According to Anfavea, auto production reached 212.3k in May, below our 276k forecast. The weak result is due to cargo transportation stoppages. We estimate a 30% mom/sa decrease, weaker than the signaled by Fenabrave’s vehicle sales (-14.9%). In yoy terms, auto production receded 15.3%. Exports declined 21.3% mom/sa and 17.3% yoy. Domestic sales declined 12.4% mom/sa, but are still positive in yoy terms (3.2%). The production breakdown shows a steep decline in both light vehicles (-28.2%) and trucks and buses (-28%). Inventories (measured as days of sales) declined to 19.9 from 22.1, as a result of a steeper decline in auto production than the observed in domestic sales. Inventories are below the historical average (23.5). Our preliminary forecast for May’s industrial production declined to -6.4% mom/sa (-3.4% yoy) from -5.0%.
The Serasa Experian Index for Retail Activity fell 1.7% mom/sa in May (our seasonal adjustment). The index is up 1.6% yoy. The breakdown highlights the impact of transportations stoppages after May 23, as the sectors more affected were ‘vehicles & parts’ (-10.3% mom/sa) and ‘fuel and lubricants’ (-6.5%mom/sa). Combining with other indicators, our preliminary forecasts for May are: core retail sales (-1.6% mom/sa) and broad retail sales (-3.4% mom/sa).
Day Ahead: The Central Bank announced another FX swap rollover auction of up to 15,000 contracts.
Mexico’s gross fixed investment picked up in 1Q18, in spite of NAFTA and elections uncertainties, supported by significantly stronger investment in machinery & equipment and the rebound of construction. The monthly gross fixed investment indicator fell 4.1% year-over-year in March – below our forecast (-3%) and median market expectations (-2.6%, as per Bloomberg) – dragged by a negative calendar effect (i.e.: less business days because of the Easter holidays). In fact, according to calendar-adjusted data reported by the statistics institute (INEGI), growth was quite higher in March (2.1% year-over-year) which implied an expansion of 3.1% year-over-year in 1Q18 (from a 2.3% fall in 4Q17).
We expect the acceleration of gross fixed investment to be transitory. The public sector’s investment in physical capital (9.4 year-over-year in real terms in April, from 7.6% in 1Q18) indicate that construction investment might have not slowed down in the first month of 2018 (probably supported by reconstruction works), but the fiscal consolidation plan to reach a 0.8% of GDP primary surplus target by the end of the year will likely imply some adjustment in the next quarters. Likewise, nominal imports of capital goods only slowed down moderately in April (22.7% qoq/saar, from 31.3% in March). However, we expect that recent increase of uncertainty associated to NAFTA (with no deal yet, and deteriorated trade relations given the U.S. tariffs on steel and aluminum and Mexico’s retaliatory measures) and higher odds for AMLO of winning a majority in Congress will likely discourage private investment decisions.
On another note, private consumption also accelerated in 1Q18, on the back of a stronger real wage bill. The monthly proxy for private consumption grew 1.3% year-over-year in March – dragged by the negative calendar effect of the Easter holidays – and 4.6% year-over-year according to calendar-adjusted data reported by INEGI. The growth was of 2.8% year-over-year in 1Q18 (from 2.3% in 4Q17).
We believe that the annual growth rate of the monthly proxy for private consumption will increase moderately in 2018 (compared to the 3% recorded in the previous year). The factors supporting retail sales are robust formal employment – which has grown at an average pace of 4.4% year-over-year in the first four months of 2018 (from an average of 4.3% in 2017) amid positive economic activity surprises – and the substantial fall of inflation (which has translated into growing real wages, after four consecutive quarters of contraction). This, in fact, is also reflected into a much more dynamic real wage bill (9.9% qoq/saar in April, using nominal wages reported by the Mexican Institute of Social Security IMSS, from average growth of 2.9% qoq/saar in 2017). On the negative side, however, consumer confidence has weakened year-to-date (although there was some improvement in April and May) and remittances converted into pesos are less supportive (because of MXN appreciation) although they remain growing robustly in USD terms (and the recent weakening of the MXN will provide a boost).
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Day Ahead: The statistics institute (INEGI) will announce March’s CPI inflation at 10:00 AM (SP Time). We expect a -0.20% month-over-month variation (consensus: -0.22%). Assuming our forecast is correct, headline inflation would decrease to 4.47% year-over-year in May (consensus: 4.46%).
Inflation in May came broadly in line with expectations and remains just above the 3% target in annual terms. The 0.25% monthly price gain (0.23% one year before) was in line with the 0.25% Bloomberg market consensus and just below our 0.30% forecast. Annual inflation inched up, but remains broadly unchanged since March, pointing at limited inflationary pressures. The monthly change was led by increases in housing and transport costs. The 0.45% monthly increase in housing related prices led the gain in the month (+0.14 pp contribution) after prices of utilities (electricity, gas and water) and rent accelerated in May. Additionally, transportation rose 0.38% led by airplane tickets (+3.39%) and gasoline prices (1.07%), contributing 0.05pp to the total reading. Meanwhile, the monthly food inflation (0.06%) was stable compared to one year before (0.07%). Prices excluding food gained 0.33% (+0.29% one year earlier), while tradable goods (excluding food and regulated prices) grew below headline inflation (0.22%, still up from the 0.15% recorded one year before). The non-tradable goods (also excluding food and regulated items) gain was broadly unchanged at 0.32% (0.34% in May 2017). Annual inflation inched up to 3.16% (from 3.13% in April).
We expect inflation to end the year close to the 3.2% (4.09% in 2017). With low inflationary pressures and activity that remains weak, we still expect one more rate cut before the cycle ends with the policy rate at 4.0% this year.
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Day Ahead: The central bank will publish the trade balance for the month of May at 9:30 AM (SP Time). We expect a milder trade surplus of USD 700 million (consensus: USD 850 million). Later at 10:00 AM (SP Time), INE will publish nominal wage growth for April. With the output gap still wide, wage pressures are likely to remain muted.
Day Ahead: The Central Bank of Peru (BCRP) will announce its reference rate at 8:00 PM (SP Time). We and the consensus expect the board to keep the rate constant at 2.75% in June.
Itaú Activity Surprise Index: Brazil drives negative surprise in LatAm. Our Itaú Activity Surprise Index declined slightly to -0.28 in May (from -0.26 in April). Brazil’s component weakened once again to -0.58, due to lower-than-expected prints for industrial production and year-over-year GDP growth, dragging the entire LatAm index down. Chile’s component improved in May – though remained negative – with lower-than-expected retail sales. Colombia, Mexico and Peru components all posted positive surprise.
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Itaú Inflationary Surprise Index: Inflation continues surprising to the downside in LatAm. Our Itaú Inflationary Surprise Index marginally increased to -0.28 in May, from -0.31 in April. The main downward contributions in the month came from the price dynamics in Brazil and Mexico, while the surprises in Chile, Colombia and Peru were roughly balanced. The decline in the Mexican component in the month reflected downward surprises in the official consumer price indexes (both CPI and May’s bi-weekly CPI). Similarly, in Brazil official price index posted descending variations – notably May’s IPCA-15 and April’s IPCA. Peru and Chile contributed with modest downward surprises, as the first registered a strong disinflation and the second, a modest increase in the official price index. Colombia’s contribution was null in the month.
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