Latam Talking Points

Argentina

The central bank increased its policy rate (7-day repo) by 300-bps in an inter-meeting decision, to 30.25%.During the two scheduled meetings held in April (the latest one last Tuesday), the central bank kept the policy rate unchanged at 27.25% with a vigilant tone, warning that it could increase rates if price tracking for May doesn’t indicate a reduction of inflation. To help push both inflation and inflation expectations down amid the key wage negotiation season, the central bank is intervening aggressively in the exchange rate market, selling from March until yesterday USD 5.5 billion (and USD 3.0 billion in the first four days of this week). Given the low level of reserves (we estimate that net reserves – that is, gross reserves minus reserve requirement in dollars and swap from China – currently stand at USD 3.3 billion) and the wide current account deficit (4.8% of GDP last year), the strategy is not sustainable, at least if not accompanied with a monetary policy response. In the brief press release announcing the decision, the central bank said “it is ready to act again if necessary.” Thus, the behavior of exchange rate in the near future will be a key determinant of monetary policy. Considering the rate increase already implemented, we think CPI data will play a less important role over the next few decisions.

The center-piece of President Macri’s economic strategy is to reduce the fiscal deficit only gradually, taking into consideration governability and the willingness to increase competitiveness of the economy (by reducing the tax burden). However, this strategy can only work if financing for the transitorily wide deficits are available. Recent price action strongly suggests financial conditions for Argentina are becoming tighter. Amid scarcer financing, equilibrium with weaker exchange rate, temporarily higher inflation and higher interest rates is likely. A faster fiscal adjustment would contribute to make the necessary adjustments to the new environment more orderly. Growth will likely be lower in this adjustment period.
** Full Story here.

Week Ahead: Tax collection for April will see the light on Wednesday. We expect tax collection to increase 35.0% yoy to ARS 253.7 billion in April. On Thursday, the central bank will release its monthly expectations survey. On Friday, the car-makers association (ADEFA) will release April data on production, exports and domestic sales to car dealers. We expect an increase in car production this year due to an expected higher demand from Brazil and the beginning of operations of new plants. ** Read our full week ahead note below.

Colombia

As expected, the central bank of Colombia reduced the monetary policy rate by 25bps in April. The decision had the backing of the 7 board members, the first unanimous decision since December 2017, when the board left the policy rate unchanged at 4.75%. In recent months, the board gradually moved away from the indication the easing cycle had come to an end in January amid still-weak activity, the ongoing disinflation and a correction of external imbalances. The press release indicated that food price inflation alongside core measures led the disinflation process, and that inflation forecast are close to 3% in a two-year horizon. At the press conference, General Manager Echavarría revealed he sees an upside risk to inflation coming from food prices this year, so the yearend estimate for inflation would be closer to 3.3%-3.4%, rather than to the 3% target, as previously expected (same as Itaú).

The press release shows the board is on data-dependent mode, so more easing is likely in a context of a strong exchange rate and a negative output gap. However, we note that Finance Minister Cárdenas voted for a 25-bp rate cut rather than the 50-bp decrease he advocated prior to today’s meeting. During the press conference, Mr. Cárdenas justified the change on recent favorable activity data. Additionally, General Manager Echavarría hinted that the current policy rate level is already expansionary (in the previous statement, the central bank judged the policy rate as only slightly expansionary), saying that the neutral policy rate is estimated between 4.69% and 5.29%, but fell short of ruling out additional rate cuts. In this context, we expect one additional 25-bp rate cut. Moreover, we think the probability of rates below 4% is diminishing, especially considering the supportive external environment and lower uncertainty over domestic politics – both of which should lift economic growth ahead. The next monetary policy meeting will take place on June 29. ** Full Story here.

The labor market showed mix signals at the beginning of the year. The national unemployment rate moderated to 9.4% in March (from 9.7% one year ago) amid a stable urban unemployment rate (10.6%), which came in below ours and market expectations. Hence, the unemployment rate for 1Q18 was 10.7%, broadly stable from one year ago (10.6%), while the participation rate continues to fall and job creation remains weak. Despite the benign unemployment rate surprise, we still see signs of weakness in the labor market, something that would justify additional monetary support at today’s central bank monetary policy meeting. Employment growth picked up to 0.4% year over year from 0.1% in 4Q17, supported by a milder job destruction in urban areas (-0.3% year over year, following -0.8% in 4Q17). The negative note in urban areas came from a falling participation rate (to 66% from 67% in 1Q17), which is likely capping increases in the unemployment rate.

An improvement in the labor market is key to the expected recovery. Our 2.5% growth forecast this year (1.8% in 2017) is also motivated by low interest rates, higher real wages (as inflation falls) and a favorable external environment. ** Full Story here.

Week Ahead: On Friday, the institute of statistics (DANE) will publish exports for the month of March. We expect March exports to come in at USD 3.310 million. ** Read our full week ahead note below.

Brazil

The nation-wide unemployment rate climbed to 13.1% in March – from 12.6% in February -, printing above the median of market estimates and our call (both at 12.9%). Importantly, first-quarter readings are deeply affected by seasonality in layoffs. The unemployment rate is 0.6 p.p. lower than in March 2017. Using our seasonal adjustment, unemployment was stable at 12.5%. The labor force shrank 0.1% in 1Q18 vs. 4Q17, but expanded 1.1% yoy. The participation rate (ratio of the labor force to the working-age population, both seasonally adjusted) has been receding in recent months (to 61.7% now from 61.9% in the quarter ended in November). Nevertheless, the participation rate remains much higher than its historical average (61.3%). Employment receded 0.2% qoq/sa, but rose 1.8% yoy. Quarterly readings have been deteriorating since 3Q17, as a period of strong gains in informal jobs came to an end.

Nominal wages dropped 0.3% qoq in 1Q18, but expanded 2.5% yoy. The average real wage declined 0.7% qoq and 0.3% yoy. With losses in real wages and employment, the real wage bill shrank 1.3% qoq, while the year-over-year increase slowed to 1.8% in 1Q18 from 3.7% in the quarter ended in February. The many labor market indicators (PNAD, CAGED, DIEESE/SEADE, surveys) show a slowdown in employment and real wages, affecting the outlook for household spending this year and reinforcing the downside to 2018 GDP growth scenario (currently at 3.0%). ** Full Story here.

Power regulator Aneel changed to yellow from green mode the electricity tariff flag system for May. We estimate a 6bps impact over May’s IPCA monthly inflation.

Week Ahead: On economic activity, March’s industrial production will be this week’s highlight, to be released on Thursday. We forecast a 0.8% mom/sa increase. Coincident indicators for April’s industrial production will also be released through the week: auto sales (Fenabrave) on Wednesday and auto production (Anfavea) possibly on Friday. On external accounts, we expect the trade balance (Wed.) to post a USD 6.3 billion surplus in April. In month over month terms (seasonally adjusted), both exports and imports are set to increase (1.0% and 4.9% respectively). Over 12 months, we expect the trade surplus to recede to USD 66 billion. Finally, on fiscal accounts relative to March, the consolidated public sector will be released on Monday, for which we expect a BRL 24.9 billion deficit. ** Read our full week ahead note below.

Mexico

The trade balance narrowed in 1Q18, on the back of a growing non-energy surplus. The monthly trade balance surprised to the upside in March by posting USD 1.9 billion surplus – above median market expectations of USD 0.3 billion (as per Bloomberg) – with the 4-quarter rolling deficit narrowing to 9.5 billion (around 0.8% of GDP, from USD 10.9 billion in 2017). The narrowing of the 4-quarter rolling deficit was explained by a larger non-energy surplus (USD 9.3 billion, from USD 7.5 billion in 2017) which was partly offset by a wider energy deficit (USD 18.8 billion, from USD 18.4 billion in 2017). Manufacturing exports expanded by 15.3% qoq/saar in 1Q18 (from 13% qoq/saar in 4Q17), while non-oil imports were up by 15.5% qoq/saar (from 9.2% qoq/saar) during the same period. Within non-oil imports, the acceleration was broad-based; specifically: consumer goods gained 11.9% qoq/saar, from 1.9%, intermediate goods were up by 13.3% qoq/saar (from 10.1%) and capital goods increased at a strong 36.1% qoq/saar, from 11%.

We expect a further narrowing of the trade deficit in 2018, as the strong U.S. economy boosts Mexico’s manufacturing exports, oil output stabilizes, and internal demand grows at a moderate pace. Regarding imports, although recent data has surprised to the upside (specially purchases of capital goods), we believe that tight macro policies (fiscal and monetary) and the uncertainties over NAFTA and presidential elections will curb domestic demand. In fact, the better investment numbers could be linked to reconstruction efforts, following the natural hazards that hit Mexico last semester. ** Full Story here.

Week Ahead: Starting the week, the statistics institute (INEGI) will publish the flash estimate of Q1’s GDP growth, which we estimate at 1.4% year-over-year. At the margin, nevertheless, a 1.4% year-over-year GDP growth rate is consistent with a sequential expansion of 0.5% quarter-over-quarter in 1Q18. On the same day, the Ministry of Finance (Hacienda) will announce March’s fiscal balance. We believe that the fiscal deficit indicators (excluding the Central Bank’s dividend) continued narrowing in 1Q18, as the fiscal consolidation plan entered its final year (aiming at an ambitious 0.8% of GDP primary surplus). The Central Bank (Banxico) will publish April’s Expectations Survey on Wednesday. We believe inflation expectations for 2018 will move down, and the survey might drop out the 25-bp rate hike expected for 2Q18, as in the Banamex survey. In contrast, GDP growth and exchange rate expectations are unlikely to show meaningful changes. ** Read our full week ahead note below.

Chile

Week Ahead: Today, the national institute of statistics (INE) releases the March industrial activity indicators. We expect manufacturing production to contract 0.9% year over year (3.7% previously), penalized by two fewer working days. Also on Monday, INE releases the national unemployment rate for 1Q18. We expect an unemployment rate of 6.8% (6.6% in 1Q17), as gains in participation likely surpass job creation. On Thursday, INE will publish the private consumption activity indicators for March. We expect the commercial activity index to have expanded 4.8% from last year as retail sales grow 4.3%. On Thursday, the central bank will publish the decision of its two-day monetary policy meeting (May 2-3). We expect the board to leave the monetary policy rate unchanged at 2.5%. ** Read our full week ahead note below.

Peru

Week Ahead: The statistics institute (INEI) will announce April’s CPI on Tuesday, which we forecast at 0.05% month-over-month. Assuming our forecast is correct, annual inflation would increase to 0.67% year-over-year in April. On Wednesday, INEI will publish the full set of coincident indicators for March’s economic activity. We expect these indicators to come in mixed. On the positive side, we already know that credit to the private sector continued accelerating and domestic value added tax collections were strong. We also expect imports of capital goods to strengthen, in line with rising mining investment (amid high metal prices). Conversely, labor market data remains poor. ** Read our full week ahead note below.

 

The Week Ahead in LatAm 

Argentina

Tax collection for April will see the light on Wednesday. Argentina’s tax revenue totaled ARS 238.8 billion in March, marking a 12.5% year-over-year nominal expansion, affected by a base of comparison effect (the collection of penalties related with the tax amnesty in March 2017). Excluding those penalties, tax collection rose 35.9% YoY (8% in real terms). We expect tax collection to increase 35.0% yoy to ARS 253.7 billion in April.

On Thursday, the central bank will release its monthly expectations survey. In the latest publication, analysts increased their inflation forecasts for 2018 (to 20.3% from 19.9%) and for 2019 (to 14.3% from 14.0%).

On Friday, the car-makers association (ADEFA) will release April data on production, exports and domestic sales to car dealers. In March, auto production rose by 25.2% year over year, while exports grew 58.2% year over year and domestic sales expanded by 15.5% year over year in the same period. We expect an increase in car production this year due to an expected higher demand from Brazil and the beginning of operations of new plants.

Brazil

On economic activity, March’s industrial production will be next week’s highlight, to be released on Thursday. We forecast a 0.8% mom/sa increase. Coincident indicators for April’s industrial production will also be released through the week: auto sales (Fenabrave) on Wednesday and auto production (Anfavea)possibly on Friday.

On the external accounts, we expect the trade balance (Wed.) to post a USD 6.3 bn surplus in April, below the USD 7.0 bn posted in the same month of last year. In month over month terms (seasonally adjusted), both exports and imports are set to increase (1.0% and 4.9% respectively). Over 12 months, we expect the trade surplus to recede to USD 66 bn, and the 3-month seasonally-adjusted and annualized result will likely recede to USD 71 bn.

Finally, on fiscal accounts relative to March, the consolidated public sector will be released on Monday, for which we expect a BRL 24.9 bn deficit.

Chile

On Monday, the national institute of statistics (INE) releases the March industrial activity indicators. In February, the 8.9% increase in industrial production was lifted by mining expanding 16.9% (5.8% at the start of the year), while manufacturing increased 3.7% (5.7% in January). We expect a robust external demand, high copper prices, low interest rates and low inflation amid increased confidence to continue supporting an activity recovery this year. Available data for March shows electricity generation accelerated to 5.9% year over year (5.5% previously). We expect manufacturing production to contract 0.9% year over year (3.7% previously), penalized by two fewer working days.

Also on Monday, INE releases the national unemployment rate for 1Q18. In the quarter ending in February, the unemployment rate picked up more than expected to 6.7%, 0.3 percentage points above that recorded one year ago. The surprise partly comes from the labor force accelerating to 3.0% (the highest rate since 2011), a possible sign of the improved private sentiment and expectation of finding jobs. Meanwhile, employment grew 2.7%, the fastest pace since the quarter ending in February 2014, with private salaried jobs showing a notable improvement. We expect an unemployment rate of 6.8% (6.6% in 1Q17), as gains in participation likely surpass job creation.

On Thursday, INE will publish the private consumption activity indicators for March. The commercial activity index – which aggregates retail, wholesale and vehicle sales – expanded 5.9% year over year in February (7.9% in January), driven by robust car sales, while wholesale trade growth moderated. Available data for March shows car sales continue to perform well, but growth moderated as it faces a higher base of comparison (+12.5% yoy), while retail sales in the Metropolitan Region of Santiago picked up from February. Therefore, we expect the commercial activity index to have expanded 4.8% from last year as retail sales grow 4.3% (4.0% previously).

On Thursday, the central bank will publish the decision of its two-day monetary policy meeting (May 2-3). As activity continues to perform well and inflationary pressures remain muted, broadly in line with the central bank’s baseline scenario presented in the 1Q18 inflation report, we expect the board to leave the monetary policy rate unchanged at 2.5%.

Colombia

At the end of the week, the institute of statistics (DANE) will publish exports for the month of March. Export growth slowed in February to 8.3% (19.2% in January) as coal exports moderated and falling oil volumes remain a drag. We expect March exports to come in at USD 3.310 million, a 0.8% contraction from last year, with lower coffee volumes and prices countering higher oil and ferronickel exports.

Mexico

Starting the week, the statistics institute (INEGI) will publish the flash estimate of Q1’s GDP growth which we estimate at 1.4% year-over-year (down from 1.5% in 4Q17). Services output has been robust in the first months of 2018, and industrial production has begun to recover. However, we highlight that March 2018 had 3 less business days than March 2017 (mainly because of the Easter holidays) which will likely imply a year-over-year contraction of the monthly GDP proxy (IGAE) in this month. At the margin, nevertheless, a 1.4% year-over-year GDP growth rate is consistent with a sequential expansion of 0.5% quarter-over-quarter in 1Q18.

On the same day, the Ministry of Finance (Hacienda) will announce March’s fiscal balance. We believe that the fiscal deficit indicators (excluding the Central Bank’s dividend) continued narrowing in 1Q18, as the fiscal consolidation plan entered its final year (aiming at an ambitious 0.8% of GDP primary surplus). Moreover, higher oil prices likely boosted government revenues, in year-over-year terms. The headline numbers of the 12-month rolling fiscal deficit indicators, however, will widen because the time series will drop out the MXN 322 billion (1.5% of GDP) received from the Central Bank in March 2017.

The Central Bank (Banxico) will publish April’s Expectations Survey on Wednesday. We believe inflation expectations for 2018 will move down, and the survey might drop out the 25-bp rate hike expected for 2Q18, as in the Banamex survey. In contrast, GDP growth and exchange rate expectations are unlikely to show meaningful changes.

Peru

The statistics institute (INEI) will announce April’s CPI on Tuesday, which we forecast at 0.05% month-over-month. Inflation would be contained by lower food prices (mainly explained by a sharp decline in chicken prices, whose weight in the CPI basket is 3%) and a fall in interprovincial bus fares (payback from the increase observed in March, during the Easter holidays). Conversely, higher gasoline prices would exert some upward pressure. Assuming our forecast is correct, annual inflation would increase to 0.67% year-over-year in April (from 0.36% in March). We note there is an unfavorable base effect in April (which pushes annual inflation up), because there was monthly deflation in the same month of last year (when El Niño began to fade).

On the day after, INEI will publish the full set of coincident indicators for March’s economic activity. We expect these indicators to come in mixed. On the positive side, we already know that credit to the private sector continued accelerating and domestic value added tax collections were strong. We also expect imports of capital goods to strengthen, in line with rising mining investment (amid high metal prices). Conversely, labor market data remains poor.

Fuente: Itaú

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