In April, seasonally-adjusted industrial production fell 0.4% from the previous month.


After showing signs of improvement in 1Q18, the recovery of industrial production seems to have lost strength in April. The monthly industrial production indicator grew 3.8% year-over-year in April – above our forecast and median market expectations (both 3.6%, as per Bloomberg) – inflated by a big positive calendar effect (i.e.: more business days because of the non-overlapping Easter holidays). In fact, according to calendar-adjusted data reported by the statistics institute (INEGI), industrial production grew a weak 0.1% year-over-year in April, with the three-month moving average growth rate standing at 0.2% year-over-year (from 0.1% in March). In April, seasonally-adjusted industrial production fell 0.4% from the previous month, pulling down quarter-over-quarter annualized growth to 1.4% (from 2.7% qoq/saar in March, which was actually the highest print in over two years). Notably, the strong rebound of construction activity in 1Q18 (11.7% qoq/saar, from 2.5% in 4Q17), likely explained by temporary reconstruction works (post-natural disasters), moderated in April (to 5.4% qoq/saar). Likewise, mining output also lost momentum (-6.8% qoq/saar in April, from -0.9% in March). Manufacturing, in contrast, gained traction (3.4% qoq/saar in April, from 2.5% in March).

We expect a gradual acceleration of industrial production – both sequentially and in year-over-year terms – in coming quarters, driven by stronger manufacturing exports (boosted by the pick-up of the U.S. economy) and the stabilization of oil output. Conversely, we believe that construction activity will deteriorate. Construction surprised to the upside in 1Q18, likely driven by reconstruction work (matching a substantial acceleration of public investment), but it is bound to moderate assuming the government wants to meet the 0.8% of GDP primary surplus target set for 2018 (from 0.4% of GDP in 2017, excluding the Central Bank’s windfall dividend). More importantly, the more severe uncertainties associated to NAFTA (with the parties missing to reach an agreement before Mexico’s elections) and the presidential elections will curb private investment (and construction activity, from a supply perspective).
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According to the Focus survey, the median GDP growth expectations declined 24 bps for 2018 (to 1.94 %) and 20 bps for 2019 (to 2.80%), and did not change for 2020 (at 2.50%). In the opposite direction, IPCA inflation expectations increased 17 bps for 2018 (to 3.82%) and 6 bps for 2019 (now at 4.07%), remaining flat for 2020 (at 4.00%). Median forecasts for the exchange rate remained flat for 2018 and 2019 (both at BRL 3.50/USD) and depreciated to BRL 3.60/USD for 2020 (from 3.54).

Day Ahead: The statistics institute (IBGE) will release its monthly Systematic Survey of Agricultural Production at 9:00 AM (SP Time). The Central Bank announced another FX swap rollover auction of up to 8,800 contracts.


Day Ahead: The central bank will announce its biweekly monetary policy rate 5:00 PM (SP Time). The central bank kept the benchmark interest rate (7-day repo rate) unchanged at 40% during May. The monetary authority maintained a wide corridor delimited by a lending rate at 47% and a borrowing rate at 33%, to provide flexibility to domestic asset yields’ response to high-frequency shocks. We and the consensus do not expect changes in the reference rate at the next meeting.


Day Ahead: The statistics institute (INEI) will announce April’s trade balance throughout the day. Given preliminary data reported by the customs agency (SUNAT), we expect the trade balance to post a monthly surplus of USD 367 million.

All LatAm

Weekly Fixed Income Strategy: Another strong USD trade this week? We expect the Fed to hike the policy rate by 25bps to 1.75-2.0% and median dots to move up to 4 hikes in 2018 in its meeting on Wednesday. In our view, the Fed must continue to tighten policy gradually to bring GDP growth back to potential, as unemployment rate is low (3.75%), core inflation is close to 2% target, and financial conditions remain favorable and continue to suggest 2.75%-3.0% GDP growth. The Fed hike and guidance could continue to support USD against EMFX, and it will be important to monitor the behavior of LatAm currencies. Since the USD started to visibly strengthen in mid-April, BRL, MXN and ARS have been underperforming, while CLP and COP outperformed.
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Fuente: Itaú

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