Brazil’s job creation improving, but still negative


January’s job creation virtually in line with expectations. CAGED formal job creation registered -40.8k in January, in line with our estimate and market expectations (both at -36k). Seasonally-adjusted, 8k formal jobs were closed. The 3-month moving average improved to -57k from -81k. Overall, contractions have slowed and January’s result represents a slight improvement in the last two months, but the numbers are still compatible with a rise in the unemployment rate. We expect positive job creation only in the second half of this year.


Nominal fiscal deficit indicators narrowed in January on the back of a significant increase of oil revenues. The rolling 12-month public sector borrowing requirements narrowed to MXN 544.5 billion in January 2017 (from MXN 556.6 billion in December 2016, 2.9% of GDP), with the public deficit moving to MXN 485.1 billion (from MXN 503.7 billion, 2.6% of GDP) and the primary balance posting a MXN 12.8 billion surplus (from a 24 billion deficit, -0.1% of GDP) during the same period. In our view, it is likely that the Mexican government will meet its fiscal targets for 2017 (primary surplus of 0.4% of GDP and public sector borrowing requirements of 2.9% of GDP), potentially preventing a rating downgrade. We believe that higher oil revenues (in spite of lower oil output) and a large dividend from the central Bank (possibly around 1.5% of GDP, resulting from exchange rate gains on international reserves) will be crucial. However, the recent decision of the government to smooth gasoline price variations through the adjustment of the excise tax (until the transition to full liberalization is completed in December 2017) introduces a new element of risk. Specifically, this means that any depreciation of the exchange rate will have a smaller positive effect on fiscal flows (considering that even though the local currency value of oil revenues would increase, the government would drain revenues from a lower IEPS that would need to decrease to stabilize gasoline prices). ** Full story here.

Mexico’s gross fixed investment recovered somewhat in 4Q16, on the back of residential construction, but is seems bound to slowdown in coming quarters. Gross fixed investment expanded 0.9% y/y in December – in between our forecast (1%) and market expectations (0.8%) – leaving the growth rate of 4Q16 at 1% y/y (3Q16: -0.7% y/y). Investment in machinery & equipment weakened in 4Q16 (to 0.7% y/y, from 2.9% y/y in 3Q16), but this was offset by stronger construction activity (1.2% y/y in 4Q16, from -3.1% y/y previously). Within construction, the residential component picked up (5.5% y/y, from 0.6% y/y in 3Q16) while non-residential construction kept falling (-2.3% y/y in 4Q16, from 6.2% y/y previously). Looking ahead, we expect the uncertainty over the course of US policies to discourage investments in Mexico. Moreover, the deterioration of household balance sheets (amid higher inflation and rising domestic interest rates) coupled with sagging consumer confidence will likely affect residential construction.


The continuance of business confidence at low levels does not point to a significant recovery in activity ahead. Think-tank Icare published its business confidence index for February, which came in at 46.0 (50 is neutral), from the 46.4 one year ago (January: 44.9). Confidence has now completed 35 consecutive months in pessimistic territory. Low inflation is leading to  an improvement in real wage growth, likely supporting the commerce sub-index staying in favorable territory at 51.0 (49.8 one year ago and 50.3 last month). Mining confidence is at 61.6, likely favored by the recovery in copper prices. The labor strike at the country’s largest copper mine continuing sentiment in the industry ahead could cool. Once the volatile mining confidence is excluded, business confidence sits at 42.4 (42.6 one year ago). We expect an activity recovery to 2.0% this year, from the anticipated 1.5% for 2016; however, risks remain tilted to the downside. As average copper prices improve, inflation declines and interest rates fall, the economy will likely react favorably. However, the political uncertainty leading up to the general election in November could keep private sentiment and investment subdued, while supply shocks in the mining sector could impede the recovery.

New sectorial indices released by the national statistics institute (INE) show retail activity remained robust at the beginning of the year. Retail and vehicle sales grew 3.8% m/m in January (previous: 2.7%), in line with market consensus and below our 4.5% forecast. The month was once again characterized by strong vehicle sales (21.8% y/y increase), helping lift durable goods sales growth to 17.4%. The 3.0% annual gain in retail sales (previous: 2.6%) was driven by the 11.3% rise in clothing, footwear and specialized leather products (explaining around one third of the 1.3 percentage point contribution to total commercial sales). When compared to the previous retail sales index, the new series hints at a downwards revision in retail activity in the latter part of last year. Meanwhile, supermarket sales increased 1.8% y/y, down from 3.4% at the close of 2016. With inflation expected to stay low and the interest rate likely to decline further, private consumption activity could see some benefit. However, the loosening labor market will partly counter this. Overall, we expect an activity recovery to 2.0% this year, from the anticipated 1.5% for 2016, however, risks remain tilted to the downside. ** Full story here.

Today, central bank will publish the GDP proxy (Imacec)for the month of January. Industrial production indicators came in weak for the month with mining and manufacturing contracting from one year earlier. On the other hand, private consumption related activity remained dynamic at the beginning of the year. We expect the GDP proxy to be flat from December (0.9% in the previous month), resulting in an annual growth rate of 1.0% (1.2% in the previous month).


Consumer price inflation continued to decelerate in January, as food price gains moderate. Prices increased 1.01% from January, down from 1.28% one year before, below market expectations as well as Itaú’s 1.30% forecast. Most major categories posted gains in the month, with education (+6.78% MoM, 0.42 percentage point contribution to the headline gain) and food prices (+0.71 MoM, +0.21pp) leading the monthly increase. The gain in food prices came well below the 1.44% recorded one year prior, as past supply-side shocks fade. Non-tradable (excluding food) price inflation accelerated to 1.66% (+1.44% one year prior) as did tradable inflation (1.11%, from 0.75%), likely reflecting the implementation of the VAT increase in February. The resulting 5.18% annual inflation (5.47% in January) was the lowest since August 2015 (4.74%). Food price inflation was the main contributor to 12-month inflation (+5.21% YoY, +1.55pp contribution), followed by housing related costs (+4.55% YoY, +1.39pp contribution). Excluding food prices, inflation decelerated from the previous month, as did regulated price inflation (also excluding food items). Meanwhile non-tradable price inflation and tradable goods price inflation (both excluding food and regulated prices) picked up from one year ago. Going forward, we expect the disinflationary process to advance amid a firmer currency and a negative output gap.

All LatAm

Our Activity Surprise Index decreased to 0.03 in February from 0.14 in January. Mexico and Colombia are the only economies with indexes in positive territory, while Peru’s index showed a significant decline. In Brazil, the surprises were negative for most monitored indicators, pointing to a weak 4Q16. The reality suggests that activity in the region is picking up, but that a recovery will be slow. ** Full story here.


Global Monetary Policy Monitor: interest rate differential with the US to narrow further in South America. In February, monetary policy decisions were made in 18 of the 33 countries we monitor. The number of central banks hiking interest rates has equaled the number of central banks cutting rates. On the expansionary side, Brazil’s central bank reduced rates by another 75 bps, in line with expectations, and in Colombia, the central bank surprised the market with a 25 bps rate cut (while it was expected to stay on hold). On the contractionary side, in Mexico, Banxico implemented another 50 bps rate hike, and in China, several interest rates were up. We expect the monetary easing process to continue in South America. We forecast additional rate cuts in Brazil, Chile, Colombia and Argentina. On the other hand, in Peru, our forecast is for interest rates to remain unchanged, while in Mexico, we expect rate hikes along with the Fed. In March, we highlight the decisions in developed countries. We expect the Fed to hike interest rates on strong current data, well-behaved financial conditions and the outlook for a more expansionary fiscal policy ahead. In Europe, England and Japan, we expect that the respective central banks will likely maintain the current stimuli. ** Full story here.

The Week Ahead in LatAm


On Thursday, the INDEC (the official statistical agency) will report February inflation for the greater Buenos Aires area (the city of Buenos Aires and neighboring counties in the Province of Buenos Aires). According to Elypsis consulting firm, inflation in that area hit 2.5% month over month.

On Friday, the government of the City of Buenos Aires will release the CPI for February. According to Elypsis, consumer prices climbed 2.9% month over month.


4Q16 GDP will be the week’s main economic release (Tues.). We estimate a contraction of 0.6% quarter-over-quarter seasonally adjusted. From the supply standpoint, we expect the eighth drop in a row in service activity (-0.6%). The industrial sector may also contract during the quarter. On the demand side, household spending is expected to fall for the eighth consecutive quarter as well (-0.6%). Furthermore, investments and exports may also drop, but spending by public administration and imports are likely to advance. If our estimate is correct, GDP declined 3.5% in 2016. In our view, the economy will start expanding in 1Q17.

Moreover, January’s industrial production will hit the wires on Wednesday. We expect production to be broadly stable in the month, with a 0.1% increase month-over-month seasonally adjusted. Finally, we estimate vehicle production (Anfavea) to reach 190k in February, to be released on Tuesday. If confirmed, this will represent a 0.6% increase in production month-over-month seasonally adjusted.

Moving to the inflation front, February’s IPCA will come out on Friday, for which we forecast a 0.45% monthly rise. Inflation in the month will be marked by the annual readjustment of tuition fees, which will make up half of the monthly change. In the opposite direction, slightly negative monthly contributions from the food and clothing groups are expected. In annual terms, inflation will set back to 4.9% from 5.35% in January, further consolidating its downward trend.


On Monday, central bank will publish the GDP proxy (Imacec) for the month of January. Industrial production indicators came in weak for the month with mining and manufacturing contracting from one year earlier. On the other hand, private consumption related activity remained dynamic at the beginning of the year. We expect the GDP proxy to be flat from December (0.9% in the previous month), resulting in an annual growth rate of 1.0% (1.2% in the previous month).

The central bank will publish the trade balance for February on Tuesday. We forecast a USD 650 million surplus (USD 720 million in January), taking the rolling 12-month trade balance to USD 4.3 billion (USD 4.6 billion in 2016). In the first three weeks of the month, imports increased 14.8% (+13.4% in January), pulled up by energy imports and durable consumer goods, while industrial goods led the 2.2% rise in total exports (+8.8% in the previous month).

Later on Tuesday, the National Institute of Statistics (INE) will publish nominal wage growth for January. In the previous month, nominal wage growth moderated to 4.7% year-over-year (4.9% previously). We expect the current disinflation and the loosening labor market to limit wage growth ahead.

On Wednesday, INE will publish inflation data for February. We expect prices to gain 0.3% from January (+0.5% in January), but acknowledge upside risks. Consumer prices are expected to be pulled up by seasonal changes to apparel, annual rental readjustment and electricity prices. As a result, annual inflation would come in at 2.8% (2.8% previously), hovering below the center of the central bank’s 2%-4% target range.


On Saturday, inflation for February will be released. In the previous month, consumer price inflation continued to decelerate to 5.47% yoy (5.75% at the close of 2016 and 7.45% one year before). The slowdown came from a significant deceleration of food price inflation. We expect consumer prices to gain 1.30% from January, partly pulled up by the implementation of the VAT increase, while food price gains moderate. As a result, annual inflation will stay broadly stable at 5.49%.

On Friday, the monetary policy meeting minutes from February will be published. At the meeting, the central bank surprised the market for the third consecutive month by cutting the policy rate by 25-bp to 7.25%. The decision was by a 4-2 majority. During the press conference announcing the decision, both Finance Minister Cardenas and Central Bank General Manager Echavarría mentioned the sharp fall of consumer confidence to a historical low was the key factor behind the rate cut. The minutes will likely confirm that the most likely scenario has the policy rate falling in coming months, but the timing will be data dependent.



INEGI (the statistics institute) will announce February’s CPI inflation on Thursday. We expect a 0.48% month-over-month variation, driven by a significant increase of core goods (tradable) prices which reflects the pass-through from exchange rate depreciation. Energy prices would also increase, in spite of a small decrease in gasoline prices, because natural gas and LPG prices were higher. Conversely, a drop of agricultural prices would cushion the upward pressure. Assuming our forecast is correct, headline inflation would rise from 4.72% year-over-year in January to 4.76% year-over-year in February.


The Central Bank will hold its monthly meeting on Thursday, to decide on the reference rate. Given the recent increase of headline inflation (to 3.3%, from 3.1%), further above the target range (1%-3%), we expect the board to maintain the reference rate at 4.25%. The increase of U.S. Treasury yields in 2017, and its potential implications on Peru’s partially dollarized economy, will also keep the BCRP watchful. In fact, the BCRP just lowered foreign currency reserve requirements to prevent an unwarranted tightening of USD credit conditions (particularly relevant for corporates).

Ending the week, INEI (the statistics institute) will publish January’s trade balance. We forecast a surplus of USD 126 million. Preliminary data from customs (SUNAT) show that nominal exports grew 25% year-over-year in January, driven by higher metal prices and volumes. Nominal imports, in contrast, expanded at a moderate pace (1% year-over-year).

Fuente: ITAU

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