Given the poor performance of recent months, the quarterly change slipped back to negative levels after 18 months of gains


Core retail sales fell 0.5% mom/sa in July, printing below the median of market expectations (+0.3%) and our estimate (+0.1%). Compared to one year ago, core sales declined 1.0% and experienced the first negative reading under this metric in 16 months. The June result was revised downward by 0.1%. Meanwhile, broad retail sales dropped 0.4% mom/sa, missing the median of market expectations (+0.2%) and our call (stability). Sales were 1.5% lower than before the truckers’ stoppages (February-April average). Compared to July 2017, broad retail sales grew 3.0%. Given the poor performance of recent months, the quarterly change slipped back to negative levels after 18 months of gains.
Retail sales readings, the recent dynamics of confidence indicators and diffusion of the main monthly indicators reinforce our view of weak underlying growth in the Brazilian economy. Coincident indicators out so far (vehicle sales, surveys with consumers and retail entrepreneurs, Serasa retail index, inquiries to credit protection service SCPC) suggest that broad retail sales climbed 1.6% mom/sa in August. Our preliminary estimate for core retail sales is a small 0.1% drop. The disparity between forecasts is caused mainly by our expectation of a 3.6% hike in auto sales.
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Copom Cockpit: Stable Selic in September amid growing uncertainties. The Brazilian Central Bank’s Monetary Policy Committee (Copom) meets again next week. Notwithstanding the pressure on the exchange rate, so far recent moves have not translated into significant secondary effects on inflation. Copom’s inflation forecasts for 2018 will likely remain stable in both the market scenario (which includes exchange and interest rates according to the Focus survey) and the reference scenario (which assumes constant exchange and interest rates) when compared to those released in the last monetary policy meeting. With relatively stable forecasts and high level of slack in the economy, we believe that the dislocation of the balance of risks – largely driven by the risk of disappointment with the expectation of reforms – is so far not enough to motivate a change in the monetary policy stance, in the absence of further deterioration. In other words, we believe that the current situation is still consistent with a stable Selic rate at 6.5% in the next Copom meeting.
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Day Ahead: July’s Service Sector Survey (PMS) will be released at 9:00 AM (SP Time). We forecast a 1.3% yoy increase (consensus: 1.9%).

Upcoming nationwide polls (as informed by the Superior Electoral Court): Datafolha (September 14), MDA (September 17) and Ibope (September 18).


An increase in regulated prices and a weaker ARS caused inflation to rise in August. Consumer prices rose 3.9%, above the Bloomberg market consensus forecast of 3.8%. Price increases on electricity, transportation, fuel and medical services drove the CPI higher. The sharp depreciation of the ARS had a partial impact on consumer prices in in August and will likely have a bigger impact in September. Inflation for the last twelve months rose to 34.4% in August, while the annualized three-month measure soared to 52.3%.

The weaker ARS will likely have a significant impact on inflation in September. Private consulting firm Elypsis forecasts a 5.5% increase in consumer prices this month. We revised our year-over-year inflation forecast for December up to 45%, due to the pass-through of the ARS depreciation to prices, expectations of further fuel-price adjustments, and another round of gasoline price hikes scheduled for October. We see no room to cut the monetary policy rate (currently at 60%) in this challenging inflationary scenario, with risks skewed to the upside.
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According to the central bank’s monthly survey, median inflation expectation for the end of 2018 remained stable at 3.22%, in line with Itaú’s 3.2% forecast. The 1-year inflation outlook was also steady at 3.37%, while the 2-year horizon inflation expectation edged down to 3.04%. Expectations for core inflation (excluding food prices) dipped to 3.14% for the 1-year outlook, while for the 2-year expectation moderated to 3.02%, in line with the central bank’s 3.0% target. Meanwhile, the policy rate is seen stable at 4.25% until April 2019, when Central Bank would increase it to 4.50% (no change from the previous survey). The normalization cycle would continue in July 2019 with a hike to 4.75%. We expect the central bank to keep the policy rate unchanged at 4.25% for the remainder of the year, as inflation remains under control and activity gradually recovers. The next monetary policy meeting will be held on September 28, with Finance Minister Alberto Carrasquilla replacing Mauricio Cardenas on the board.

Day Ahead: Activity indicators for the month of July will be published at 12:00 PM (SP Time. We expect July’s industrial production to increase 3.7% year over year (consensus: 2.9%), and July’s retail sales to grow 4.5% in twelve months (consensus: 5.5%).


Scenario Review: Aftershocks. The depreciation of the Argentine peso (ARS) and the country’s economic recession are likely to affect Uruguay. We revised our GDP growth forecasts for 2018 and 2019 to 1.5% and 1%, respectively. Inflation is expected to remain above the upper bound of the central bank’s target in August, due to the recent depreciation of the UYU. We raised our inflation forecasts to 8.7% for YE18 and 8% for YE19. Fiscal consolidation has become more challenging due to lower expected growth. Our fiscal deficit forecasts for both 2018 and 2019 stand at 3.9%.
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Macro Scenario: Lower inflation expectations. The PYG weakened less than other currencies in the region due to BCP intervention, amid the volatility affecting emerging markets. We adjusted our YE18 exchange rate forecast to 5,950 PYG/USD. Inflation stands at 3.9%, below the center of the target range set by the BCP (4% ± 2%). We revised our YE18 inflation forecast downward, to 3.7%, due to the expected deflationary impact of the border trade. Activity (5.9% yoy in 2Q18) moderated at the margin in a more volatile external environment, and it supports our GDP growth forecast of 4% for YE18. Our GDP growth forecast for 2019 also stands at 4%, supported by a slightly more benign international scenario.
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Day Ahead: The statistics institute (INEI) will announce July’s GDP proxy. We estimate that the GDP proxy expanded 2.6% year-over-year (consensus: 2.3%).

Fuente: Itaú

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