We foresee the easing cycle ending with a policy rate of 4.5%, following two additional 25-bp cuts.
Talk of the day
Banrep surprised market expectations and resumed interest rate cuts with a 25-bp move to 5%, after staying on-hold for only one month. Five board members voted for the decision, while 2 members favored staying on-hold. This is in sharp contrast with the previous month, when only two board members voted for a 25-bp rate cut (with the majority favoring an unchanged policy rate). According to the statement, a more favorable inflation outlook led to the decision to loosen policy despite a somewhat better outlook for activity (the central bank’s technical team revised the growth forecast for 2018 to 2.7% from 2.4% previously). However, the central bank warned the move should not be taken as the beginning of a continuous sequence of rate cuts.
We maintain our forecast that the easing cycle will end with a policy rate of 4.5%, following two additional 25-bp rate cuts. The timing of rate cuts, however, will be (activity and inflation) data dependent. ** Full story here.
The Colombian labor market deteriorated in 3Q17. The national unemployment rate in September rebounded to 9.2% from the 8.5% recorded one year prior. The urban unemployment came in at 10.5%, above the 9.2% print in September 2016, surprising both us and the market (who had a 9.8% forecast). Once adjusted for seasonal factors, the national unemployment rate also increased to 9.4% in 3Q17 (9.6% in September) from 9.2% in 2Q17 (9.4% in 1Q17). The urban unemployment rate had a similar behavior, recording 11% in September (10.1% in August), so 3Q17 increased to 10.8% from 10.6% in 2Q17 (10.4% in 1Q17). We expect the quality of job growth to remain weak in coming months, with an average unemployment rate of 9.0% for 2017 (from 9.2% in 2016). The labor dynamics in urban areas (where formal employment is more prevalent) will be a key determinant of the expected activity recovery ahead.
The BCB released the credit figures for the month of September. The daily average of new non-earmarked loans expanded 5.1% mom/sa in real terms, while new earmarked loans fell 4.0%. Overall seasonally-adjusted delinquency slid 0.1 p.p. to 3.6%. Interest rates charged on non-earmarked loans receded to 43.3% from 45.6%, dropping for non-financial corporations and households. Average spreads in these transactions also narrowed for both segments. Meanwhile, average interest rates charged on earmarked loans slipped to 9.3% from 10.0%, falling for non-financial corporations and households. Average spreads in these transactions declined for non-financial corporations and increased for households. ** Full story here.
Confidence in the retail sector (from FGV’s monthly commerce survey) rose 3.7% mom/sa in October to 92.5, the highest level since August 2014. The increase was driven by both the current situation component (2.7%) and by expectations (4.3%).
According to O Globo newspaper, a poll conducted by Ibope institute shows former president Lula leading voting intentions. In the spontaneous survey, Lula has 26% of voting intentions, followed by Representative Bolsonaro (9%); Marina Silva ranks in third place with 2%, while both Geraldo Alckmin and João Doria have 1%. When the names of the candidates are presented beforehand, Lula ranks first again (35%), Bolsonaro’s votes reach 13%, Mrs. Silva gets 8%, Alckmin 5% and Doria 4%. Finally, in a scenario in which Lula is not running, both Bolsonaro and Marina have 15% of voting intentions, with TV host celebrity Luciano Huck in the third place (8%), Mr. Alckmin with 7% and Doria with 5%. This was the first poll focusing on the 2018 elections led by the Ibope institute.
The Copom minutes (Tuesday) will be the key release of the week. In its last meeting, the Copom delivered the widely expected outcome, a 75bps rate cut to 7.50%pa, in an unanimous vote. The statement following the decision suggests that the plan remains to slow down the pace of easing moderately, which we read as a signal that the December move will probably be a 50-bp cut, that would take the Selic to 7.0%pa. After that, we expect the Copom will end the cycle with another 50bps cut, at the beginning of 2018, with a terminal rate of 6.5% – although we concede that the meeting statement hints at the cycle ending this year. The minutes will likely provide further details on the rationale behind the decision and the changes in the statement. On economic activity, September’s industrial production will be released on Wednesday – we expect a 0.7% month over month s.a. increase, offsetting August’s drop. The nationwide unemployment rate for September will come out on Tuesday – we expect it to decrease 0.1 p.p. to 12.5% (unchanged at 12.6% according to our seasonal adjustment). On external accounts, we expect October’s trade balance (due Wednesday) to once again post a strong surplus (USD 5.0 billion). On fiscal accounts, the consolidated primary result for September (including regional governments and state-owned companies) will be released today at 10:30 AM (SP time). We project a BRL 24.8 billion deficit. ** Read our full week ahead note below.
The Week Ahead in Latam
On Tuesday, the INDEC will publish the manufacturing and construction data for September. According to the IPI (a private index released by OJF consulting firm), manufacturing grew 3.8% year over year in September (+0.1% mom/sa). Construction also continued to perform well according to private indicators. Construction inputs sales, as measured by the industrial union Grupo Construya, rose by 15.5% year over year in September, while cement deliveries (published by the cement chamber) rose 13.6% year over year in that month.
Tax collection for October will see the light on Wednesday. Argentina’s tax revenue totaled ARS 224.1 billion in September, marking a 33.1% yoy nominal expansion, above the annual inflation in that month (23.7%). We expect taxes to increase 35.6% yoy (to ARS 227.2 billion) in October.
On Thursday, the central bank will release its monthly expectations survey. In the latest publication, analysts kept unchanged their inflation forecasts for this year (at 22%) but adjusted upwards those for 2018 and 2019 (to 15.8% and 11.0% from 15.7% and 10.9%, respectively). Inflation expectations for every year are above the central bank’s target ranges (12-17% for 2017, 10% ±2% for 2018 and 5% ±1.5%). The central bank hiked recently the reference rate given the insufficient pace of disinflation that threatens to de-anchor inflation expectations.
On Friday, the car-makers association (ADEFA) will release October’s data on production, exports and domestic sales to car dealers. In September, auto production rose by 10.2% year over year, exports grew 16.4% year over year, and domestic sales expanded by 12.4% year over year.
The Copom minutes will be released on Tuesday. In its last meeting, the Copom delivered the widely expected outcome, a 75bps rate cut to 7.50%pa, in an unanimous vote. The statement following the decision suggests that the plan remains to slow down the pace of easing moderately, which we read as a signal that the December move will probably be a 50bps rate cut, that would take the Selic to 7.0%pa. After that, we expect the Copom will end the cycle with another 50bps cut, at the beginning of 2018, with a terminal rate of 6.5% – although we concede that the meeting statement hints at the cycle ending this year. The minutes will likely provide further details on the rationale behind the decision and the changes in the statement.
On economic activity, September’s industrial production will be released on Wednesday – we expect a 0.7% month over month s.a. increase, offsetting August’s drop. The nationwide unemployment ratefor September will come out on Tuesday – we expect it to decrease 0.1 p.p. to 12.5% (unchanged at 12.6% according to our seasonal adjustment). FGV will release its economic uncertainty indicator for October on Monday and the business confidence surveys on industry and services on Tuesday. Finally, Fenabrave’s vehicle sales for October will come through on Wednesday.
On fiscal accounts, The consolidated primary result for September (including regional governments and state-owned companies) will be released on Monday. We expect a BRL 24.8 billion deficit with regional governments posting a BRL 0.5 billion deficit and state-owned companies a BRL 0.4 billion deficit.
On external accounts, we expect October’s trade balance (due Wednesday) to once again post a strong surplus (USD 5.0 billion, topping the USD 2.4 billion in the same month last year). On a monthly basis, both exports and imports will probably post a modest decrease (-2.5% and -3.3%, respectively – seasonally adjusted). Nonetheless, the rolling12-month surplus is expected to advance to around USD 67 bn (from USD 64 bn). This result should show some stabilization at a lower level when compared to the beginning of the year, in line with our view of milder results for the trade balance over the coming months.
On Monday, the national statistics agency (INE) will publish the industrial activity indicators for the month of September. Industrial production started the third quarter of the year on a stronger footing, boosted by a temporary rebound of mining production. Available data for September shows electricity generation continues to expand, growing 2.4% year over year (4.8% previously). Affected by unfavorable calendar effects, we expect manufacturing production to decline 2.0% from last year (+1.4% in August).
On Tuesday, INE will release the national unemployment rate for the third quarter of the year. The unemployment rate remained low in the quarter ending in August as job growth in the public sector, along with non-salaried employment, stayed robust. Meanwhile, private salaried employment remained weak, shedding jobs in the quarter. With job growth dynamics expected to endure, we see the unemployment rate reaching 6.6%, down 0.2pp from one year ago (7.0% in 2Q17).
The national statistics agency (INE) will publish the private consumption activity indicators for September at the close of the week. In the previous month, the commercial activity index – aggregating vehicle, retail and wholesale activity – came in slightly above expectations, lifted by durable goods sales, while wholesales were less of a drag. Vehicle sales will continue to drive durable goods in September, but more moderately than before (9.5% year over year in the month vs. 44% in August). We expect the commercial activity index to have increased 3.2% from last year (4.9% previously).
On Wednesday, DANE will publish exports for the month of September. In the previous month, exports grew a mild 1.5% year-over-year (38.3% previously), as the low base effect passed. Coffee and oil were the main drivers of export growth in the month, while coal exports were a drag. We expect exports to come in at USD 3.3 billion, a 20% annual expansion, boosted by a recovery of coal exports.
Starting the week, the Ministry of Finance (Hacienda) will announce September’s fiscal balance. We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. According to 2018 budget bill presented in September, the 5-year fiscal consolidation (announced in 2013) will end in 2018, with the public sector borrowing requirements decreasing to 2.5% of GDP (from 4.6% of GDP in 2014); that is, a level sufficient enough to decrease the public-debt-to-GDP-ratio on a sustained basis.
On Tuesday, INEGI (the statistics institute) will publish the flash estimate of Q3’s GDP growth, which we expect to come in at 1.6% year-over-year (down from 1.8% in Q2). The monthly GDP proxy (IGAE) was weak in July (1.1% year-over-year), and then improved in August (2.3% year-over-year), but September will probably feature subdued growth because of the earthquakes. Overall, we believe that solid consumption and manufacturing exports continue to underpin the economy. The point is that, according to a recent survey published for INEGI, approximately 40% of businesses in the affected states by the earthquakes (which account for one third of the economy) closed their doors for one day. So this temporary headwind will drag growth in September.
The statistics institute (INEI) will announce October’s CPI inflation on Wednesday. We forecast a 0.15% month-over-month inflation rate. Food inflation likely increased a bit in October, with significantly higher prices for chicken (which has a weight of 3% in the CPI basket) partly offset by falling lemon prices (which had skyrocketed in previous months because El Niño ruined the 1H17 harvest). However, lower gasoline prices and the lagged effects of PEN appreciation exerted downward pressure. Assuming out forecast is correct, annual inflation would decrease to 2.67 year-over-year in October (from 2.94% in September).
On the same day, INEI will publish the full set of coincident indicators for September’s economic activity, which we expect to show an improvement. We already know that public investment growth accelerated substantially in September (to 20.6% year-over-year), as the fiscal stimulus is pumped in, and other indicators linked to domestic demand also firmed up (employment data, electricity consumption, and business confidence indicators from the Central Bank’s survey).
The Central Bank will publish October’s expectations survey on Thursday. Given the fall of inflation in September (to 2.9%, from 3.2% in August) and evidence that points to a further decrease in October, we believe inflation expectations will adjust downwards. This is particularly relevant because it can give the Central Bank more confidence to cut rates before the end of 2017. We do not expect significant changes in GDP growth, exchange rate, and monetary policy rate expectations.