Latam Talking Points

Argentina

The central bank hiked the reference rate (7-day repo) by 675 bps to 40% in a new inter-meeting decision. Furthermore, the central bank’s lending rate (47%) and the borrowing rate (33%) imply a wide corridor, giving the central bank degrees of freedom to tighten/loosen monetary policy further without new increases in the reference rate. This is the third time in a week that the monetary authority decides to tighten monetary conditions to cope with a run on the peso (the reference rate was left unchanged in the latest scheduled April decision at 27.25%). In the press release announcing the decision, the central repeated that “it is ready to act again if necessary”.
The monetary authority complemented the decisions limiting the net foreign exchange exposure of the banks to 10% of their capital (down from 30% before). The central bank said it may continue to intervene in the exchange rate market (not only in the spot but also with futures).
In a coordinated movement, the minister of treasury announced a faster tightening of the fiscal accounts than that initially targeted. The treasury committed to post a primary deficit of 2.7% in 2018 instead of 3.2% to soft dependence on capital markets. At the same time, the finance minister reaffirmed not to tap the international markets this year.

We expect the recent measures to calm down markets but we note that Argentina still remains vulnerable to changes in external financial conditions, given the wide current account deficit and low reserves. In fact, even considering the recent exchange rate weakening, it is likely that the current account deficit this year will stand between 3.5% and 4.0% of GDP. Reserves, once excluding foreign currency liabilities of the central bank, stand at around 5% of GDP.

Furthermore, while we think the new fiscal targets are feasible, they are certainly ambitious. Higher inflation and a weaker currency will likely provide support to tax collection and the government still has control on around 50% of the primary budget. However, even if the fiscal consolidation is implemented, it could have adverse consequences for Macri’s popularity, casting doubts on the outcome of next year’s presidential elections, which can generate renewed noise in the markets. ** Full Story here.

The credit agency Fitch revised the Argentine outlook to stable from positive based on recent economic volatility and large fiscal and current account deficits. The rating remains at B.

Week Ahead: On Tuesday, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate. We do not expect changes in the next meeting, but we note that Argentina remains vulnerable given its sizable external deficit (4.8% of GDP last year) and low reserves. So, the behavior of the exchange rate in coming days will remain a key determinant of the monetary policy.  ** Read our full week ahead note below.

Colombia

Export growth slowed in the first quarter of the year as commodity price growth moderated and volumes faltered. Total export growth was 9.8% year over year in 1Q18, from 13.6% in the final quarter of 2017. Coffee exports were still the principal drag, but diminished its fall to 13.7% (-27.4% in 4Q17). Meanwhile, oil exports grew 11.8%, down from 19.8% in 4Q17 as volumes shrunk 11.9% (-6.2% in 4Q17). Coal exports slowed to 23.8% (70.4% previously) on the back of slowing prices (+14.8% vs. +25.5% in 4Q17) and volumes (+7.7% vs. +34.2% in 4Q17). Exports excluding traditional products (oil, coal, coffee and ferronickel) improved to 5.2% from -3.2% in 4Q17. At the margin, exports grew 5% qoq/saar, decelerating from 35.7% in 4Q17 as oil and coal exports slowed. A still weak internal demand and the higher terms of trade will lead to some improvement in the trade balance this year. Correspondingly, we expect a current account deficit of 3.1% of GDP (3.3% last year).

Week Ahead: On Saturday, the National Institute of Statistics will release inflation for April. We expect consumer prices to gain 0.21% from February, taking annual inflation to 2.87%. On Monday, the central bank of Colombia will publish the minutes of the April 27 unanimous decision to cut the policy rate by 25-bp to 4.25%. Overall, we expect signs that the board remains on data-watch mode, hence signaling the easing cycle could continue under the appropriate conditions. On Friday, activity indicators for the month of March will be published. We expect industrial production to decline 2.5% year over year. Meanwhile, retail sales likely gained 3.8% in twelve months. Also on Friday, the central bank will publish the trade balance for the month of March. We expect the trade balance correction to persist with a deficit of USD 365 million in March. ** Read our full week ahead note below.

Chile

Consumer confidence moved back into optimistic ground in April, indicating the activity recovery will likely continue to consolidate in the months ahead. Adimark’s consumer confidence index is at 51.2 points, an 11.1 point gain over a 12-month period (50 = neutral, same as the level recorded in March). The sub-index that evaluates the 5-year economic outlook of the country remains in pessimistic territory (at 42.2), as well as the one that evaluates an individual’s current economic standing (up to 44.1 from 43.9 in March). Meanwhile, the consumer expectation to purchase household goods dipped to 55.9 points (57.2 in March), while the 12-month ahead economic expectation picked up to 65.2 (61.2 in March). With inflation staying low, monetary policy expansionary and the labor market gradually recovering, consumer confidence is likely to stay optimistic. We expect activity growth to pick up to 3.6% this year, from the 1.5% last year.

Week Ahead: On Monday, the central bank will publish the GDP proxy (Imacec) for the month of March. We forecast Imacec (monthly GDP proxy) to result in annual growth of 4.0% in March, triggering activity to increase 3.9% in the first quarter of 2018. Later, the central bank will publish the trade balance for the month of April. We expect a trade surplus of USD 800 million. Still on Monday, INE will publish nominal wage growth for March. With the output gap still wide, wage pressures are likely to remain muted. Inflation for the month of April will be released on Tuesday. We expect consumer prices to gain 0.1% from March, leading to an annual inflation of 1.7% in the month. ** Read our full week ahead note below.

Brazil

Week Ahead: April’s IPCA inflation will be released on Thursday. We forecast a 0.30% monthly increase, with the 12-month reading at 2.84%. On economic activity, we forecast core retail sales (Fri.) to remain stable (month-over-month, seasonally adjusted) and broad sales (which include vehicles and construction material) to increase 0.8%. In year over year terms, we forecast core sales to grow 5.7% and broad sales at 7.1%. The monthly Systematic Survey of Agricultural Production, also from IBGE, will be released on Thursday. Finally, three important industrial production coincident indicators for April will likely come through: auto production (Anfavea) possibly on Monday, paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR) (both without a specified date). The Central Bank announced the rollover of 8,900 FX swap contracts expiring in June 1st on Monday. ** Read our full week ahead note below.

Mexico

Week Ahead: Starting the week, the statistics institute (INEGI) will publish February’s gross fixed investment. We estimate that gross fixed investment accelerated to 5% year-over-year. INEGI will announce April’s CPI inflation on Wednesday. We expect a -0.31% month-over-month variation. Assuming our forecast is correct, headline inflation would decrease to 4.58% year-over-year in April. Finally, INEGI will publish March’s industrial production. We estimate that industrial production fell 2.8% year-over-year. On the same day, the National Association of Department Stores and Supermarkets (ANTAD) will announce April’s same-store-sales. We expect the growth of ANTAD sales to slow down to 3.5% year-over-year. ** Read our full week ahead note below.

Peru

Week Ahead: The Central Bank of Peru (BCRP) will hold its monthly board meeting on Thursday, to decide on the reference rate. We expect to board to keep the rate constant at 2.75% in May. On the same day, the statistics institute (INEI) will publish March’s trade balance. We forecast a USD 570 million surplus. According to preliminary data reported by the customs agency (SUNAT), nominal exports expanded 24.6% year-over-year in March. On the import side, highlight that SUNAT’s data shows a 16.7% year-over-year expansion of capital goods imports. ** Read our full week ahead note below.

All LatAm

Itaú Inflationary Surprise Index: Inflation surprises to the downside in Latin America. Our Itaú Inflationary Surprise Index fell to -0.31 in April, from -0.04 in March. The main downward contributions in the month came from the price dynamics in Brazil, Mexico and Colombia. The decline in the Brazilian component in the month reflected downward surprises in the official consumer price indexes (IPCA). In Mexico, the variation of the price indexes released in April continued to surprise downwards, evidence of more favorable inflationary dynamics. As a result, we continue to forecast disinflation to 3.7% by year-end. The Colombian component returned to negative territory, with a stronger currency and an output gap in negative territory curbing inflationary pressures of non-tradable items. Finally, the surprise indexes of Chile and Peru remained stable in the month, but still in negative territory. ** Full Story here.

Itaú Activity Surprise Index: Negative surprises in April. Our Itaú Activity Surprise Index declined to -0.24 in April (from 0.08 in March). Brazil’s component declined to -0.35 due to lower-than-expected prints for retail sales and industrial production, as well as higher-than-expected unemployment rate. Chile’s component declined in April on the back of a still-gradual recovery in non-mining activity and lower-than-expected retail sales. Colombia’s component also declined as activity indicators underwhelmed in spite a low base of comparison. The Mexican index improved at the margin, in spite of NAFTA and the elections. Finally, the Peruvian index increased in April, albeit remaining in negative territory.
** Full Story here.

LatAm Macro Calendar

The Week Ahead in LatAm

Argentina

On Tuesday, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate. The central bank increased its policy rate (7-day repo) to 40% from 27.25% in three inter-meeting decisions since the last week of April. The decisions followed a run on the peso that led to sales of USD 7.7 billion of international reserves since March. In the latest statement, the central bank repeated “it is ready to act again if necessary”. With a weaker currency and current higher interest rates, we do not expect changes in the next meeting, but we note that Argentina remains vulnerable given its sizable external deficit (4.8% of GDP last year) and low reserves. So, the behavior of the exchange rate in coming days will remain a key determinant of the monetary policy.

Brazil

April’s IPCA inflation will be released on Thursday. We forecast a 0.30% monthly increase, with the 12-month reading at 2.84%, coming from 2.68% in March. Healthcare (+14bps) and Food (+6bps) are expected to post the major contributions to the monthly reading.

On economic activity, we forecast core retail sales (Fri.) to remain stable (month-over-month, seasonally adjusted) and broad sales (which include vehicles and construction material) to increase 0.8%. In year over year terms, we forecast core sales to grow 5.7% and broad sales at 7.1%. The monthly Systematic Survey of Agricultural Production, also from IBGE, will be released on Thursday. Finally, three important industrial production coincident indicators for April will likely come through: auto production (Anfavea) possibly on Monday, paper cardboard dispatches (ABPO) and traffic of heavy vehicles (ABCR) (both without a specified date). This data will give further clues on the pace of economic activity into 2Q18, after a disappointing 1Q18.

Chile

On Monday, the central bank will publish the GDP proxy (Imacec) for the month of March. In the month, commercial activity stayed robust (3.4%) and strong mining data lifted industrial production (8.7%). We forecast Imacec (monthly GDP proxy) to be flat from February and result in annual growth of 4.0% in March (similar to February), resulting in activity increasing 3.9% in the first quarter of 2018 (3.3% in 4Q17).

On Monday, the central bank will publish the trade balance for the month of April. In the first quarter of the year, the largest trade surplus was recorded since 2011. Elevated mining exports, mainly aided by price, were the principal driver of the trade improvement along with firm global growth. In the first three weeks of April, exports growth was 30% yoy (19% in March), as mining exports stayed robust and industrial exports rebounded. Meanwhile, imports picked up to 30% (9% in March), lifted by intermediate energy goods imports. We expect a trade surplus of USD 800 million (USD 597 million surplus one year ago).

Later on Monday, INE will publish nominal wage growth for March. In February, wage disinflation continued with growth of the historically merged wage index inching down to 3.2% year over year (from 3.3% in January; 4.2% in 2017), the lowest reading since the end of global financial crisis in 2010, after a prolonged period of below-potential growth. With the output gap still wide, wage pressures are likely to remain muted.

Inflation for the month of April will be released on Tuesday. Inflation surprised to the downside in March as inflationary pressures remain contained given the stronger Chilean peso (keeping tradable inflation low), spare capacity in the economy and indexation mechanisms. Annual inflation decelerated to 1.8% (from 2.0% previously), below the central bank’s 3% target. Price tracking for the month shows that milk, refuse removal, diesel, rent and hospital services will lift consumer prices in the month. This rise would be partly countered by falling transportation and fruit and vegetable prices. We expect consumer prices to gain 0.1% from March (0.2% one year earlier), leading to an annual inflation of 1.7% in the month.

Colombia

On Saturday, the National Institute of Statistics will release inflation for April. In March, inflation came in well below expectations mainly explained by lower food inflation, despite the lead up to the Easter holiday. As a result, annual inflation edged closer to the central bank’s 3% target, slowing to 3.14% from 3.37% in February. The pass-through from the strengthened Colombian peso was evident by the low tradable inflation; however, sticker non-tradable inflation also moderated. We expect consumer prices to gain 0.21% from February (0.47% one year ago), taking annual inflation to 2.87%, the lowest since September 2014. Apparel and education prices will likely be the main drag on the monthly consumer price change.

On Monday, the central bank of Colombia will publish the minutes of the April 27 unanimous decision to cut the policy rate by 25-bp to 4.25%. The minutes will likely show the board sees reduced inflation risks and that the activity recovery is gaining ground. Overall, we expect signs that the board remains on data-watch mode, hence signaling the easing cycle could continue under the appropriate conditions.

On Friday, activity indicators for the month of March will be published. Activity remains weak but has shown some signs of improvement, particularly at the margin. For March, we expect industrial production to decline 2.5% year over year (1.5% in February), partly impacted by two fewer working days as well as a high base of comparison. Meanwhile, retail sales likely gained 3.8% in twelve months (5.0% in February), aided by the strong performance of the Colombian peso, low inflation and falling interest rates.

Also on Friday, the central bank will publish the trade balance for the month of March. In February, a USD 548 million deficit was recorded, narrowing from the USD 762 million deficit recorded one year earlier. The corresponding 12-month rolling trade deficit continued to shrink from the USD 6.2 billion recorded in 2017, to USD 5.8 billion at the end of February. We expect the trade balance correction to persist with a deficit of USD 365 million in March, compared to the USD 639 million deficit one year before.

Mexico

Starting the week, the statistics institute (INEGI) will publish February’s gross fixed investment. We estimate that gross fixed investment accelerated to 5% year-over-year (from 4.1% year-over-year in February). Notably, coincident indicators such as construction activity (4.5% year-over-year, from 4.2% in January) and imports of capital goods (20.1% year-over-year, from 18.8%) picked up in February.

INEGI will announce April’s CPI inflation on Wednesday. We expect a -0.31% month-over-month variation, driven by the sharp decline of regulated electricity prices. We note that the Federal Electricity Commission (CFE) periodically introduces lower “warm season tariffs” in April-May and lifts them in October-November. Also importantly, core prices were likely contained by sharp decreases for airfares and hotels & tourism services reflecting the payback from the Easter holidays in March (when these prices increased significantly). Assuming our forecast is correct, headline inflation would decrease to 4.58% year-over-year in April (from 5.04% in March).

Finally, INEGI will publish March’s industrial production. We estimate that industrial production fell 2.8% year-over-year (from a 0.7% expansion in February), dragged by a large negative calendar effect (i.e.: March 2018 had three less business days than March 2017, mainly because of the Easter holidays). This calendar effect is also implicit in coincident indicators, such as vehicle production (-10.6% year-over-year in March, from 6.6% in February) and oil output (-7.6% year-over-year, from -6%). Nevertheless, we believe that seasonally-adjusted industrial production expanded at the margin in March, driven by construction (which has been picking up, probably because of the reconstruction works).

On the same day, the National Association of Department Stores and Supermarkets (ANTAD) will announce April’s same-store-sales. We expect the growth of ANTAD sales to slow down to 3.5% year-over-year (from 9.9% in March). We note that, in contrast to most activity data, the holidays actually boost ANTAD sales. So the calendar effect for April 2018 is negative. In any case, the growth trend of ANTAD sales would remain broadly stable (with the three-month moving average growth rate hovering around 6% year-over-year). Looking at the fundamentals, the labor market remains strong and real wages are accelerating because of falling inflation. However, on the negative side, consumer confidence has been deteriorating, credit is growing at a slower pace (amid higher domestic interest rates), and remittances converted in pesos are less supportive (because of MXN appreciation).

Peru

The Central Bank of Peru (BCRP) will hold its monthly board meeting on Thursday, to decide on the reference rate. After cutting rates by 150 bps since May 2017, we believe the easing cycle concluded in March (with one last 25-bp cut). Therefore, we expect to board to keep the rate constant at 2.75%in May. Even though low inflation provides the board with room to cut rates, if economic activity disappoints, GDP growth seems to be picking up at the margin. In fact, the monthly GDP proxy accelerated to 3.7% qoq/saar in February (from 1.3% in January) and coincident data for March look a bit better.

On the same day, the statistics institute (INEI) will publish March’s trade balance. We forecast a USD 570 million surplus, driven by a strong acceleration of exports. According to preliminary data reported by the customs agency (SUNAT), nominal exports expanded 24.6% year-over-year in March (up from 1.3% in February). Notably, higher metal prices for copper, gold and zinc (Peru’s top 3 exports) and stronger metal output (5.5% year-over-year in March, from 1.4% in February) are boosting exports. On the import side, highlight that SUNAT’s data shows a 16.7% year-over-year expansion of capital goods imports in March (up from 8% in February) which probably reflects the firming up of investment.

Fuente: Itaú

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