The analyst survey has one hike before year-end, while the trader survey points to a hike taking place between 4Q18 and 1Q19. Both see the policy rate reaching 3.5% in two years. One change from the December IPoM edition is the indication that the start of the hiking rates will unfold as “macroeconomic conditions consolidate the convergence of inflation to the target”, with no explicit reference to a date when this would occur. In the previous IPoM, the central bank noted the likely start of the normalization process would be in 2H18 (as the output gap started to narrow).

An improved external scenario, private sentiment recovery and favorable financial conditions along with solid growth by the end of 2017, led the central bank to upgrade its growth outlook. For 2018, activity is seen increasing between 3.0% and 4.0% (Itaú: 3.6%), raising the range by half a percentage point since the 4Q17 IPoM. While inflation has evolved in line with expectations (around 2%) since December, the central bank lowered its inflation forecast. The baseline scenario now sees headline inflation hovering around 2% until 1Q19 with a yearend rate of 2.3% for this year (down from 2.9% previously; Itaú: 2.5%). The December IPoM saw higher core inflation by yearend 2018, at 2.6%. The central bank’s baseline scenario assumes some depreciation of the real exchange rate over the forecast horizon towards its long-term equilibrium level (close to a 5% depreciation from spot levels). A weaker Chilean peso would also aid an inflation increase in the forecast horizon. Overall, the risks for these inflation forecasts are deemed balanced. However, the central bank notes that the recent evolution of the exchange rate has led to lower inflation expectations and the board will continue to monitor the implication of this on the convergence of inflation to the target (read by us as its diluted easing bias). ** Full Story here.


The GDP slowdown is largely due to falling investment. Aggregate supply (that is, GDP plus imports of goods & services) grew 3% year-over-year in 4Q17, closer to our forecast (2.9%) than to median market expectations (2.6%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was also 3% year-over-year (from 2.6% in 3Q17). Interestingly, the demand breakdown of GDP reveals that the growth of domestic demand weakened to 1.6% in 2017 (from 3% in 2016) dragged by falling investment (-1.5%, from 1.1%). In fact, both private investment (-0.6%, from 2.2%) and public investment (-6.4%, from -4.2%) contracted. Consumption, in contrast, only weakened moderately, with private consumption (3%, from 3.7%) performing better than public consumption (0.1%, from 2.4%). On the foreign trade front, exports of goods & services accelerated to 3.8% in 2017 (from 3.5% in 2016) which – considering the abovementioned growth for imports – implied a net negative contribution of -0.9pp to GDP growth. Finally, inventories had a nil contribution to growth in 2017.

We expect GDP growth of 1.8% in 2018, slightly below the 2% recorded in the previous year. The factors playing against economic growth in the short-term are the uncertainties associated to NAFTA and elections (which put investment decisions on hold) and tight macro policies (fiscal and monetary). On the positive side, however, we note that a stronger U.S. economy will boost Mexican manufacturing exports, lower inflation will support consumption, and the fiscal drag will be smaller in 2018 (last year of fiscal consolidation plan) relative to 2017. ** Full Story here.

Day Ahead: Statistics institute (INEGI) will publish CPI inflation figures for the first half of March at 11:00 AM (SP Time). We expect bi-weekly inflation to post 0.19% (consensus: 0.24%). Assuming our forecast is correct, CPI inflation would decrease to 5.07% year-over-year (consensus: 5.14%).


Day Ahead: The national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of January at 4:00 PM (SP Time). With activity indicators in the month coming in mixed (but aided by low base effects), we expect the coincident indicator to post growth of 2.0% yoy (consensus: 1.80%).

Fuente: ITAU

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