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Recent economic weakness in Brazil, particularly in the labor market, has strengthened our view that the central bank is close to the end of its painful, but necessary, tightening cycle. We expect the BCB to increase its policy rate by 50bp to 14.25% at next week's monetary policy meeting, and then leave the rate on hold for the foreseeable future.
Brazil's central bank conformed to expectations on Wednesday, cutting the Selic rate by 75 basis points to 12.25%, without bias. Overall, the BCB recognises that the economic signals have been mixed in recent weeks, but the Copom echoed our view that the data are pointing to a gradual stabilisation and, ultimately, a recovery in GDP growth later this year.
The publication yesterday of the BCB's second quarterly inflation report under the new president, Ilan Golfajn, revealed that inflation is expected to hit the official target next year, for the first time since 2009. The inflation forecast for 2017 was lowered from 4.7% to 4.4%, just below the central bank's 4.5% target.
The publication yesterday of the first BCB quarterly inflation report under the new president, Ilan Golfajn, revealed his initial views on inflation, the currency, and monetary policy. Overall, Mr. Golfajn has taken a hawkish approach. We think Brazil's first rate cut will come no earlier than Q4, likely at the final meeting of the year, providing the government continues the fiscal consolidation process and inflation keeps falling.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
At Wednesday's BCB monetary policy meeting, led for the first time by the new president, Roberto Campos Neto, the COPOM voted unanimously to maintain the Selic rate at 6.50%, the lowest on record.
Brazil's economy remains mired in a renewed slowdown, and low--albeit temporarily rising-- inflation, which is allowing the BCB to keep interest rates on hold, at historic lows.
Brazil's central bank again matched expectations on Wednesday, cutting the Selic rate by 100 basis points to 10.25%, without bias. The COPOM s aid that a "moderate reduction of the pace of monetary easing" would be "adequate".
Brazilian inflation is off to a good start this year, and we think more good news is coming. The January mid-month IPCA-15 index rose an unadjusted 0.3% month-to-month, a tenth less than expected. This was the smallest gain for January since 1994 and the sixth consecutive month in which the number came in below expectations.
Brazil's monetary authority adopted a neutral tone and kept its main rate on hold at 6.5% at its monetary policy meeting on Wednesday, surprising investors.
February's COPOM meeting minutes again signalled that Brazil's central bank will stick with its cautious approach to monetary policy.
Brazilian inflation has been well under control in the past few months, laying the ground for a final rate cut at the monetary policy meeting on March 21.
Brazilian inflation has been well under control in the past few months, still laying the ground for rates to remain on hold for the foreseeable future.
The Brazilian industrial sector started this year on a very downbeat note, despite a 2% month-to-month jump in output. The underlying trend in activity is still very weak. Production fell 5.2% year-over-year.
Brazil's mid-April inflation report delivered more evidence that inflation is decelerating; it fell to 9.3% from 10.0% in March, reaching the slowest pace since July 2015. The unadjusted month-to-month increase surprised marginally to the upside, but the key story is of a declining year-over-year trend. Core inflation, which is a lagging indicator of the business cycle, slowed again, in line with the decline in services and market prices inflation.
Brazil's central bank doubled the pace of rate increases last Wednesday, in the wake of the re-elected Rousseff government's promise to tackle the severe inflation problem.
Inflation pressures in Brazil are still easing rapidly. The mid-May unadjusted IPCA- 15 index rose just 0.2% month-to-month, much less than the 0.6% historical average for the month. Base effects pushed the year-over-year rate down to 3.8% from 4.1% in April. Food prices, healthcare and personal costs were the main drivers of the modest month-to-month increase.
Banxico raised its benchmark interest rate by another 25bp to 7.0% at last Thursday's policy meeting. This hike follows nine previous increases, totalling 375bp since December 2015, in order to put a lid on inflation expectations and actual inflation. Both have been lifted this year by the lagged effect of the MXN's weakness last year, the "gasolinazo", and the minimum wage increase in January.
Brazil has made a convincing escape from high inflation in the past few months, laying the groundwork for a gradual economic recovery and faster cuts in interest rates. Mid-March CPI data, released this week, confirmed that inflation pressures eased substantially this month.
Brazil's benchmark inflation index, the IPCA, rose 0.7% month-to-month in May, above market expectations. The stickiness of some components explains the surprise upshift; food prices in particular rose by 1.4% in May, after a 1% increase in April. Housing also rose at a faster rate than we had expected, due mainly to a 2.8% jump in the electricity component, the largest single contributor to May's headline increase.
Brazil's Monetary Policy Committee--Copom--increased the Selic rate by 50bp to 13.75% on Wednesday, as widely expected. The short statement was unchanged from the previous four meetings, indicating the decision was unanimous and without bias, maintaining uncertainty about the next steps. Many Copom members, especially its President, Alexandre Tombini, have signaled that they intend to persevere in their attempt to bring the inflation rate down to 4.5% by the end of 2016.
Brazil economic and political outlook is still opaque, but grim, after a vast array of negative news. Impeachment of President Rousseff remains a possibility; the process of fiscal consolidation is messy and politically bloody; rumors that Finance Minister Levy might leave his post next year have intensified; and the latest data showed that the recession worsened in Q3. As a consequence, the BRL and interest rates have been under pressure and we see no clear signs that the turmoil will ease soon.
Brazil's central bank is desperately trying to get a grip on inflation. It has raised the Selic rate by 225bp, to 13.25%, in just the last six months, and real rates now stand at a hefty 5.0%. And, at last, we are seeing tentative signs that policymakers and the government, after hiking rates and adjusting regulated prices, are making some headway.
The latest CPI data in Brazil confirm that inflationary pressures eased considerably last month. Inflation fell to 8.5% year-over-year in September, from 9.0% in August, as a result of both lower market- set and regulated inflation.
Two key points can be extracted from the minutes of the last BCB meeting, when policymakers increased the Selic interest rate by 50bp to 12.75%. First, the bank recognized that the balance of risks to inflation has deteriorated, due to the huge adjustment of regulated prices and the BRL's depreciation, but it specifically referred only to "this year" in the communiqué.
In recent weeks Brazilian central bank officials have reinforced their message that they will continue fighting inflation with "determination and perseverance". CPI inflation is failing to subside, at least at the headline level, where the latest readings are very disappointing, and expectations have remained stubbornly high. And the BRL has fallen 13% year-to-date, posing further inflation threats ahead. All these factors mean that the BCB will increase its main interest rate yet again in July.
Brazil's improving economic and political situation allowed the BCB to cut the Selic rate by 100bp to 8.25% at its Wednesday meeting, matching expectations.
Brazil's inflation rate remained well under control over the first half of February. We see no threats in the near term, indicating that more stimulus will be forthcoming from the BCB.
Brazil's April CPI data this week showed that inflation pressures remain weak, supporting the BCB's focus on the downside risks to economic activity. Wednesday's report revealed that the benchmark IPCA inflation index rose 0.1% unadjusted month-to-month in April, marginally below market expectations.
Inflation in Brazil ended 2017 well under control, despite December's modest overshoot. This will allow the BCB to cut rates further in Q1 to underpin the economic recovery.
The BCB's Copom kept Brazil's Selic rate at 14.25% this week, as expected. The brief accompanying communiqué was very similar to the January statement, saying that after assessing the outlook for growth and inflation, and "the current balance of risks, considering domestic and, mainly, external uncertainties", the Copom decided to keep the Selic rate at a nine-year high, without bias.
Brazil's headline CPI has been well above the upper limit of the BCB's target zone since January 2015. We expect this situation will continue for some time, due to the lagged effect of last year's sharp increases in regulated prices, El Niño, the BRL's sell-off in 2015, and, especially, widespread price indexation.
Friday's inflation report for Brazil confirmed that inflation is rapidly falling towards the BCB's target range, helping to make the case for stepping up the pace of monetary easing to 50bp at the Copom's January meeting.
Economic data released on Friday underscored our view that bolder rate cuts in Brazil are looming. The BCB's latest BCB's inflation report, released on Thursday, showed that policymakers now see conditions in place to increase the pace of easing "moderately" .
Inflation pressures in Brazil and Mexico are well under control, with the August mid-month readings falling more than expected, strengthening the case for the BCB and Banxico to cut interest rates in the near term.
While we were out, Brazil's economic and political situation continued to improve, allowing the BCB to cut the Selic rate by 100bp to 9.25% at its July 26th meeting, matching expectations.
The monetary policy committee--Copom--of the BCB kept Brazil's main interest rate on hold at 14.25% at its Wednesday meeting. After seven consecutive increases since October 2014, totaling 325bp, policymakers brought the tightening cycle to an end. They are alarmed at the depth of the recession, even though inflation remains too high and public finances are collapsing.
In Brazil, the minutes of the Copom's November meeting, released yesterday, are consistent with our forecast for a 50bp rate cut in January. At its last two meetings, the BCB cut the Selic rate by only 25bp, to 13.75%, amid concerns about services inflation, global uncertainty, and the Fed's likely rate hike next week.
Brazil is now paying the price of President Rousseff's first term, which was characterized by unaffordable expansionary policies. As a result, inflation is now trending higher, forcing the BCB to tighten at a more aggressive pace than initially intended--or expected by investors--depressing business and investment confidence.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
Inflation in Brazil and Mexico is ending Q3 under control, allowing the central banks to keep easing monetary policy.
Recent polls in Argentina suggest that Alberto Fernández, from the opposition platform Frente de Todos, has comfortably beaten Mauricio Macri, to become Argentina's president.
This week's November mid-month inflation reports in Brazil and Mexico underscored their divergent trends. Inflation pressures are steadily falling in Brazil, but in Mexico, the pass-through from the MXN's sell- off is driving up inflation and inflation expectations.
Improving fundamentals have supported private spending in Mexico during the last few quarters. This week's soft retail sales report does not change the picture of a strong underlying trend in consumption. Sales were weaker than expected, falling 1.1% month-to-month in September, but this followed a 1.5% jump in August, and average gains of 1.1% in the previous three months. Mexican retail sales are much more volatile than in most developed economies, and we have been expecting mean reversion following rapid gains during the first half of the year and most of Q3.
In a relatively light week in terms of economic indicators in Brazil, the inflation numbers and the potential effect of the recent BRL sell-off garnered all the attention.
Inflation in the biggest economies in the region remains close to cyclical lows, allowing central banks to ease even further over the next few months.
Brazil's economic outlook is gradually improving following a challenging Q2, which was hit by political risk, putting business and consumer confidence under pressure.
The Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
Brazil's economic prospects continue to deteriorate rapidly, due to a combination of rising political uncertainty, the failure of the new government to advance on reforms, and ongoing external threats.
The BRL remains under severe stress, despite renewed signals of a sustained economic recovery and strengthening expectations that the end of the monetary easing cycle is near.
Banxico cut its policy rate by 25bp to 7.75% yesterday, as was widely expected, following August's 25bp easing.
The COPOM meeting minutes, released yesterday, brought a balanced message aimed at curbing market pricing of further rate cuts, in our view.
Mexico's private spending stumbled at the start of the second quarter.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
While we were out, data released in Mexico added to our downbeat view of the economy in the near term, supporting our base case for interest rate cuts in the near future.
We are going to print two days before the July 1 presidential election in Mexico.
Before this week's earthquake, the resilience of Mexico's economy in the face of a volatile and challenging global backdrop owed much to the strength of domestic demand, especially private consumption.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
Recent polls suggest that Jair Bolsonaro has comfortably beaten Fernando Haddad, to become Brazil's president.
The economic data in Brazil were poor while we were away.
Brazil's central bank looked through the recent dip in the BRL and left interest rates at 6.50% at Wednesday's Copom meeting, in line with the consensus.
Brazil's central bank kept the SELIC rate on hold on Wednesday at 14.25% for the eight consecutive meeting. The decision, which was widely expected, was unanimous, but the post-meeting statement was more detailed and informative than the central bank's June communiqué. We think the shift was intentional; the central bank's new board, headed by Mr. Ilan Goldfajn, is eager to strengthen the institution's credibility and transparency.
Brazil's inflation rate remained well under control over the first half of February.
Brazil's decision to keep interest rates at 14.25% on Wednesday was a surprise. The consensus forecast immediately before the meeting was for a 25bp increase. As recently as Tuesday, though, most forecasters expected a 50bp increase, following hawkish comments from Board members since the last meeting in November, and rising inflation expectations. But the day before the meeting, the IMF revised its forecast for 2016 GDP to -3.5%, much worse than the 1% drop it predicted in October.
The beginning of the electoral campaign last week in Brazil bodes uncertain results and a very close competition for the presidential elections on October 7.
Brazil's central bank is finally decisively facing its demon, persistently high inflation. The eight-member policy board, known as Copom, decided unanimously on Wednesday to increase the Selic rate by 50bp to 12.25%, the highest level in more than three years, in line with the consensus.
Data released yesterday in Brazil helped to lay the ground for interest rate cuts over the coming months.
Brazil's inflation data continue to disappoint, but they are showing some signs of improvement, at the margin. The mid-month CPI, the IPCA-15 index, jumped to 9.3% year-over-year in July, up from 8.8% in June, soaring well above the upper bound of the inflation target and reaching the highest level since December 2003, as shown in our first chart.
Mexico's economy continues to withstand several headwinds, especially the sharp currency depreciation--shown in our first chart--falling commodity prices, and the tough external environment. The country is still one of the economic bright spots in the region, thanks to its resilient domestic demand. June retail sales rose 5.4% year-over-year, well above expectations, and up from 4.1% in May. The underlying trend is positive, averaging 4.8% in the second quarter, well above its 2014 pace.
The COPOM meeting was the centre of attention in Brazil this week. The committee cut the main rate by 25 basis points to a new historical low of 6.50%, in line with market expectations.
Friday's inflation data in Brazil confirmed that the ripples from the truckers' strike in May were still being felt at the start of the third quarter.
The bad news just keeps coming for Brazil's economy. The mid-month CPI, the IPCA-15 index, rose 1.2% month-to-month in March. Soaring energy prices remain the key contributor to the inflation story in Brazil, pushing up the housing component by 2.8% in March, after a 2.2% increase in February.
Broad-based inflation pressures in Brazil remain tame despite the sharp BRL depreciation this year, totalling about 7% in the last three months alone.
Brazil's benchmark inflation index, the IPCA, fell 0.1% month-to-month unadjusted in August, below market expectations.
EM risk sentiment remains grim as the Trump administration dispenses protectionist trade measures. LatAm's biggest economies, Brazil and Mexico, have been hit the hardest, with their currencies falling 3.3% and 2.2% respectively in the last week, the most in the EM world.
Markets have been positively surprised by Brazil's rapid disinflation, the efforts at fiscal reform, and the prospect of growth in the economy this year. The Ibovespa index is now above its pre-crisis high and the real has approached the key level of three per USD in recent months. But the latest GDP report, released yesterday, showed that the economy struggled in Q4. Real GDP fell 0.9% quarter-on-quarter, worse than the revised 0.7% drop in Q3.
Brazil's recent data show that inflation is still falling, allowing the central bank to ease further next month, while economic activity is improving, though the rate of growth has slowed.
The Brazilian Central Bank's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
The Brazilian central bank cut its benchmark Selic interest rate by 50bp, to 7.0%, on Thursday night and confirmed our view that the end of the easing cycle is not far off.
Brazil's industrial sector came roaring back at the start of Q3, following a poor end to Q2. Industrial production jumped 0.8% month-to-month in July, driving the year-over-year rate higher to 2.5%, from 0.5% in June and just 0.1% on average in Q2.
Brazil's economic performance has improved marginally in recent months, with inflation falling and economic activity and sentiment data stabilizing, or even increasing modestly. The latest regional economic activity report, for instance, showed that although overall output declined again on a sequential basis in March-to-May, three of the five regions expanded.
Data released on Friday showed that November inflation was in line with, or below, expectations in Brazil, Colombia and Chile.
Last week's data supported our view that monetary policy across LatAm will continue to diverge in the short term. Brazil will have to prolong its monetary tightening cycle, while economies such as Colombia and Chile will remain on hold despite the recent slowdowns in their economic cycle.
Recent inflation numbers across LatAm have surprised, in both directions. On the upside, Brazil's IPCA index rose 0.2% month-to-month in September, above the market consensus forecast of 0.1%.
Inflation in most economies in LatAm is well under control, allowing central banks to keep a dovish bias, and giving them room for further rate cuts.
China's official, unadjusted trade data for October grabbed the headlines, as they look great at first glance.
News on Mr. Bolsonaro's economic plans and announcements on key names for his government this week are helping the currency and easing risks perception in Brazil.
The Brazilian central bank cut the benchmark Selic interest rate by 25bp, to 6.75%, on Wednesday night, as expected.
Brazil's central bank is in a very delicate situation. The economy is on the verge of another recession, but at the same time the BRL is falling, inflation expectations are rising and the inflation rate is overshooting. Fiscal policy is also tightening to restore macro stability magnifying the squeeze on growth.
LatAm assets have struggled in recent days as it has become clear that the Fed will hike next week. But we don't expect currencies to collapse, as domestic fundamentals are improving and the broader external outlook is relatively benign.
Wednesday's Brazilian industrial production data were worse than we expected but the details were less alarming than the headline. Output slipped 1.8% month-to-month in March, the biggest fall since August 2015, setting a low starting point for Q2.
The Brazilian economy enjoyed a decent Q2, with GDP rising 0.2% quarter-on-quarter, despite the disruptions caused by the truck drivers' strike, after a 0.1% decline in Q1.
Colombia's peso has been one of the most battered currencies in LatAm this year, due mainly to the sharp fall in oil prices, the country's primary export. The COP has dropped about 23% this year against the USD. At the same time, other temporary factors, most notably the impact of El Niño on food prices, have done a great deal of inflation damage too. October's food prices increased 1.4% month-to-month, pushing the year-over-year rate up to 8.8% from an average of 6.6% in the first half of the year. Overall inflation has jumped to 5.9% in October from 3.8% in January, forcing BanRep's board to act aggressively.
The news in Brazil on inflation and politics has been relatively positive in recent weeks, allowing policymakers to keep cutting interest rates to boost the stuttering recovery.
Brazil's industrial sector continued to support the economy in Q3. The underlying tr end in output is rising and leading indicators point to further growth in the near term.
Brazil's recession eased considerably in the first quarter, due mainly to a slowing decline in gross fixed capital formation, a strong contribution from net exports, and a sharp, albeit temporary, rebound in government spending. Real GDP fell 0.3% quarter-on-quarter, much less bad than the revised 1.3% contraction in Q4.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
The data in LatAm have been all over the map in recent weeks. Brazil's cyclical stabilization continues, while Mexican numbers confirm that the economy has come under pressure in recent months.
While we were out, Brazil's central bank delivered a widely-expected 75bp easing, cutting the benchmark rate to 7.5% in an unanimous vote.
While we were out, the economic news in LatAm was mostly positive. The main upside surprise came from Mexico, with the IGAE activity index--a monthly proxy for GDP--rising 2.9% year-over-year in August, up from 1.2% in July, and an average of 2.4% in Q2. A modest rebound was anticipated, but the headline was much better than we and the markets expected.
Brazil's economy likely will bounce back during the second half of this year and into 2018, after the second quarter was marred by political risk.
The week started well for Brazil's President Bolsonaro.
The recovery of some key commodity prices, policy action in China, and stronger expectations that the U.S. Fed will start hiking rates later during the year, have helped reduce volatility in LatAm financial markets. Oil prices have rise by around 20% year-to-date, iron ore prices are up about 60% and copper has risen by 7%.
Friday's Brazilian industrial production data were relatively positive. Output was unchanged month-to-month in May, and April's marginal gain was revised slightly higher. The flat monthly reading pushed year-over-year growth in output up marginally to -8.9% from -9.1%. May production rose month-to-month in two of the four major categories.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
Brazil's manufacturing PMI edged down to a six-month low of 45.2 in December, from 46.2 in November. This marks a disappointing end to Q4, following a steady upward trend during the first half of the year, as shown in our first chart. December's new work index fell to 45.2 from 47.7 in November, driving a slowdown in production, purchases of materials, and employment. The new export orders index also deteriorated sharply in December, falling close to its lowest level since mid-2009.
The Brazilian Central Bank's policy board--the Copom--met expectations on Wednesday, voting unanimously to keep the Selic rate on hold at 6.50%.
Brazil's July economic activity index, released yesterday, showed that the economy started the second half of the year strongly. The IBC-Br index, a monthly proxy for GDP, rose 0.4% month-to-month, pushing the year-over-year rate up to 1.4%, from -0.4% in June.
Political risks in Brazil recently have simmered alongside the modest cyclical recovery, but they are now increasing. President Michel Temer's future remains hard to predict as circumstances change by the day.
The latest IPCA inflation data in Brazil show the year-over-year rate fell to 8.8% in June from 9.3% in May. This is the slowest pace since May 2015, with inflation pulled lower by declines across all major components, except food. Indeed, food prices were the main driver of the modest 0.4% unadjusted monthto-month increase, rising by 0.7%, following a 0.8% jump in May. The year-over-year rate rose to 12.8% in June from 12.4%.
Brazil's consumer recession finally eased in November. Retail sales jumped 2.0% month-to- month, following an upwardly-revised 0.3% drop in October, and the year-over-year rate rose to -3.5% from -8.1%. November's astonishing performance probably reflects seasonal adjustment problems related to Black Friday discounting. Sales have climbed in the last four Novembers, suggesting that consumers' pre-Christmas spending patterns have shifted permanently.
Brazil's inflation rate is in double digits for the first time in 12 years. The benchmark IPCA price index rose 1.0% month-to-month in November, lifting the year-over-year rate to 10.5%, the highest since November 2003. The core IPCA increased 0.7% month-to-month, pushing the year-over-year rate in November up to 8.9% from 8.6% in October.
The MPC was relatively bullish on the outlook for households' spending when it signalled its view, in February's Inflation Report, that the case for raising interest rates before the end of this year had strengthened.
Recent activity data in Mexico have been soft and leading indicators still point to challenging near-term prospects, due mainly to relatively high domestic political risk, stifling interest rates and difficult external conditions.
Recent inflation numbers across the biggest economies in LatAm have surprised to the downside, strengthening the case for further monetary easing.
Inflation in Brazil surprised to the upside this week, with a sharp rebound that looks alarming at face value.
Brazilian political risk remains high but, as we have argued in previous Monitors, it is unlikely to deter policymakers from further near-term monetary easing. The political crisis, however, does suggest that the COPOM will act cautiously, waiting until the latest storm passes before acting more aggressively, despite ongoing good news on the inflation front.
Consumers' spending in Brazil weakened at the end of Q4, but we think households will support GDP growth in the first quarter.
Brazil and Argentina, South America's biggest economies are going through a metamorphosis. Brazil is emerging from its recession and a modest recovery is on the horizon. Exports have rebounded, thanks to the lagged effect of the BRL's sharp sell-off last year, and confidence has improved significantly in recent months. The likelihood that interim President Michel Temer will stay on as head of Brazil's government has also helped to boost sentiment.
Brazil's political situation is steadily improving, with the latest events proving a step in the right direction.
Brazil's domestic economic outlook has not changed much recently.
Inflation pressures are falling rapidly in Brazil, suggesting that the Copom will continue to ease aggressively in the near term. January's CPI report,released Wednesday, showed that inflation plunged to 5.4% year-over-year, from 6.3% in December, chiefly as a result of continued disinflation in key components, such as food, housing prices--including utilities--and transportation.
With the exception of Mexico, November inflation was or below expectations in LatAm. Mexico's overshoot increases the likelihood that Banxico will hike its reference rate at the next board meeting on December 20.
Yesterday's first estimate of full-year 2016 GDP in Mexico indicates that growth gathered momentum over the second half of last year. But risks are now tilted to the downside, following the U.S. election. GDP rose 0.6% quarter-on-quarter in Q4, after a 1.0% increase in Q3. Growth was much slower in the firs t half, as shown in our char t below.
Recent economic weakness in Brazil, particularly in domestic demand, and the ongoing deterioration of confidence indicators, have strengthened the case for interest rate cuts.
While we were out, Brazil's economic, fiscal and political position continued to deteriorate further. The recession deepened in the fourth quarter, with Brazil's economic activity index surprising yet again to the downside in October, falling for the eight consecutive month. The index fell 0.6% month-to-month and 6.4% year-over-year, the biggest contraction since the index began in 2004. And the prospects for first quarter consumption and industrial output have deteriorated substantially. Unemployment increased further in November, and inflation continues to rise, with the mid-month CPI--the IPCA-15 index-- increasing 1.2% month-to-month in November, after a 0.9% increase in October.
Brazil's recession has been severe, triggered by the downturn in the commodity cycle, which revealed the underlying structural weaknesses in the economy. This set off an acute shock in domestic demand, but it has bottomed in recent months and we now expect a gradual recovery to emerge.
While we were out, monetary policy in Latin America was unchanged, except in Brazil, where the Monetary Policy Committee--Copom--this week raised the Selic rate by 50bp to 13.25%, in line with expectations. Looking ahead, we now expect no changes in policy in Brazil or elsewhere over the next few months, or at least until the Fed starts hiking rates.
Data released on Wednesday confirmed that the Brazilian economy was relatively resilient in Q1. Leading indicators suggest that it will do well in Q2 and Q3, but downside risks are rising.
The fact that Brazilian economy shrank in the first quarter was never in doubt; what really mattered was the pace of contraction. Surprisingly; the decline was just 0.2% quarter-on-quarter in Q1, above market expectations, but still down after the meagre 0.3% gain in Q4.
While we were out, Brazil's Monetary Policy Committee--Copom-- increased the Selic rate by 50bp to 14.25% on July 29th. The short statement indicated that the decision was unanimous and without bias. But it also signaled that the Copom is ready to end the tightening cycle if the data and, especially, the BRL, permit.
Recent inflation and activity data in Mexico were dovish.
Brazilian inflation hit its lowest rate in almost seven years in March, while Mexico's rate is the highest since July 2009. Yet we expect Mexico to tighten policy only modestly in the near term, while Brazil will ease rapidly.
The first round of Brazil's presidential elections will take place this Sunday, followed by a probable runoff on October 28.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from a downwardly-revised 0.5% in Q3.
The recession in Brazilian consumers' spending continues, but the severity of the pain is easing. Retail sales plunged 0.9% month-to-month in March, pushing the year-over-rate down to -5.7%, from a revised -4.2% in February. The March headline likely was depressed by the early Easter.
Economic growth in Brazil is not likely to improve significantly this year. Our pessimism was underscored by the November industrial production data last week, showing a contraction of 0.7%, and pushing output to its lowest level since June.
The data in LatAm have been all over the map in recent weeks.
The Brazilian central bank left its benchmark Selic interest rate on hold at 6.5% on Wednesday night and confirmed our view that policymakers will stand pat for the foreseeable future, provided the BRL remains stable and Mr. Bolsonaro is able to push forward his reform agenda.
Copom's meeting was the focal point this week in Brazil. The committee eased by 25bp for the second straight meeting, leaving the Selic rate at 13.75%, and it opened the door for larger cuts in Q1. Rates sat at 14.25% for 15 months before the first cut, in October. In this week's post-meeting statement, policymakers identified weak economic activity data, the disinflation process--actual and expectations--and progress on the fiscal front as the forces that prompted the rate cut.
Political risk in Brazil has increased substantially, following reports that President Temer was taped in an alleged cover-up scheme involving the jailed former Speaker of the House. If the tapes are verified, calls for Mr. Temer to face impeachment will mount.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
Brazil's President Dilma Rousseff was removed from office on Wednesday, following an impeachment trial triggered by allegations that Ms. Rousseff used "creative" accounting techniques to disguise Brazil's growing budget deficit, ahead of her re-election in 2014. The Senate voted 61-20 to convict Ms. Rousseff; only 54 votes were needed to oust her. For Ms. Rousseff's leftist Workers' Party, her removal marks the end of 13 years in power.
While we were away, EM growth prospects and risk appetite deteriorated, due mainly to rising geopolitical risks and Turkey's currency crisis.
Prospects for further rate cuts in Brazil, due to the sluggishness of the economic recovery and low inflation, have played against the BRL in recent weeks.
The Brazilian Central Bank's policy board, COPOM, left the Selic rate at 6.50% on Wednesday, as widely expected.
Local policy drivers have remained in the spotlight in Brazil, against a background of important recent global events.
Economic data released in recent weeks underscore that Brazil emerged from recession in Q1, but the recovery is fragile and further rate cuts are badly needed. The political crisis has damaged the reform agenda, and political uncertainty lingers.
Brazil's April economic activity index--a monthly proxy for GDP--surprised to the downside, again. The IBC-BR index was unchanged month-to-month but contracted a dreadful 4.8% year-over-year, down from a revised 3.2% contraction in March. These results imply Q2 GDP of about -1.9% quarter-on-quarter, much worse than the 0.2% contraction in Q1. The release offers no details, but the report signals a continued steep, steady deterioration.
Inflation pressures in LatAm are moderating, and governments have been taking steps to pursue fiscal consolidation. These factors, coupled with a relatively favourable external environment, are providing policymakers with the opportunity to start relaxing monetary policy.
Brazil's central bank kept the Selic policy rate at 6.50% this week, as markets broadly expected.
Chile's central bank left rates unchanged on Tuesday for the fourth consecutive month, as recent data confirmed the sluggish pace of the economic recovery and inflation edges down closer to the target range. In the statement accompanying the decision, the BCCh kept its tightening bias, saying that the normalisation of monetary policy needs to continue at a data-dependent pace, in order to achieve its 3% target.
Private consumption remains resilient in Brazil and recent data suggest that growth will continue over the coming months.
The consumer in Brazil was off to a strong start to the first quarter, and we expect household spending will continue to boost GDP growth in the near term.
Evidence of a modest upturn in Brazilian consumers' spending continues to mount. Retail sales rose 1.0% month-to-month in April, pushing the year-over-rate up to +1.9%, from an upwardly-revised -3.2% in March.
Mexico's central bank, Banxico, last night capitulated again, reacting to the depreciation of the MXN by increasing interest rates by 50bp--for the fourth time this year--to 5.25%.
Brazil's industrial sector keeps losing momentum, despite interest rates at record lows and improving confidence.
Inflation in Brazil ended 2018 under control, despite slightly overshooting expectations.
Economic data in Brazil over the second quarter were relatively positive, and June reports released in recent weeks, coupled with leading indicators for July, are encouraging.
LatAm assets did well in Q1, on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD.
Economic data released yesterday underscored that Brazil emerged from recession in the first quarter, but further rate cuts are needed. Indeed, the monthly economic activity index--the IBC-Br--fell 0.4% monthto- month in March, though this followed a strong 1.4% gain in February.
Brazil's consumer resilience in Q3 continued to November, but retail sales undershot market expectations, suggesting that the sector is not yet accelerating and that downside risks remain.
Consumption has been a serious weak spot in Brazil over the past year. After reaching record growth rates in 2010, it has gradually slowed to its lowest pace in more than ten years.
Brazil's consumer sluggishness in Q3 and early Q4 eased in November.
Brazil's monetary policy committee, the Copom, cut the Selic rate by 25bp to 14.0% in a unanimous decision, without bias, on Wednesday. This marks the start of the first easing cycle since 2012, and it arrives after 15 months with rates held at 14.25%.
Brazil's central bank started the year firing on all cylinders. The Copom surprised markets on Wednesday by delivering a bold 75bp rate cut, bringing the Selic rate down to 13.0%. In October and November, the Copom eased by only 25bp, but inflation is now falling rapidly and consistently. The central bank said in its post-meeting communiqué that conditions have helped establish a "new rhythm of easing", assuming inflation expectations hold steady.
Inflation in Brazil remained subdued at the start of the second quarter, strengthening the odds for an additional interest rate cut next month, and opening the door for further stimulus in June.
Brazilian inflation is off to a bad start this year, but January's jump is not the start of an uptrend, and we think good news is coming.
Brazilian inflation rate remained well under control at the start of this year, and we think the news will continue to be favorable for most of this year.
The bad economic news in Brazil is unstoppable. The mid-month CPI index rose 1.3% month-to-month in February, as education, housing, and transport prices increased. School tuition fees jumped 6% month-to-month in February, reflecting their annual adjustment, and transport costs rose by 2% due to an increase in regulated gasoline prices.
Brazil's economic data last week were appalling. The IPCA-15 price index rose 1.3% month-to-month, the fastest pace in 12 years, pushing the annual rate to 7.4% in mid-February from 6.7% in mid-January,well above the 6.5% upper bound of the BCB's target range.
In one line: Inflation is well under control; the BCB will cut rates next week.
Brazil's macroeconomic scenario is becoming easier to navigate for the central bank. Both actual inflation and expectations are slowing rapidly, as shown in our first chart. And since the March BCB monetary policy meeting, the BRL has appreciated about 10% against the USD, while commodity prices and EM sentiment have also improved markedly.
In one line: Low inflation still gives the BCB board room for manoeuvre.
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