The Central Bank Weekly Focus Survey released on February 19 showed that inflation expectations for year end 2010 continued to move away from the mid-point of the central bank target range of 4.5% (+ -2%), while the monetary policy rate (SELIC) stayed unchanged. Moreover, GDP growth expectations for 2010 were revised marginally up and the real (BRL) for year-end 2010 stayed unchanged.
Inflation expectations, as measured by IPCA, deteriorated further to 4.86% from 4.8% for year-end 2010; however, inflation expectations for 12 months ahead and for year-end 2011 stayed well anchored at around 4.5%. IGP-M forecast for 2010 also continued deteriorating to 5.3% from 5.26% of the previous week and 4.59% of the third week of January. This inflation reading, however, also showed that inflation expectations for 2010 are stable at 4.5%. Average GDP growth forecasts were revised marginally up to 5.5% from 5.47% for 2010 and stayed unchanged at 4.5% for 2011.
Furthermore, analysts expect the SELIC to be around 11.25% by year end 2010, unchanged for the fifth week in a row. Though, it was revised down for year-end 2011 to 11% from 11.25%. The markets’ DI curve is pricing in a little bit more than 320 basis points in hikes to around 12% by year-end 2010, starting in March (more than 25 basis points). Needless to say, the markets were anticipating almost 400 basis points in hikes by mid-January. Finally, the real (BRL) stayed unchanged for the end of 2010 at BRL 1.8 per USD and for year end 2011 at BRL 1.85 per USD.
Consumer prices to February 15 from January 15, as measured by IPCA-15, came in higher than expected at 0.94% m/m or 4.6% y/y. The Bloomberg consensus and RGE were expecting 0.85% m/m and 0.82% m/m, respectively. Sharper than expected increases in food (0.98% m/m) and transport prices (1.28% m/m), together with higher education costs (4.55% m/m) drove inflation in the period under review. As explained before, adverse weather conditions, higher transport fares and seasonal factors (back to school) pushed the aforementioned reading up.
Finally, augmented retail sales, which include automobiles and construction materials, increased 14.3% y/y while retail sales expanded 9.1% y/y in December. These results were in line with Bloomberg consensus and RGE’s expectations of 14.5% y/y for augmented retail sales, but somewhat lower than consensus and RGE’s forecast of 10.5% y/y for retail sales. Slower growth in automobile sales by the end of last year (28% y/y vs. 37% y/y in November), despite faster increases in construction materials (17% y/y vs. 4.5% y/y in November) avoided augmented retail sales from posting another robust reading. Adjusted for seasonal factors, however, augmented retail sales increased at a slower pace of 0.6% m/m from 0.8% m/m in November driven by stronger growth in automobile (1.6% vs. 0.5% m/m in November) and construction materials (3.3% m/m vs. 3.2% m/m in November). Retail sales posted a 0.4% m/m decline in December from a 0.7% m/m increase the previous month as supermarkets (-1.2% m/m) and white-goods (-3.3% m/m) performed poorly. On a three month moving average comparison (3MMA), retail sales moderated to a 0.6% increase from 1% in November and October, while the augmented retail posted a 0.2% decline, the first since December 2008, after expanding 0.9% and 1.6% in November and October, respectively.
Overall, the higher than expected inflation reading (IPCA-15) and increasing inflation expectations, in particular for this year, are in line with RGE’s view that the central bank will likely initiate the hiking cycle in Q2 2010, perhaps come April. Needless to say, inflation pressures should stabilize soon as the seasonal effects (adverse weather conditions, increased public tariffs and back to school) wears out. Meanwhile, the slower than expected retail sales suggest that demand is moderating at the margin so the central bank will not necessarily hike in March, as the markets are currently pricing in, in RGE’s view.
In Mexico, economic activity (IGAE) expanded 0.5% y/y in December, the first positive yearly reading since October 2008. The Bloomberg consensus was expecting a 0.3% y/y contraction while RGE was anticipating a 1.4% y/y expansion. In December, strong growth in industrial production (1.6% y/y), which was heavily influenced by a rebound in US demand, and a gentler contraction in the service sector (-0.3% y/y) supported economic activity that month. The December result eased the pace of contraction in Q4 2009 to 2.3% y/y from an average decline of 8.1% y/y in the first three quarters of 2009, and brought average GDP to a fall of 6.6% y/y in 2009 from an expansion of 1.4% y/y in 2008. Adjusted for seasonal factors, IGAE eased the pace of acceleration in December to 0.4% m/m from 1.4% m/m the previous month, as growth in the service sector eased to 0.5% m/m from 1.1% m/m in November, despite stronger expansion in industrial output to 1% m/m from 0.7% m/m in November. In Q4 2009, IGAE expanded 8.9% q/q s.a. annualized after expanding 10.8% q/q s.a. annualized in Q3 2009.
Moreover, Mexico’s retail sales expanded 1.6% y/y in December, easing the pace of contraction to 1.3% y/y in Q4 2009 from an average decline of 5.3% y/y in the first three quarters of 2009. The result was in line with RGE’s 1.6% y/y and consensuses’ 1.5% y/y forecasts. Adjusted for seasonality, retail sales increased 0.3% m/m after expanding 2% m/m in November, pushing the index up to 3.5% q/q s.a. annualized growth in Q4 2009 from a 2.2% q/q s.a. annualized contraction in Q3 2009.
On February 22nd Mexico’s Exchange Commission announced a reserve accumulation program in order to enhance the country’s credit profile. The CB will auction US$ 600 million in put options to local credit institutions at the end of every month, starting in February. The options can be partially or fully exercised during the following month at the interbank reference exchange rate (fix) of the last business day, as long as the “fix” is not greater than the average exchange rate of the last 20 days prior to the exercise date. This same method was successfully used between 1996 and 2001. In addition, Banxico plans to purchase up to USD 20 billion during 2010 – 2011 from Pemex (Petroleos Mexicanos) and the Federal Government, in a gradual way as to not affect the free floating exchange rate regime.
RGE continues to believe that Mexico’s economic activity during H1 2010 will grow robustly as a result of a low base, improving domestic confidence and strong growth in the U.S.; however, the expansion will likely lose steam in H2 2010 as the low base effect wears out and growth in the U.S. falters. In the U.S., growth momentum from H2 2009 will continue in H1 2010, with average annualized growth a bit short of 3%. Fiscal stimulus, inventory cycle and base effects will continue to be supportive of growth in H1, however this might change in H2 2010. Base effects will wane, the restocking cycle will likely contribute to growth less than the liquidation cycle has recently and the fiscal stimulus contribution to growth will be at best neutral but most likely negative. RGE expects U.S. growth to average an annualized 1.5% in H2 2010, considerably below potential. In Mexico, RGE expects Mexico to expand on average 4.5% y/y in H1 2010 and 2.5% y/y in H2 2010, averaging 3.6% y/y in 2010 (for further detail please read Q1 2010 US and Mexico Outlooks).
Finally, as mentioned in the past, Mexico’s decision to accumulate reserves should be taken positively by the markets as the country will strengthen its external position to better deal with moments of greater global volatility. However, this should not be a replacement for sound macroeconomic management, deeper structural reforms and efforts to reduce depend
ence on the U.S. (Please read “RGE Currency Outlook: The Mexican Peso”)
Economic activity expanded 5% y/y in December, closing 2009 at 0.8% y/y (6.8% y/y in 2008), according to official figures released on February 19 by INDEC. The result was slightly higher than RGE forecast of 4.5% but well above Bloomberg consensus of 3.8%. Adjusted for seasonal factors, economic activity increased at a faster pace of 1.8% m/m, compared to 0.9% m/m in November, bringing growth to 8.2% q/q s.a. annualized in Q4 2009 from 0.7% q/q s.a. annualized in Q3 2009. Moreover, INDEC reported that industrial production expanded 4.8% y/y in January, which was well below Bloomberg consensus and RGE expectations of 14.6% y/y and 10.6% y/y, respectively. The worse than expected decline in food output and metal-mechanics, despite strong automobile production (66% y/y), drove the worse than expected result. On a seasonally adjusted basis, industrial, production dropped 8% m/m driven by a generalized decline, especially a 44% m/m contraction in automobile output and a 9% m/m drop in food production.
RGE’s main concern in Argentina continues to be high inflation, uncertain economic policy, and institutional deterioration. Moreover, as expressed in RGE’s Q1 2010 Argentina’s Outlook, changes in the central bank management and the government’s focus on economic growth indicate that the local currency (ARL) will remain under a weakening path for the foreseeable future. RGE expects the ARS to weaken to about ARS 4.2 by year end 2010 and ARS 4.5 by year end 2011.
According to Citigroup’s market survey, in which RGE participated, average inflation expectations increased to 3.8% from 3.6% for year end 2010, while GDP growth forecasts remained stable at 2.7% (RGE 3%). Moreover, the monetary policy rate (repo rate) remained unchanged at 4.4% (RGE 5%) and the Colombian peso (CLP) was revised up to CLP 1990 from CLP 1975 per US$ (RGE CLP 2078).
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