First quarter GDP data showed a mild activity improvement. The National Statistics Agency (DANE) updated the National Accounts base year from 2005 to 2015, and shifted the benchmark activity indicator from the SA series to the NSA version, making a forecast comparison unsuitable. The new NSA GDP series grew 2.2% year over year in 1Q18, after the 1.8% in 4Q17. Still shrinking construction, mining and manufacturing activity reflects that the recovery is not absent of risk and keeps the option of one further 25-bp rate cut to 4.0% relevant.
Driving activity at the start of 2018 were financial and insurance services (6.1% vs. 8.1% in 4Q17), public administration and defense (5.9% vs. 4.3% in 4Q17) and technical, scientific and administrative services (5.6% vs. 1.2% in 4Q17). Additionally, private consumption related retail and wholesale trade picked up to 3.9%, from 0.4% in 4Q17. Dragging activity down in the quarter were natural resources related activity with mining falling 3.6% (-1.8% previously) and agriculture growth slowing from 6.6% in 4Q17 to 2.0%. Manufacturing contracted 1.2% (-1.8%), while construction shrunk 8.2% (-1.8% previously). We expect a gradual recovery this year, with growth accelerating to 2.5%. Higher oil prices, an expansionary monetary policy and stronger global growth will be the drivers of the recovery. Nevertheless, risks are skewed to the downside given the activity slowdown at the margin. ** Full Story here.
Inflation expectations remained broadly stable in May. According to the central bank’s monthly survey, the yearend 2018 inflation expectations edged up to 3.32% (3.30% previously; Itaú: 3.2%), while the 1-year horizon outlook remained stable at 3.30%. The 2-year horizon inflation expectations moved to 3.11% (3.05% in April). Expectations for core inflation (excluding food prices) fell to 3.16% (3.3% in April) for a 1-year horizon and came in at 3.06% for the 2-year horizon, close to the central bank’s 3% target. Meanwhile, the policy rate is seen stable at least until April 2019 at 4.25%. We believe there is room for one additional 25-bp cut, so the policy rate ends the year at 4.0%, as a widening output gap and a firmer currency keep inflationary pressures contained. The next monetary policy meeting will take place on June 29.
The increase in consumer prices in April surpassed expectations once again. CPI rose by 2.7% from March to April, above the market forecast of 2.5%, according to the Bloomberg survey, and higher than the 2.3% reported in the previous month. Headline inflation reflected the latest adjustments in regulated prices as well as persistently high core inflation. The 12-month inflation increased to 25.5%, from 25.4% in the previous month. Core item prices increased by 2.1% MoM (down from 2.6% in March), led by apparel, restaurants and recreation. The annual reading was 22.4%, while the annualized three-month measure increased to 30.8% (from 27.6% in March).
According to our diffusion index, inflation on 50% of the core items accelerated in April, from 29% in March. Regulated prices soared in April, up 5.3% MoM and 39.3% YoY, affected by adjustments in gas and transportation tariffs. The prices of items affected by seasonality increased by 0.9% MoM and 17.4% YoY. Recent weakening of the ARS is likely to keep inflation high in the near future, despite lower regulated price increases. We recently adjusted our inflation forecast for this year to 23.5% (from 20% before), above the 15% target.
On a separate note, the primary fiscal deficit registered a new YoY drop in April. The treasury posted a primary deficit of ARS 10.3 billion in April, from a deficit of ARS 18.7 billion in the same month of 2017. As a consequence, the 12-month rolling primary balance declined to a deficit of ARS 385.5 billion, from ARS 393.8 billion in March. We estimate a drop in the primary deficit as a percentage of GDP, to 3.3% from 3.5% in March – the target for this year was recently lowered to 2.7% of GDP. The nominal deficit stands at approximately 5.6%. Tax revenues – excluding extraordinary revenues linked to the tax amnesty in 2017 – increased by a solid 5.3% in real terms during the first four months of the year (31.6% YoY in nominal terms), in line with the strong performance of the economy in the period. Primary expenditures fell by 6.2% YoY in real terms year to date, marking a 17.3% YoY increase in nominal terms. Pension expenditures rose by 31.4% YoY (nominal), reflecting the indexation on past inflation and the evolution of the salaries index, although partly offset by cuts in subsidies (-19.4% YoY) and capital expenditures (-23.6% YoY). Wages have increased by 18.8% YoY, year to date.
The fiscal result is in line with a faster tightening of fiscal accounts in 2018. The treasury is now committed to a primary deficit of 2.7% of GDP, down from an original target of 3.2%. The decision aims to reduce the country’s dependence on capital markets, given the lower appetite for Argentine debt. The treasury maintained the fiscal primary deficit target for 2019 at 2.2% of GDP. In our view, the new fiscal goal (although ambitious) is feasible, although we acknowledge that the IMF could demand an even more ambitious adjustment. Our current scenario of a weaker currency and higher inflation favors a lower primary deficit this year. ** Full Story here.
Argentine Central Bank sold Lebacs to cover more than 100% expiring. On top of that, the Treasury issued USD 3.0 billion in local-currency securities, paying 20% (5-year) and 19% (8-year).
According to the IBGE’s monthly services survey (PMS), services sector real revenue fell 0.2% mom/sa in March, dipping for the third consecutive month. The breakdown shows mom/sa declines in 3 out of 5 sectors, so the diffusion of activities was consistent with the headline. The result is unlikely to trigger downward revisions to 1Q18 GDP trackings like the two previous PMS releases. The yoy growth came at -0.8%, above consensus (-1.4%) and slightly below our forecasts (-0.6%). It is worth mentioning that the survey encompasses approximately 34% of the services GDP, so it should not be seen as an indicator for the whole services sector.
Paper cardboard dispatches (ABPO) fell 1.3% mom/sa in April (our seasonal adjustment). The weak reading resulted in a 0.4% decline in the 3-month moving average (from 0.2% in the previous month). In yoy terms, paper cardboard dispatches is up 8.9%. Our preliminary forecast for April industrial production declined to 9.2% yoy (previous: 9.7%), 0.9% mom/sa. The outlook of a strong yoy growth is due to additional working days.
Itaú Unibanco monthly GDP expands 0.3% in 1Q18. In March, Itaú Unibanco monthly GDP went up 0.1% mom/sa. Compared to the year-earlier period, the advance in the indicator quickened to 0.7% from 0.5% in February. In 1Q18, it expanded 0.3% vs. the previous quarter, a result that is consistent with our forecast for GDP in the same timeframe. For April, based on already released coincident indicators, we forecast, for the time being, a small increase of 0.3% mom/sa in PM-Itaú. ** Full Story here.
Day Ahead: The Brazilian Central Bank’s Monetary Policy Committee (Copom) will announce the monetary policy rate at 6:00 PM (SP Time). We and the consensus expect a final 25-bp cut in the Selic, seeking to minimize risks of inflation converging later to the target. In addition, the BCB will release March’s monthly activity index (IBC-Br) at 8:30 AM (SP Time). We and the consensus expect the index to decrease -0.2% in month-over-month terms, and the 12-month-reading to increase 0.3%. The Central Bank announced the auction of 5,000 new FX swap contracts and the rollover of up to 4,225 FX swap contracts.
Activity gained significant traction in 1Q18. The monthly GDP proxy expanded 3.9% year-over-year in March – above our forecast (3.3%) and median market expectations (3.5%, as per Bloomberg) – which implies growth of 3.2% year-over-year in 1Q18 (from 2.2% in 4Q17); although the final (quarterly) GDP numbers will be announced on May 21st . We note that even though year-over-year growth in 1Q18 was subject to a negative calendar effect (i.e.: less business days because of the Easter holidays) this was partly offset by a low statistical base in 1Q17 (when El Niño battered the economy). Non-natural resource sectors, which account for three quarters of the economy, expanded 3.6% year-over-year in 1Q18 (from 3.2% in 4Q17) with robust construction output and incipient improvements in non-primary manufacturing and consumption-related sectors (i.e.: commerce and other services) in spite of still-weak labor market conditions. Turning to natural resource sectors (up by 1.8% year-over-year in 1Q18, from -1.1% year-over-year in 4Q17), the rebound of growth was led by fishing output (given the backlog of the fishing season postponed in 4Q17) and primary manufacturing (in which the processing of fishing goods accounts for a significant amount of output).
At the margin, momentum is much stronger. The seasonally-adjusted GDP proxy, as per the Statistics Institute’s (INEI) report, increased 0.7% from the previous month. Importantly, this implies that quarter-over-quarter annualized growth jumped to 7.1% in 1Q18 (from 1% qoq/saar in 4Q17). Although the qoq/saar print is being affected by a low base of comparison in 4Q17 (due to postponement of the fishing season and the impeachment attempt to President Kuczynski which caused a slowdown of public investment), over the past three months month-over-month growth averaged 9% annualized. ** Full Story here.