Political events in Brazil will take center-stage this week

The Supreme Electoral Court will begin trial on the Dilma Rousseff/Michel Temer presidential ticket on Tuesday.

Talk of the Day


The week’s highlight will be the Supreme Electoral Court (TSE) trial that is analyzing the request to annul the Dilma Rousseff/Michel Temer presidential ticket on Tuesday (June 6). Also, the Senate’s Economic Affairs Committee may vote the labor reform.

The Copom minutes will be released on Tuesday. In its last meeting, the Copom cut the Selic rate by 100bps to 10.25% p.a., without bias, in a unanimous and a widely expected decision. The committee signaled that the next move is probably going to be a 75-bp rate cut, that would take the Selic to single-digit for the first time since 2013. The Copom made it clear that the prolonged, elevated, uncertainty on the reform process and on the economic adjustment is the main risk factor going forward. We’ll learn more about the reasoning behind the Copom decision with the release of these minutes. May’s IPCA consumer inflation will be released on Friday. We forecast a 0.48% monthly rise, with the year-over-year inflation slowing to 3.8% from 4.1%. ** Read our full week ahead note below.

Industrial production expanded 0.6% in April, topping the median of market estimates and our forecast (0.1% and 0.0%, respectively). Compared to April 2016, the indicator declined 4.5%, influenced by fewer working days. The March reading was revised upward by 0.24 p.p., so that, considering the level, the surprise in the April result totals approximately 0.8 p.p. (the sum of above-expectation mom/sa growth and the March revision). The breakdown by economic category showed gains for capital goods (1.5%), intermediate goods (2.1%) and durable consumer goods (1.9%), while production of other consumer goods fell slightly (-0.8%). The breakdown by activity pointed to 0.6% growth in manufacturing and a slide of 1.4% in extraction and mining. On a more detailed level, 13 out of 24 activities posted monthly gains. Also, available coincident indicators (capacity utilization, vehicle sales, weekly foreign trade figures, power consumption) point to a drop of 1.0% mom/sa in May. ** Full story here.


The minutes from the central bank’s May monetary policy meeting reveal that the board was divided in its decision to cut the policy rate by 25bps to 2.5%. Of the five board members, Joaquin Vial voted to keep the policy rate at 2.75% (which was our call for the meeting). The removal of the easing bias at the meeting suggested that the easing cycle (initiated in January and consisting of 100bps), has been concluded. The minutes show that the central bank’s current economic outlook is similar to that held in the 1Q17 Inflation Report (IPoM), thereby indicating that no further rate movements are likely at least in the short-run. Overall, the evolvement of activity and inflation met internal expectations. Yet, there was some discussion among board members on the significance of seemingly favorable data (durable consumption, machinery and equipment investment, improved consumer sentiment), versus adverse shocks of temporary nature (labor disruptions at the end of last year and in 1Q17), as the former could point at improving outlook for activity ahead.

We expect the central bank to keep the policy rate at 2.5% until at least 2H18 as the economy remains weak and inflation well behaved. In the upcoming IPoM, we expect the inflation report to confirm the central bank’s baseline scenario of no further easing, while making only marginal changes to the growth (1%-2% for 2017 in the 1Q17 report) and inflation (2.9% yearend) outlooks. However, we note that if activity disappoints and inflation comes below expectations, additional rate cuts remain a possibility. ** Full story here.

Commercial activity is still lifted by durable consumption, amid underwhelming non-durable consumption. The commercial activity index fell 0.5% from last year (our call: 1.0%), as retail consumption excluding vehicle sales contracted 0.3% year over year (-0.14 p.p. to the headline gain) and wholesale activity fell 4.1% (-1.86 p.p. contribution). Meanwhile, sales of vehicle and parts expanded 12.5% from last year, adding 1.4 p.p. to the headline figure. Retail activity including vehicle sales contracted 0.4% (well below the 3.0% forecast according to market consensus), with durable consumption (+8.9% year over year, +1.47 p.p. contribution) lifting growth, while non-durable goods were a drag (-2.2% year over year, -1.83 p.p. contribution). In the quarter ending in April, the commercial activity index saw a slowdown to 1.2% year over year (3.0% in 4Q16), dragged down by wholesale activity (-1.5% year over year, from 2.8% in 4Q17), while retail activity excluding vehicle sales was broadly stable from the end of last year (+1.7%, compared to 1.8% previously). Our diffusion index shows commercial activity losing dynamism.

The outlook for consumption is far from exciting. The favorable performance of durable consumption will be hampered by a loosening labor market and the end of the tourism season, which reportedly lifted commercial activity earlier in the year. In all, weak commercial activity follows disappointing industrial performance in the first month of 2Q17, and reaffirms our view that the GDP proxy Imacec will show activity contracted 0.5% year over year in April. At last, we expect GDP growth of 1.6% this year, stable from 2016. ** Full story here.


Export growth slowed in April as the gains from higher commodity prices diminished. In the month of April, total exports rose 6.8% year over year (40.8% in March), with coal and oil exports leading the gains (although both declined in terms of quantity). Oil quantities dropped 5.3% year over year, the lowest decline since July 2016 and could suggest a bottoming out. Oil prices rose 46.4%, far less than the doubling of prices recorded earlier in the year. Coffee exports fell 24.6% from April 2016 (hampered by a high base of comparison). In the quarter ending April, exports increased 20.8% year over year (32.4% in 1Q17 and 13.7% in 4Q16). Coal and oil exports remain the driving forces, while exports excluding Colombia’s traditional goods (coal, coffee, oil and ferronickel) grew a mild 2.9% (8.8% in 1Q17). We expect a current account deficit of 3.6% of GDP this year (4.4% last year), aided by commodity prices being higher, on average versus last year, and weak internal demand.

All Latam

Itaú Inflationary Surprise Index: broad disinflation in Brazil, upward surprises in Mexico. Our index fell to -0.12 in May, coming from -0.09 in April. Brazil led downward surprises in the month, as the General Price Indexes (IGPs) registered deeper monthly deflation than anticipated by the market. Peru’s CPI also recorded a below-expected figure, amid a reversion of the agricultural supply-shock triggered by the El-Niño. In contrast, all three of Mexico’s inflation indices exceeded their respective expectations once again. ** Full story here.

Itaú Unibanco LatAm Market Conditions Index: volatility strikes Brazilian financial variables in May. According to our index, the region as a whole marginally improved to 0.01 (from: -0.06). However, the general trend as measured by the three-month moving average worsened to 0.20 from 0.42, influenced by Brazil (which saw a deterioration in both financial conditions and commodities), Colombia (impacted by the depreciated COP and falling oil prices), and Peru (with the majority of components deteriorating). Mexico was the positive highlight, with the recent appreciation of the MXN positively impacting financial conditions. ** Full story here.


Global monetary policy monitor: easing bias remains in emerging markets. In May, there were monetary policy decisions in 22 of the 33 countries we monitor. Countries that cut monetary policy rates were Brazil (by 100 bps, in line with expectations), Chile (by 25 bps, while the policy rate was expected to be maintained), Colombia (by 25 bps, in line with the consensus) and Peru (by 25 bps, in line with our expectation, while consensus expected stability). On the other hand, the Mexican central bank opted for another 25-bp hike, in line with expectations. In June, the main highlights are the monetary policy meetings in developed countries. In the U.S., we expect the Fed to implement an additional 25-bp hike. In the Eurozone, we expect the current stimulus to be maintained. ** Full story here.


The Week Ahead in LatAm


On Monday, the car-makers association (ADEFA) will release May data on production, exports and domestic sales to car dealers. In April, auto production fell by 15.1% year over year and exports dropped 10.3% year over year, while domestic sales rose by 12.6% year over year in the same period.

On Thursday, the INDEC (the official statistical agency) will report May inflation for the greater Buenos Aires area (the city of Buenos Aires and neighboring counties in the Province of Buenos Aires). Inflation accelerated in April to 2.6% mom from 2.4% in March and 2.5% in February. According to private estimates, inflation showed a deceleration in May. We expect the monthly inflation to hit 1.7%, bringing the year-over-year reading to 24.4% from 27.5% in April.


On Tuesday, June 6, the Supreme Electoral Court (TSE) will resume the trial that is analyzing the request to annul the Dilma Rousseff/Michel Temer presidential ticket. The Senate’s Economic Affairs Committee may vote the labor reform.

The Copom minutes will be released on Tuesday. In its last meeting, the Copom cut the Selic rate by 100 bps to 10.25% p.a., without bias, in a unanimous and a widely expected decision. The committee signaled that the next move is probably going to be a 75-bp rate cut, that would take the Selic to a single digit for the first time since 2013. The Copom made it clear that the prolonged, elevated, uncertainty on the reform process and on the economic adjustment is the main risk factor going forward.  We’ll learn more about the reasoning behind the Copom decision with the release of these minutes.

May’s IPCA consumer inflation will be released on Friday. We forecast a 0.48% monthly rise, with year-over-year inflation slowing to 3.8% from 4.1%. The housing group will make up most of the rise, as a result of higher electricity tariffs (contributing 32 bps to the headline). Transportation and food prices are likely to contribute to the downside with negative readings. Inflation will thus continue its long-lasting course of decline, driven mainly by ample slack in the economy and the favorable food price shock. The main risks for inflation continue to be of political nature, especially on matters th at would interfere with the Social Security reform process in Congress.

Economic activity indicators will see a less busy week following the 1Q17 GDP release. Anfavea will release May auto production on Tuesday – we forecast 236k units produced. On Wednesday, Serasa may release its May retail activity index, an important coincident indicator for IBGE’s retail sales. Finally, IBGE will release the monthly update of its Systematic Survey of Agricultural Production on Thursday.


On Monday, the central bank will publish the GDP proxy (Imacec) for the month of April. The month of April had a negative calendar effect, resulting in weak industrial production indicators in spite of a mining recovery at the margin (following the conclusion of the labor strike at the largest copper mine) as well as disappointing commercial activity. As the labor strike at the country’s largest copper mine ended, we expect mining activity to support a 1.5% expansion from March (-0.3% in the previous month), resulting in an annual decline of 0.5% (+0.3% in March) in the GDP proxy.

Also on Monday, the central bank will present its 2Q17inflation report (IPoM). Following the 4Q16 report, the central bank embarked on an easing cycle that saw the policy rate fall by 100bp, reaching 2.5% in May. The press release announcing the 25-bp cut in the previous month dropped the easing bias in favor of a neutral stance, signaling rate cuts would be off the table at least in the short-run. We expect the inflation report to confirm that the central bank’s baseline scenario does not include further easing, with only marginal changes to the growth forecast (1%-2% for 2017 in the 1Q17 report) and inflation (2.9% yearend) outlook. However, the central bank could signal that monetary policy would remain expansionary for a prolonged period (at least during the two-year forecast scenario).

On Wednesday, the central bank will release the trade balance figures for May. We forecast a USD 470 million surplus (USD 564 million surplus in May 2016), taking the rolling 12-month trade balance to USD 3.9 billion (USD 5.3 billion in 2016). In the first three weeks of the month, imports increased 7.7% (+5.9% in April), still pulled up by consumer goods imports, while mining and industrial exports led the total export recovery of 11.2% (-0.9% in the previous month). However, a strike by the customs service towards the end of the month likely hampered the result.

On the same day, the National Institute of Statistics (INE) will publish nominal wage growth for April. Wage inflation has gradually moderated as the labor market loosens, the economy cools and inertia stays low (as inflation is running below the target). In March, nominal wage growth was broadly stable at 4.3% year-over-year (4.9% in December 2016).

To end a busy data week, inflation for the month of May will be published by the National Institute of Statistics on Thursday. We expect prices to be flat from April (+0.2% in April). Consumer prices are expected to be pulled down by declining interurban transport following the end of the Easter celebration. As a result, annual inflation would dip to 2.4%, from 2.7% previously, closer to lower bound of the 2%-4% target range.


On Monday, the national institute of statistics will release inflation for May. In the previous month, the disinflation process stalled with the behavior of indexation mechanisms and increased inflation persistence being reflected in sticky core inflation. We expect consumer prices to gain 0.21% from April, taking annual inflation down to 4.35% (4.66% in April).

On Friday, the central bank of Colombia will release the minutes of the monetary policy meeting held in May. At the meeting, a split board decided to cut the policy rate by 25-bps to 6.25%, less aggressive than the 50-bp cut in the previous month. A tick-up in inflation expectations and sticky core consumer prices have created some unease in the board. Nevertheless all board members were in favor of further easing. The minutes will likely reflect heightened concern for inflation dynamics.


Starting the week, the statistics institute (INEGI) will publish March’s gross fixed investment. We forecast that gross fixed investment grew 3% year-over-year (up from a 3.1% contraction in February), boosted by a pickup in imports of capital goods and a positive calendar effect (as this year the Easter holidays took place in April, rather than March).

INEGI will announce May’s CPI on Thursday. We expect a 0.13% month-over-month decline in the CPI, driven by the 23.3% reduction of regulated electricity tariffs by the Federal Electricity Commission (CFE) and the decrease of gasoline prices. However, the hike of regulated interurban transport fares (“colectivo”) by 3.9%, the 122% spike in the price of avocados (observed in the second half of May), and the persistent increase of tradable goods’ prices would partly offset the negative pressure.Assuming our forecast is correct, however, annual inflation would increase to 6.15% year-over-year (from 5.82% in April).

Finally, INEGI will publish April’s industrial production on Friday. We expect a 2.8% year-over-year contraction (down from a 3.4% expansion in March), based on a deterioration of coincident indicators and a negative calendar effect (because of the Easter holidays). In April, manufacturing exports and auto production slowed down significantly, and public investment and oil output fell sharply (which point to a contraction of construction and mining, respectively).


The Central Bank will hold its monthly meeting on Thursday, to decide on the reference rate. We expect the Board to deliver a 25-bp cut (to 3.75%), considering May’s negative inflation surprise (explained by falling food prices due to the unwinding of El Niño) and the fact that coincident indicators for activity remained poor in April. Importantly, the forward guidance in the monthly statement explicitly reads: “the Board is watchful of inflation and its determinants, especially the reversion of supply shocks, to loosen monetary policy in the short-term”.

The statistics institute (INEI) will publish April’s trade balance on Friday. We forecast a USD 27 million surplus. Preliminary data from customs (SUNAT) show that nominal exports expanded 8% year-over-year in April, on the back of metallic mining exports. According to the same source, nominal imports also expanded 8% year-over-year, with a pickup in imports of consumer and intermediate goods, but a significant deterioration in imports of capital goods (which suggests that private investment remains weak).

Fuente: ITAU

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