Latam Talking Points


The consolidated public sector posted a primary surplus of 46.9 billion reais in January, close to our forecast (47.3 billion) and above market consensus (37.1 billion). The consolidated primary deficit accumulated over 12 months shrank to 1.5% of GDP from 1.7%. The central government’s result, as published by the National Treasury, was a surplus of 31.1 billion reais (our estimate: 30.0 billion). The most noteworthy developments of the month were 8 billion reais in extraordinary revenues from REFIS/ PRT tax amnesty program, a nominal decline of 3 billion reais in subsidy expenses vs. one year earlier, and discretionary spending remaining at low levels. Regional governments posted a surplus of 10.5 billion reais, while state-owned companies had a deficit of 0.1 billion reais (while we anticipated a surplus of 11.0 billion and zero, respectively).

Public debt dynamics remain unfavorable. The public sector’s net debt climbed to 51.8% of GDP in January from 51.6% in December, while the general government’s gross debt expanded to 74.5% of GDP from 74.0%. Despite still-negative primary results, the upward trend in public debt is set to moderate in the next years, reflecting the cyclical rebound in economic activity, historically-low interest rates and BNDES repayments to the National Treasury. However, keeping this scenario consistently favorable depends strictly on the approval of reforms (such as the pension reform) to signal the gradual return to primary surpluses that are compatible with structural stabilization in public debt. Without reforms, the government is less likely to meet the constitutional spending cap from 2019 onward, fueling doubts about the sustainability of the rebound in economi c activity and low interest rates going forward. ** Full Story here.

The nation-wide unemployment rate climbed to 12.2% in January, topping the median of market estimates (12.0%) and our call (12.1%). Importantly, these readings were deeply affected by seasonality in layoffs, which typically pick up by year-end. The unemployment rate is 0.4 p.p. lower than in January 2017. Using our seasonal adjustment, unemployment rose 0.1 p.p. to 12.5%. The labor force grew 0.2% in the quarter ended in January compared to the August-October period and 1.6% yoy. The participation rate (ratio of the labor force to the working-age population) advanced to 61.9% from 61.8%, explaining the seasonally-adjusted increase in unemployment and getting farther from its historical average (61.3%).

Employment expanded 0.3% qoq/sa and 2.1% yoy. Quarterly gains have been decelerating since 3Q17, due to slower growth in informal jobs. Nominal wages rose 1.2% qoq in the quarter ended in January and 4.1% yoy. The average real wage climbed 0.2% qoq and 1.2% yoy. The real wage bill expanded 3.6% yoy and 0.7% qoq, boosted by higher employment and higher real wages under both metrics. ** Full Story here.

FGV has released two of its monthly surveys covering industry and services, as well as its uncertainty index. Both confidences improved further in February, suggesting stronger growth dynamics than the surveys related to construction, consumer and commerce released earlier. All surveys show expectations well above the current condition index, suggesting additional improvement ahead. Our growth scenario for 2018 (3.0% GDP growth) is consistent with confidences rising further through the year.

Business confidence in the industrial sector rose 1.0% mom s.a. in February to 100.6. The final reading came 0.8 pp above the preview. Confidence in the services sector rose 1.4% in February to 93.1, reaching the highest level since 2Q14. The improvement was driven by both expectations (1.4%) and the current condition assessment (1.5%). Finally, FGV’s economic uncertainty index fell 7.1pp to rose slightly to 102.5 in February, reaching the lowest level since September, 2014. The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators, given that the analysis of newspaper accounts for 70% of the aggregate index. A high figure is associated with greater uncertainty that is negatively related to economic activity.

Day Ahead: 4Q17 GDP will be released at 9:00 AM (SP Time). Our forecast points to a 0.1% qoq/sa gain (consensus: 0.3%). If confirmed, this result will lead Brazil’s annual GDP to rise 1.0% in 2017 (consensus: 2.5%).February’s trade balance will be released at 3:00 PM (SP Time). We and the consensus expect it a USD 4.9 billion surplus.


The Central Bank of Mexico (Banxico) published the first quarterly inflation report of the year, with a greater emphasis on the role that inflation forecasts will play in the board’s decision framework. Back in August 2017, Banxico began publishing its expected trajectory for inflation (previously inferred from a fan chart, which associated shades of red to different probabilities for certain inflation levels). Today, Banxico took a further step in this direction by publishing the actual values of average annual inflation (headline and core) that it expects for the next 8 quarters, comparing them with the forecasts of their previous scenario (December Inflation Report). The expected inflation trajectory is higher than in the previous scenario, but this does not add much new information relative to the latest monetary policy decision. In fact, the statement of February mentions that the board expects inflation to converge to the 3% target in 1Q19 in contrast with the statement of the previous monetary policy meeting (December) when board members said that inflation would decrease to 3% by the end of 2018. Also interestingly, the report presented a new core inflation measure – called “fundamental core inflation” – which only includes items of the CPI correlated with indicators of economic slack. Additionally, Banxico kept its GDP growth forecasts unchanged for both 2018 (2%-3%) and 2019 (2.2%-3.2%).

In all, we see the report as consistent with our view that a pause in April is likely. Of course, given risks related to NAFTA, elections, and monetary policy in the U.S., further rate hikes cannot be ruled out. But the board, or at least most of its members, seems less willing to be so reactive to the Fed and the Mexican peso as before, focusing instead on the future path for inflation. The latest data (with inflation and activity surprising to the downside) also helps to build the case for a pause. ** Full Story here.

Day Ahead: Mexican Central Bank (Banxico) will publish February’s Expectations Survey at 12:00 PM (SP Time).


Manufacturing and mining started 2018 with vigor, in line with the expected activity recovery this year.Mining will remain a clear driving force in the coming months as copper prices stay elevated and production encounters a low base of comparison given the labor strike at a principal mine early last year. Meanwhile, signs of recovering internal demand and strengthening global growth will aid a manufacturing improvement. Industrial production – which aggregates mining, manufacturing and utilities – grew 5.3% year over year in January (0.1% in December). Once corrected for seasonal and calendar effects, the growth improvement was a milder 4.0% (1.8% in December). For the quarter ending in January, industrial production grew 2.5%, up from the 2.1% in 4Q17, but still below the 2.8% in 3Q17. Compared to 3Q17, recovering manufacturing (from – 0.1% to 2.1%) has been countered by mining slowing to 3.8% (from 6.0%).

Stronger global growth, high copper prices, recovering private sentiment and expansionary monetary policy will all boost activity this year. Given the industrial production indicators, we currently expect the January Imacec (monthly GDP proxy) to rise between 2.7% and 3.2%. For the year, we expect an activity recovery of 3.3%, from 1.6% last year. ** Full Story here.

The labor market statistics for quarter ending in January show employment growth continues to pick up. Meanwhile, the unemployment rate came in at 6.5%, 0.3 percentage points above that recorded one year ago, and above market expectations of 6.4%. Employment grew 2.5% year over year (+203 thousand jobs), the fastest pace since the quarter ending in February 2014. The 16.9% increase in public salaried posts boosted overall employment growth, but the persistence of the public job growth is unlikely amid the expectation of a fiscal consolidation path ahead. While private salaried jobs grew a mild 0.5%, it did interrupt a five month job-shedding period. Recovering mining, manufacturing an agriculture employment helped explain the 23 thousand private salaried jobs created.

We expect the unemployment rate to remain broadly stable at 6.7% rate this year. As the economy advances on its recovery path, a re-composition from self-employment and public posts towards the formal private sector would occur. ** Full Story here.


The January national unemployment rate of 11.8% was stable from one year earlier, but 0.3 percentage points above our expectation, explained by higher-than-anticipated rural unemployment. The urban unemployment rate was a steady 13.4%, falling in between the Bloomberg market consensus of 13.3% and our 13.5% expectation. The seasonally adjusted labor market series showed urban unemployment ticking up 0.1 percentage point from December to 10.5%, while further rural loosening led to total unemployment picking up to 9.5% (9.2% in December).

In the quarter ending in January, total employment growth ticked up to 0.3%, from 0.1% in 4Q17. This was despite the deterioration in urban employment (-1.0% year over year, following -0.8% in 4Q17 and +0.2% in 3Q17). Additionally, the urban labor participation rate dropped 1.4 percentage points over twelve months, so the unemployment rate only inched up to 10.9% (10.6% one year before). Overall, the national unemployment rate lifted to 9.6%, 0.3pp higher than one year earlier.

Urban job destruction and falling participation reflect a weak labor market and poses a risk to a private consumption recovery. Overall, we see an activity pick-up to 2.5% this year, from the 1.8% for 2017, aided by low interest rates, higher real wages (as inflation falls) and a favorable external environment. ** Full Story here.


The EMAE (official monthly GDP proxy) expanded 2.0% yoy in December, leading to 2.8% growth in 2017, slightly below our GDP forecast of 2.9%. On a sequential basis, the economy grew 0.6% mom/sa, outpacing the downwardly revised growth of 0.3% in November, bringing quarter-over-quarter expansion to 1.3% (annualized) in 4Q17, down from the 3.6% gain posted in 3Q17. Construction increased 10% during the year, driven mostly by public sector infrastructure expenditures. Agriculture and primary activities increased by 4.8%, followed by the Service sector (3.1%) and Manufacturing (2.8%). In 4Q17, Construction grew 15.7% yoy, followed by the Service sector (3.2%), Manufacturing (2.8%) and primary activities (2.6%). According to our seasonal adjustment, all sectors except Manufacturing decelerated sequentially in 4Q17. Construction rose 3.7% QoQ/saar, down from 28. 2% in 3Q17. Primary production activities slipped 0.2% (+0.3% in the quarter ending September). Services fell 0.5%, following a 5.2% expansion in 3Q17. On a different tone, Manufacturing grew 11.8%, up from 10% in the previous quarter, helped by the recovery in Brazil.

The recent activity data together with a smaller harvest due to the severe drought suggest lower growth for this year than we were expecting. We estimate a negative contribution of primary activities to GDP growth of 0.7%, which will partially offset the benefits of a better economic outlook for Brazil and an improved sentiment for investment. We now expect GDP to increase 2.8% this year, down from our previous projection of 3.5% growth. ** Full Story here.

Day Ahead: Tax collection for February will be released throughout the day. We expect tax collection to increase 28.0% yoy to ARS 220.5 billion in February (consensus: ARS 214.0 billion).


Day Ahead: The statistics institute (INEI) will announce February’s CPI inflation at 3:00 AM (SP Time). We forecast a 0.35% month-over-month inflation rate (consensus: 0.28%). Assuming our forecast is correct, annual inflation would increase to 1.28% year-over-year in January (consensus: 1.23%) after falling for the past five months. On the same day, INEI will publish the full set of coincident indicators for January’s economic activity, which we expect to remain subdued. On the positive side, we already know that public investment picked up in January and mining output probably. However, labor market data (both employment and wages) began the year on a soft patch and fishing output remained a drag on activity because of a high statistical base in January 2017.

Fuente: Itaú

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