Paper cardboard dispatches (ABPO) rose 11.7% yoy in June, following the 19.5% yoy decline in the previous month. The dynamics has been heavily affected by the truckers’ stoppage between May 21-29. We estimate a 43.1% mom/sa increase in June, leading the seasonally adjusted index to a level 8.4% above the average in Mar-Apr. Therefore, the strong growth suggests some payback from the weakness in May, in line with the traffic of heavy vehicles (released yesterday), unlike other coincident indicators that suggest only activity resuming the Mar-Apr levels. It is worth mentioning that both ABPO and ABCR have overestimated the aggregate decline in industrial production in May, so they are likely overestimating the rebound in June as well. Our preliminary forecast for June industrial production rose to 12.2% mom/sa from 12.0% (2.4% yoy).
Weekly Elections Monitor: Who will get the support from the “big-center” parties? As reported by local news (Broadcast), PP, DEM, PRB and SD are currently discussing whether to build an alliance with the PSDB (pre-candidate Geraldo Alckmin) or PDT (pre-candidate Ciro Gomes). This is an important decision, because the big-center parties will have around 18% of the time available for TV and radio campaign (which will take place from August 31st onwards). In social media, the growth of Lula’s followers (PT) accelerated over the weekend with the news related to the TRF-4 decisions concerning his arrest. The growth of followers of Manuela D’Avila slowed down over the past week, having accelerated during the previous week due to her participation in the Roda Viva TV show. There are no electoral polls registered on the TSE website to be published in the next few days.
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Tomorrow’s Agenda: May’s Retail Sales will be released at 9:00 AM (SP Time). We forecast a 1.0% decrease mom/sa on core retail sales (consensus: -0.8%) and a steeper decline (-3.2%) on the broad segment (matching consensus’ estimates). If our forecast is correct, core retail sales would increase 2.6% yoy (identical to Bloomberg’s estimates) and broad retail sales would increase 4.4% yoy (consensus: 4.0%).
The central bank (BCRA) will complement the monetary policy rate with a close look at monetary aggregates. The monetary authority kept the benchmark interest rate (7-day repo rate) unchanged at 40% and revamped the monetary policy framework. In the statement accompanying the decision, the central bank said, besides using the interest rate as monetary instrument, it will also monitor the evolution of the ample monetary base defined as all central bank’s liabilities (short-term bills, repos and bonds used to integrate reserve requirements). The BCRA did not set an expansion target for the monetary aggregate but noted it has increased 27.6% yoy, down from 46.9% in May last year. We note that the central bank has not provided liquidity through the 7-day repo recently (currently at 43%), meaning that the policy rate has been effectively out of use since Luis Caputo was appointed Governor.
Decisions on monetary policy rate will be taken now on a monthly basis. The central bank abandoned the scheme of two meetings per month and will publish the votes of the members of the monetary policy council (currently integrated by the president, two vice-presidents, the general manager, the chief economist, and the trading manager). The BCRA reiterated its intention to maintain an active participation in the secondary market of the central bank’s short-term notes (Lebacs) in order to reinforce the monetary policy signal. The next monetary policy decision is scheduled for August 7. We do not see room for interest-rate cuts before the market stabilizes more clearly, and risks in the near term continue tilted toward further monetary policy tightening.
Scenario Review: Higher inflation, lower growth. The BCU moderated the depreciation of the UYU with interventions. We adjusted our YE18 exchange rate forecast to UYU/USD 33, given the more volatile scenario for the region, particularly in Argentina and Brazil. A weaker currency pressures consumer prices. We increased our YE18 inflation forecast to 8.0%, up from 7.3%. We adjusted our GDP growth forecast to 2.0% for 2018 and 2019 (down from 2.5%) due to lower expected growth in Argentina and Brazil and a weak harvest due to the harsh drought. Slower growth forecast (and the replenishment of crude oil inventories) will hinder fiscal consolidation. We adjusted our 2018 fiscal deficit forecast to 3.9%, from 3.4% under our previous scenario.
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Scenario Review: Growth remains solid. Activity expanded in 1Q18 and, according to preliminary indicators, growth remained robust in 2Q18. We maintain our GDP growth forecast at 4% for YE18 and YE19, supported by a bumper soybean crop. Inflation increased in June, following several months of price stability. We expect inflation at 4% for both 2018 and 2019 and we do not foresee changes in the monetary policy rate. The PYG appreciated against the USD in June, bolstered by USD sales by the central bank. We maintain our YE18 and YE19 exchange rate forecasts of PYG/USD 5,800 and PYG/USD 6,000, respectively.
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Tomorrow’s Agenda: The Statistics Institute (INEGI) will publish May’s industrial production at 10:00 AM (SP Time). We estimate that industrial production decreased 0.65% year-over-year (consensus: 0.8% increase).
Tomorrow’s Agenda: The Central Bank of Peru (BCRP) will announce its monthly reference rate at 8:00 PM (SP Time). 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 and the consensus expect the board to keep the rate constant at 2.75% in July.