The deficit was in line with our forecast (USD 400 million) and below market expectations (USD 550 million, according to Bloomberg)


Strong decline in imports led to a lower trade deficit in June. The trade balance showed a deficit of USD 382 million, almost half the amount registered in the same month of last year (USD 750 million). The deficit was in line with our forecast (USD 400 million) and below market expectations (USD 550 million, according to Bloomberg). The 12-month trade deficit narrowed to USD 11.0 billion. Even though, at the margin, the seasonally-adjusted deficit in 2Q18 increased to USD 12.2 billion (annualized) for the quarter ending in May, we note that this deficit for June improved to USD 6.6 billion (annualized) from USD 14.5 billion in the previous month. Total imports fell 7.5% YoY in June (-11.7% in volume), marking the first drop since November 2016. Imports of capital goods and parts fell 13.6% YoY, in line with the expected weak investment after the tightening of macro policies in May. Purchases of consumer goods and cars dropped by 8.8% and 15.0%, respectively. Exports decreased again in June (-1.4% YoY) as primary exports declined by 25.7%, mostly due to a decline in soybean sales (-54.9%). Exports of industrial products increased by 10.4% YoY, led by car and metal sales.

Weaker currency and lower internal demand growth will likely continue to narrow the external account deficit for the remainder of the year. We expect a trade deficit of USD 8.9 billion. We note that the travel account – tracked on a cash basis by the central bank – showed a 29% YoY reduction in expenses abroad in June, in line with our forecast of a lower current account deficit in 2018 (4.0% of GDP, down from 4.8% last year).
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Retail sales continue to strengthen supported by real wages. Retail sales expanded 2.5% year-over-year in May, above our forecast (1.9%) and median market expectations (1.9%, as per Bloomberg). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was higher 2.9% year-over-year. We expect economic activity to accelerate in 2018 to 2.3%, as manufacturing exports remain dynamic (supported by growth in the U.S.), benefiting the labor market (which coupled with lower inflation) supports consumption growth. However, until there is certainty over trade relations with the U.S. and domestic policy direction, investment growth will likely be curbed.
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Day Ahead: The statistics institute (INEGI) will announce June’s unemployment rate at 10:00 AM (SP Time). We expect the unemployment rate to post 3.30% (consensus: 3.22%).


Business confidence recovery at the close of 2Q18 bodes well for growth in 2H18. According to think-tank Fedesarrollo, June industrial confidence came in at 2.4%, above the -5.4% recorded one year earlier (0 is neutral). The quarterly average (1.6%) is 9.2 points above last year’s figure, while the seasonally adjusted series also improved from 1Q18 and is now at the highest level since 2016. The improvement from June 2017 was explained by more favorable expectations for production in the next quarter (38.4%) and increased demand (to -27.5%), and less so by improved levels of inventories. Meanwhile, retail confidence moved further into optimistic territory, coming in at 30.7%, the highest value since February 2012. Compared to June last year, all components showed improvement. Lower inventories (3.5%), better expectations of the economic situation in the coming semester (55.7%) and higher sentiment on the current situation (39.6%) explained the retail confidence gain. Improving sentiment, alongside low inflation, low rates, and a favorable external environment will likely aid an activity recovery this year to 2.5%.


According to FGV’s monthly commerce survey for July, confidence in the retail sector declined 0.9% to 88.8 in July. Commerce confidence is posting negative readings since April. The breakdown shows monthly declines on both expectations (-0.6%) and current conditions (-0.8%).

Day Ahead: June’s current account balance will be released at 10:30 AM (SP Time). We forecast a USD 300 million surplus (consensus: USD 250 million). Over 12 months, we expect the current account deficit to reach USD 14.1 billion (0.7% of the GDP). At the same time, the foreign direct investment in June will be released. We expect USD 6.3 billion in June. Over 12-month FDI is set to remain at USD 64 billion. Furthermore, the central government will be released during the day. We forecast a BRL 13.4 billion primary deficit (consensus: BRL 12.0 billion deficit). Instituto Paraná Pesquisas will likely publish a presidential voting intention poll. Finally, according to Folha de S. Paulo, the formal decision of the big center alliance with the PSDB is expected to be confirmed.

Fuente: Itaú

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