{"editing":true,"contentLoading":false,"about_us_para_1":" Verbank Advisors is an independent full-service asset management and wealth advisory firm, founded by senior investment bankers with extensive experience in the industry.","about_us_para_2":" Verbank Advisors focuses exclusively on the diverse investment needs of our clients. We provide comprehensive management consulting services to shareholders of closely held companies and financial advisory services to help our clients grow and diversify their financial and real estate holdings in multiple countries, and to pass them on to the next generation. Our partners have a deep understanding of the financial challenges facing ultra high net-worth individuals and their companies, trusted employees, family members, foundations, endowments, and non-profit undertakings and can provide tailor made solutions in several jurisdictions.","home_about_us_heading_1":"About us","home_about_us_subheading_1":"Team","home_about_us_subheading_2":"Business","home_image_banner_image":{"isImage":true,"url":"https://storage.googleapis.com/verbanknetlive.appspot.com/image_banner.jpeg","preview":"","blob":"","filePath":"","fileType":"","___id":1,"file":"","displayUrl":"https://storage.googleapis.com/verbanknetlive.appspot.com/image_banner.jpeg?a=0.8954158163390085"},"home_description_para_1":"We help you to make lasting improvements to your financial performance, realizing your most important goals by delivering the right solutions and services across investments, credit and banking. Through our advisory team, you and your family have access to our wealth management services and vast network. We don't sell our own products, we work with you and for you finding a range of investment opportunities and selecting the best suited to you.\n","home_description_para_2":"Capital markets changing geographical location","home_description_list_1":"
  • 70% of the Latin American bonds are registered on the Luxembourg Stock Exchange
  • Large international investors interested in Latin America with a high yield of USD in Lux
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    We value your interest. Please contact Jorge Usandivaras for more information regarding our investments.

    Email: jorge@verbank.net

    Telephone: +1-646-498-0170




    ","what_we_do_header":"Verbank Securities","what_we_do_bullets":"
  • With full transparency through comprehensive data analysis services, and personalized capital structure management
  • We get involved to know exactly what your current and future needs are or will be during each stage, and we accompany you throughout the process
  • We offer you management advice to search and obtain private financing (medium to long term) with an emphasis on the issuance of listed bonds in the Grand Duchy of Luxembourg

  • Regarding the discussions with potential investors, we guide you to focus exclusively on institutional investors, leaving aside the retail market
  • We believe we are in a privileged position to advise you in this process thanks to our extensive trajectory in the origination and obtaining of medium and long-term structured financing
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     regarding our investments.
    ","footer_text":"@2021, Verbank Advisors, Inc. and Verbank Agriculture, Inc","home_our_team_1_name":"Jorge D. Usandivaras","home_our_team_2_name":"Emiliano Salcines Zugasti","home_our_team_3_name":"Antonio G. Lobón","home_our_team_1_image_url":"/images/jorge.png","home_our_team_2_image_url":"/images/emilano.png","home_our_team_3_image_url":"/images/antonio.png","home_our_team_1_description":"Mr. Usandivaras is the founding partner of Verbank Holdings and affiliates. He has 30+ years of experience in Latin American financial markets, trading, investment banking, and asset management. He was the Managing Director of JP Morgan, Deutsche Bank, Merrill Lynch, and was the Senior Executive at Banco Itaú. Mr. Usandivaras graduated from the Harvard Kennedy School of Government & Law School with a Masters in Fiscal Economic Policy and International Taxation.","home_our_team_2_description":"Mr. Zugasti is the External Advisor to the Board, Chairman, and Managing Partner of Lexi. with 30+ years of experience in corporate and investment banking. Much of his career has been spent as the COO CIB in the USA and as the General Manager of BBVA New York. Mr. Zugasti is an Engineer and holds a PhD in Industrial Engineering, a Masters in Industrial Design, Postgraduate in Business Administration, as well as ACAMS CDD and BACIE certificates.","home_our_team_3_description":"Mr. Lobón is the External Advisor to the Board. He has 36 years of experience with KPMG (the last 16 of them were gained while based in New York City) till his retirement, and 4+ years as the International Managing Partner at Larrauri & Martí Abogados in Madrid. His experience includes banking, finance, and leasing with all types of funds and alternative investment industries. He has a Law Degree, Masters in Tax Law and Spanish CPA. Mr. Lobón is a member of the Madrid Bar Association and the Spanish Institute of Public Accountants.","home_our_team_1_linkedIn":"https://www.linkedin.com/in/jorge-d-usandivaras-37930b11/","home_our_team_2_linkedIn":"https://www.linkedin.com/in/emiliano-salcines-zugasti-phd-2a8097107/","home_our_team_3_linkedIn":"https://www.linkedin.com/in/antonio-g-lobon-8716bb1/","home_banner_message":"Welcome to Verbank","home_about_us_button":"More about us >","home_contact_us_button":"Send us a message >","home_our_team_button":"More about the team >","home_what_we_do_button":"More about what we do >","our_team_button":"About Verbank agriculture >","what_we_do_button":"Contact Us >","home_about_us_1_descripion":"Professionals with longstanding experience in Global Investment Banking","home_about_us_2_descripion":"Years of management experience
    at CIB
    ","home_about_us_3_descripion":"Years of team experience
    at CIB
    ","home_about_us_4_descripion":"Verbank was born in 2008 as an agribusiness management fund","home_about_us_5_descripion":"Organizational agility in decision marking","home_about_us_6_descripion":"We are in the market to help both Issuers and Investors","home_about_us_7_descripion":"Global reach with maximum experience in the Americas and Europe","home_about_us_7_title":"","home_about_us_6_title":"","home_about_us_5_title":"","home_about_us_4_title":"13 YEARS","home_about_us_3_title":"20","home_about_us_2_title":"30+","home_about_us_1_title":"12+","home_about_us_1_image_url":"/images/people.png","home_about_us_2_image_url":"/images/person.png","home_about_us_3_image_url":"/images/team.png","home_about_us_4_image_url":"/images/location.png","home_about_us_5_image_url":"/images/clock.png","home_about_us_6_image_url":"/images/network.png","home_about_us_7_image_url":"/images/globe.png","home_what_we_do_1_title":"Advice on Corporate Finance:","home_what_we_do_2_title":"Capital Structure Management:","home_what_we_do_3_title":"Market Intelligence:

    ","home_what_we_do_3_list":"
  • Weekly, monthly and annual market reports tailored to you needs
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  • Personalized Attention
  • Advice and Monitoring
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  • Debt Issuance
  • Issuance of financial trusts and appropriate funding vehicles
    • ","our_team_heading":"Team","our_team_desc":"Meet the Verbank Advisors team of financial advisors and consultants. We are committed to making the smartest investments for our client portfolios.\n","news_header":"Financial News","newarticle":"

    UNITED STATES


    The main event this week is the May/18 jobs report, due out on Friday. US growth is accelerating after the Q1/18 slowdown. The second revision of the Q1/18 GDP report was out on May 30th. Growth in the quarter was revised down to 2.2%saar, but the composition of the revision was favorable. Growth in business fixed investment was revised higher, to 9.2%saar, reinforcing the belief that we are witnessing a cycle-within-the-cycle. While the broader post global recession cycle is on its 10th year of recovery, thus, expectedly, attenuating, a mini-cycle induced by fiscal policy is just beginning—and adding strength to the economy. Most analysts expect a strong growth performance in Q2/18 (up to 3.5-3.7%saar) and through yearend, with decelerating but still above potential growth in 2019 (around 2.4%yoy).

    Broadly, this is a supportive environment for the labor market. Friday’s numbers should confirm a pace of employment expansion that is well above what is needed to absorb new entrants. Expectations are for around 190k, pushing the 6mo average to 198k jobs/month. The upshot should be further declines in the unemployment rate towards 3.5% by yearend, a rate not seen in the US since the late 1960s. Inflation is also accelerating and should soon surpass the 2% target set by the Fed, even in its favorite measure, the core Private Consumption Expenditures (PCE) deflator. It is interesting to note that increases in housing prices in the US are already outstripping inflation—by large amounts. Since Aug/16 the national home price index produced by S&P/Case-Shiller has shown annual rates of inflation in excess of 5%, reaching 6.5% in Mar/18. Meanwhile annual inflation measured by the core PCE deflator was 1.9% in Mar/18. To be sure, house prices capture both the price of housing services (or shelter, which enters the CPI) and the value of housing as an asset—and it is the latter that is driving most of the change in house prices. Nevertheless, this trend underscores the fact that what keeps inflation low is the price of goods.

    There is an issue with the slow pace of wage gains. However, survey measures of wages are on the uptick, and close to the estimated full-employment trend, at 3-3.25%yoy. Moreover, there may be deep-rooted structural reasons why measured wage gains are lagging. All of which should lead to a continually active FOMC. The mini-cycle induced by fiscal policy is a problem. It leads to a temporary acceleration of activity, and inflation, in an otherwise “maturing” cycle, and thus poses a dilemma for monetary policy. Should policy “see-through-it” and err on the side of caution, concerned with the post-crisis experience of unprecedently low inflation within the longer post-WWII history? Or should it respond, looking at signs of financial excesses, possible destabilizing expectations, and a wish to avoid sudden measures when the onset of recession is on the horizon? We believe the FOMC will lean to the latter, first and foremost because its framework remains heavily accommodative and still too nearby the Zero Lower Bound. Bringing the rate closer to neutral is an imperative this far along the recovery. Thus we expect the FOMC to implement three additional hikes this year (Jun/18, Sep/18 and Dec/18) followed by another four in 2019. A terminal rate of 3.50% could still be low, 4% would not be inconceivable, but there is too much uncertainty ahead to specify now such a path.

    Friday, June 1: Non-Farm Payrolls (NFP)—May/18. (Consensus 190k; unemployment rate 3.9%; average hourly wages 0.2%momsa, 2.6%yoy). See above.

    BRAZIL


    A strike and/or lockout by truckers, with illegal blockage of main roadways, is the latest crisis which; by incompetence or misinformation; by political omission and opportunism of Federal, State and Municipal authorities; by the confrontation between corporations, venal politicians, and businesses addicted to subsidies and public concessions; erodes confidence, halts the recovery in economic growth and employment, and increases political risk ahead of the Presidential elections in Oct/18. There was cause for protest. Gasoline and diesel prices fluctuated widely, driven not only changes in world oil prices (oil prices have risen by 50% over the past year) but also by the gyrations in the exchange rate. Discontent is widespread and confidence in the government, and in the political class, is at near rock bottom. The condition of the trucking industry is poor. There is oversupply—an unintended byproduct of misguided subsidies for fleet expansion and renewal. The regulatory framework is inadequate, and the basic infrastructure of roadways, a perennial problem. The political appropriation of the conflict is, nevertheless, alarming. Undoubtedly, the main support for the strike came from the trucking industry, not from the truckers themselves.

    A Datafolha poll released on May 29th suggests that 87% of Brazilians supported the week-long strike; 56% of those polled thought the strike should continue. Belatedly, the Government responded: With new concessions; and Congress approved a repeal of tax deductions to help finance them. The same Datafolha poll showed that by the same overwhelming margin (87%) Brazilians oppose the concessions given to transport industry and to truckers. The contradiction suggests that the poll responses are really about sentiment: against current conditions, the outlook, “the system”. They are an indication of antiestablishment perception, against politicians and their policies, a reminder of what could happen at the Oct/18 elections. And, perhaps, because of this, markets responded abruptly, with a plunge in the currency (to BRL 3.77/USD) and a sudden spike in short-term rates (+14bp to 9.1% for the Jan/21 DI). Perhaps, markets are finally unscrambling what could happen, a populist victory, from what they wish for, a centrist victory with continuity in macro policies.

    The main data point out this week was Q1/18 GDP, a 0.4%qoq, 1.2%yoy, matching consensus expectations. Because investment continued to grow (0.6%qoq, 3.5%yoy) the numbers were not a total disappointment. But they are sobering, nonetheless. Given the strike, what could have been a dip is likely to become a trend. Analysts forecast the impact of the strike at around 0.7-0.8pp of GDP, combining the direct impact and the effects of the downturn in confidence. Forecasts for Q2/18 GDP are coming in at 0.2%qoq, from 0.8% earlier. For 2018 as a whole, GDP growth could be reduced to 2%yoy, or less, from the previous range of 2.8-3.2%. The impact on the fiscal account will be equally large. First, because of concessions and new subsidies to the transport industry, which could add R$15bn to expenditures. Second, because of the impact on revenues of the anticipated slowdown in growth. Together they could add to about 0.5% of GDP—which will demand countervailing measures by the Ministry of Finance to keep to the primary deficit target of $159bn (with the new GDP estimate, about 2.4% of GDP).

    We also got data unemployment, for the credit stock and for the public accounts.

    Unemployment—quarter ending in Apr/18. Unemployment dropped to 12.9%, 12.3% with seasonal adjustment. The drop, however, was due entirely to a reduction in the labor force with the participation rate down to 61.5%. Moreover, growth in informal employment continues to outpace formal jobs which helps explain a 0.3%qoq drop in the real wage bill.

    New Loans Flow and Credit Stock—Apr/18. The stock of loans from the banking system grew 1.1%yoy, the product of a 5.5%yoy contraction in loans outstanding to the corporate sector, and a 6.4%yoy expansion in the stock outstanding to households. In real terms (deflated by the IPCA) the stock diminished 1.7%yoy, driven mainly by a reduction in the stock from public banks. Meanwhile, measured by the 12month moving averages, the flow of new loans expanded 5.1%yoy, 7.6% to households and 1.9% to firms. Thus, while corporate deleveraging continued, at the margin, the credit system is in expansion, contributing to the, albeit weak, recovery in activity and employment. Nonperforming loans (over 90days overdue) are stable: 5.4% for households and 5% for firms.

    Consolidated public sector accounts—May/18. The consolidated public sector posted a R$2.9bn primary fiscal surplus in May/18. On a 12-month basis, the primary deficit measured 1.78% of GDP and the overall public deficit (primary balance plus net interest payments) 7.51% of GDP. The public debt dynamics continued to deteriorate. The stock of gross general government debt reached 75.9% of GDP in Apr/18, up from 74.0% in Dec/17. It goes without saying that without fiscal adjustment the debt is unsustainable. Even with fiscal adjustment, minimally, respect for the constitutionally mandated expenditure ceiling, which presupposes a reform of the social security systems and of earmarked taxes, the debt is not likely to begin stabilizing until 2022/23. This under the assumptions that grows accelerates to 3%pa; that the real interest rate on government debt remains low (it is now less than 3%); and that the global economic environment continues to be supportive. In short, a tall order—one that presumes a continuity in macro policy under a centrist coalition.
    ","articles":[{"title":"US + Brazil Financial News (5/31)","date":"31st May","content":"

    UNITED STATES


    The main event this week is the May/18 jobs report, due out on Friday. US growth is accelerating after the Q1/18 slowdown. The second revision of the Q1/18 GDP report was out on May 30th. Growth in the quarter was revised down to 2.2%saar, but the composition of the revision was favorable. Growth in business fixed investment was revised higher, to 9.2%saar, reinforcing the belief that we are witnessing a cycle-within-the-cycle. While the broader post global recession cycle is on its 10th year of recovery, thus, expectedly, attenuating, a mini-cycle induced by fiscal policy is just beginning—and adding strength to the economy. Most analysts expect a strong growth performance in Q2/18 (up to 3.5-3.7%saar) and through yearend, with decelerating but still above potential growth in 2019 (around 2.4%yoy).

    Broadly, this is a supportive environment for the labor market. Friday’s numbers should confirm a pace of employment expansion that is well above what is needed to absorb new entrants. Expectations are for around 190k, pushing the 6mo average to 198k jobs/month. The upshot should be further declines in the unemployment rate towards 3.5% by yearend, a rate not seen in the US since the late 1960s. Inflation is also accelerating and should soon surpass the 2% target set by the Fed, even in its favorite measure, the core Private Consumption Expenditures (PCE) deflator. It is interesting to note that increases in housing prices in the US are already outstripping inflation—by large amounts. Since Aug/16 the national home price index produced by S&P/Case-Shiller has shown annual rates of inflation in excess of 5%, reaching 6.5% in Mar/18. Meanwhile annual inflation measured by the core PCE deflator was 1.9% in Mar/18. To be sure, house prices capture both the price of housing services (or shelter, which enters the CPI) and the value of housing as an asset—and it is the latter that is driving most of the change in house prices. Nevertheless, this trend underscores the fact that what keeps inflation low is the price of goods.

    There is an issue with the slow pace of wage gains. However, survey measures of wages are on the uptick, and close to the estimated full-employment trend, at 3-3.25%yoy. Moreover, there may be deep-rooted structural reasons why measured wage gains are lagging. All of which should lead to a continually active FOMC. The mini-cycle induced by fiscal policy is a problem. It leads to a temporary acceleration of activity, and inflation, in an otherwise “maturing” cycle, and thus poses a dilemma for monetary policy. Should policy “see-through-it” and err on the side of caution, concerned with the post-crisis experience of unprecedently low inflation within the longer post-WWII history? Or should it respond, looking at signs of financial excesses, possible destabilizing expectations, and a wish to avoid sudden measures when the onset of recession is on the horizon? We believe the FOMC will lean to the latter, first and foremost because its framework remains heavily accommodative and still too nearby the Zero Lower Bound. Bringing the rate closer to neutral is an imperative this far along the recovery. Thus we expect the FOMC to implement three additional hikes this year (Jun/18, Sep/18 and Dec/18) followed by another four in 2019. A terminal rate of 3.50% could still be low, 4% would not be inconceivable, but there is too much uncertainty ahead to specify now such a path.

    Friday, June 1: Non-Farm Payrolls (NFP)—May/18. (Consensus 190k; unemployment rate 3.9%; average hourly wages 0.2%momsa, 2.6%yoy). See above.

    BRAZIL


    A strike and/or lockout by truckers, with illegal blockage of main roadways, is the latest crisis which; by incompetence or misinformation; by political omission and opportunism of Federal, State and Municipal authorities; by the confrontation between corporations, venal politicians, and businesses addicted to subsidies and public concessions; erodes confidence, halts the recovery in economic growth and employment, and increases political risk ahead of the Presidential elections in Oct/18. There was cause for protest. Gasoline and diesel prices fluctuated widely, driven not only changes in world oil prices (oil prices have risen by 50% over the past year) but also by the gyrations in the exchange rate. Discontent is widespread and confidence in the government, and in the political class, is at near rock bottom. The condition of the trucking industry is poor. There is oversupply—an unintended byproduct of misguided subsidies for fleet expansion and renewal. The regulatory framework is inadequate, and the basic infrastructure of roadways, a perennial problem. The political appropriation of the conflict is, nevertheless, alarming. Undoubtedly, the main support for the strike came from the trucking industry, not from the truckers themselves.

    A Datafolha poll released on May 29th suggests that 87% of Brazilians supported the week-long strike; 56% of those polled thought the strike should continue. Belatedly, the Government responded: With new concessions; and Congress approved a repeal of tax deductions to help finance them. The same Datafolha poll showed that by the same overwhelming margin (87%) Brazilians oppose the concessions given to transport industry and to truckers. The contradiction suggests that the poll responses are really about sentiment: against current conditions, the outlook, “the system”. They are an indication of antiestablishment perception, against politicians and their policies, a reminder of what could happen at the Oct/18 elections. And, perhaps, because of this, markets responded abruptly, with a plunge in the currency (to BRL 3.77/USD) and a sudden spike in short-term rates (+14bp to 9.1% for the Jan/21 DI). Perhaps, markets are finally unscrambling what could happen, a populist victory, from what they wish for, a centrist victory with continuity in macro policies.

    The main data point out this week was Q1/18 GDP, a 0.4%qoq, 1.2%yoy, matching consensus expectations. Because investment continued to grow (0.6%qoq, 3.5%yoy) the numbers were not a total disappointment. But they are sobering, nonetheless. Given the strike, what could have been a dip is likely to become a trend. Analysts forecast the impact of the strike at around 0.7-0.8pp of GDP, combining the direct impact and the effects of the downturn in confidence. Forecasts for Q2/18 GDP are coming in at 0.2%qoq, from 0.8% earlier. For 2018 as a whole, GDP growth could be reduced to 2%yoy, or less, from the previous range of 2.8-3.2%. The impact on the fiscal account will be equally large. First, because of concessions and new subsidies to the transport industry, which could add R$15bn to expenditures. Second, because of the impact on revenues of the anticipated slowdown in growth. Together they could add to about 0.5% of GDP—which will demand countervailing measures by the Ministry of Finance to keep to the primary deficit target of $159bn (with the new GDP estimate, about 2.4% of GDP).

    We also got data unemployment, for the credit stock and for the public accounts.

    Unemployment—quarter ending in Apr/18. Unemployment dropped to 12.9%, 12.3% with seasonal adjustment. The drop, however, was due entirely to a reduction in the labor force with the participation rate down to 61.5%. Moreover, growth in informal employment continues to outpace formal jobs which helps explain a 0.3%qoq drop in the real wage bill.

    New Loans Flow and Credit Stock—Apr/18. The stock of loans from the banking system grew 1.1%yoy, the product of a 5.5%yoy contraction in loans outstanding to the corporate sector, and a 6.4%yoy expansion in the stock outstanding to households. In real terms (deflated by the IPCA) the stock diminished 1.7%yoy, driven mainly by a reduction in the stock from public banks. Meanwhile, measured by the 12month moving averages, the flow of new loans expanded 5.1%yoy, 7.6% to households and 1.9% to firms. Thus, while corporate deleveraging continued, at the margin, the credit system is in expansion, contributing to the, albeit weak, recovery in activity and employment. Nonperforming loans (over 90days overdue) are stable: 5.4% for households and 5% for firms.

    Consolidated public sector accounts—May/18. The consolidated public sector posted a R$2.9bn primary fiscal surplus in May/18. On a 12-month basis, the primary deficit measured 1.78% of GDP and the overall public deficit (primary balance plus net interest payments) 7.51% of GDP. The public debt dynamics continued to deteriorate. The stock of gross general government debt reached 75.9% of GDP in Apr/18, up from 74.0% in Dec/17. It goes without saying that without fiscal adjustment the debt is unsustainable. Even with fiscal adjustment, minimally, respect for the constitutionally mandated expenditure ceiling, which presupposes a reform of the social security systems and of earmarked taxes, the debt is not likely to begin stabilizing until 2022/23. This under the assumptions that grows accelerates to 3%pa; that the real interest rate on government debt remains low (it is now less than 3%); and that the global economic environment continues to be supportive. In short, a tall order—one that presumes a continuity in macro policy under a centrist coalition.
    ","preview":"UNITED STATES The main event this week is the May/18 jobs report, due out on Friday. US growth is accelerating after the Q1/18 slowdown. The..","url":"/US-Brazil-Financial-News-5-31","___id":2},{"title":"US + Brazil Financial News (5/15)","date":"15th May","content":"

    UNITED STATES


    The main data this week will be retail sales for April, out on Tuesday. It should show healthy growth, with the “control group” growing 0.4%momsa or 3.6%yoy. The control group measures sales excluding both the more quotidian and cyclical items: food and gasoline; auto dealers and building materials. It is, thus, a better gauge of the underlying economic trend. Smoothing this trend over the past 12mo, yields a pace of 3.8%yoy in Mar/18 and, expectedly, the same for Apr/18. An even longer smoothing period (60mo) yields 3.5%yoy for both months. This is less than the rather torrid pace of growth in Q2/15 (4.5%yoy) but a lot faster than the trough in Q1/17 when growth decelerated to about 3.0%yoy. It is an indication that consumption growth is healthy and still leading the economic recovery; that the soft patch in Q1/18 was limited to that period. Retail sales is historically closely linked to disposable income (the long-run correlation between the series is 89.2%). So, the expected pick-up in disposable income growth, post-tax reform, should sustain growth in retail sales in 2018—pointing to an overall rate of GDP growth of 2.8-3% in 2018—significantly above the potential rate of growth of the US economy. Today, the US is a net exporter of refined petroleum products and the third largest producer of crude oil. This means that volatility with increases in oil prices, such as we have seen over the last few weeks, should not be a deterrent to overall growth.

    The latter matters, because, as we have noted repeatedly, the labor market is beyond full employment and we should soon begin to see signs of overheating for the entire economy. Price and wage inflation should follow, even if wage growth will be less than in the past, partly because we are dealing with an increasingly older, aging labor force. The other notable events this week will be Fed-speak, notably, on Tuesday, the Senate confirmation hearing for the nominee for Fed Vice-Chair, Richard Clarida. Although he has spent the last few years as a market economist, Dr. Clarida was for many years a distinguished academician with important contributions to post-Keynesian macroeconomics. Our sense is that he reaffirms the current main view: “from headwinds to tailwinds.” In other words, that it is important for the FOMC to normalize rates as quickly as possible, before the onset of the next downturn. The Treasury yield curve continued to flatten last week—and it could soon invert. This may not be, presently, a good predictor of a recession; and it’s far from certain the Fed will slow down as the curve flattens. On the contrary, we believe it is a sign that rates in the short-end will continue to rise—a point that, implicitly, we expect Dr. Clarida to make.

    Tuesday, May 15: Retail sales—April/18. (Consensus 0.3%momsa; Control group 0.4%momsa). See above.

    Wednesday, May 16: Industrial production—April/18. (Consensus 0.6%momsa; Manufacturing 0.5%momsa). A payback for the slump in Mar/18 is expected. The focus will be on the manufacturing details. Manufacturing production has accelerated continuously since late 2016 and is presently running at the fastest growth rate since 2012. This should lead to higher rates of capacity utilization, hence a demand for new CAPEX.

    BRAZIL


    The main event this week will be the COPOM meeting on Wednesday, May 16, and there is some uncertainty going into this meeting. Not because the main trends about the economy and inflation have changed. Rather, it is about the exchange rate: The real gained 5.5% vis-Ã -vis the US dollar between its level in the third week of April and the first week of May. The question is whether this movement will influence the decision. Our sense is that it will not. As such, as preannounced, the Committee will proceed with its final rate cut in this cycle, bringing the Selic rate down to 6.25%; 800bp below its level on Oct/16, to the lowest nominal rate on record.

    It is never clear whether an Inflation Targeting central bank should use the exchange rate as an intervening variable. Obviously, there is a close correlation between movements in the exchange rate and inflation—the so-called passthrough to prices. The passthrough, however, is not fixed. Importantly, it varies with the credibility of the regime. A regime operating with anchored inflation expectations, with credibility, and not facing a singular external shock, would operate with a low passthrough; in fact, with a passthrough that is fully incorporated into inflation expectations. Thus, the volatility in the exchange rate would not add any significant “new” information to what is already captured by the usual modeling framework.

    This is what Governor Ilan Goldfajn communicated to markets. When asked about the impact on monetary policy of the latest bout of exchange rate volatility, he said that it would depend on factors such as the level of activity and the anchoring of expectations. He stressed that the volatility in the exchange rate was, in this case, exogenous—the translation of global and regional (i.e.: Argentina) shocks to the domestic market. That, as such, questions of market illiquidity, or of changes in the demand for dollar-hedge, could be dealt with direct measures: the supply of hedging instruments to the market through the central bank’s ongoing dollar/interest-rate swap operations.\nIf anything, economic activity has been weaker than expected; as has been past inflation. The measure of inflation expectations in the longer run remains firmly anchored to the target. Admittedly, the country may be facing serious political volatility in the upcoming elections, in October. However, the indicators of fiscal policy—though not entirely comforting—have not changed, nor are they expected to change. In this circumstances, the political uncertainty may be, if anything recessionary and potentially deflationary. While it could be prudent to hold the rate, a possible inflation error, undershooting the target for a second year in a row, is a matter of concern. This is why we believe that, on balance, the COPOPM will vote for a final cut.

    Wednesday, May 16: Central Bank Index of Economic Activity—Mar/18. (Consensus -0.4%momsa; 0.3%yoy). Industrial production ticked down in March. The unemployment rate was stable but at a still very high 12.5%. Services output dropped in Feb/18 and, although retail sales expanded in Mar/18, the growth was weak and uneven. For these reasons, analysts expect a weak reading for this quasi-GDP indicator. In terms of YoY growth rates, the index peaked in Dec/17 and has been decelerating since—a clear indication that the recovery lost steam in Q1/18.

    Monetary Policy Committee (COPOM)—May/18. (Consensus: 25bp rate cut to 6.25%). See above.
    ","preview":"UNITED STATES The main data this week will be retail sales for April, out on Tuesday. It should show healthy growth, with the \"control group\"..","url":"/US-Brazil-Financial-News-5-15","___id":3},{"title":"US + Brazil Financial News (5/8)","date":"8th May","content":"

    UNITED STATES


    What did we learn from last week’s FOMC meeting and NFP reading? First, we learned that the economy is doing well, and the FOMC agrees. Indeed, by some measures the labor market is beyond full-employment. The unemployment rate is down to 3.9% when the NAIRU or neutral rate is 4.5%; moreover, the rate came down even as the participation rate decreased—a clear indication that the pool of potentially usable labor resources is shrinking. Yes, yet again, the wage reading in the enterprise survey was disappointing. However, now there are contradictory signs. Other measures of wages and total compensation show growth at around 3%pa, significantly above inflation. Meanwhile the Treasury yield curve continues to flatten, as expectations of subsequent hikes by the FOMC firm-up in the short-end and the term-premium remains reduced in the long-end. Market pricing still must adjust; it remains backward-looking compared to the FOMC’s median projections, and we have little reason to doubt them. The market is at 2.6% for the 18mo2y OIS with the forwards inverted.

    It all points to a mature cycle, now in its 95th month of recovery, and likely to become the longest on record. It is, in short, “as good as it gets”. Which is why analysts foresee a change of tune at the FOMC. A change in the “balance of risks language”. If previously the good news was about a stronger economy with a healing labor market, soon, very soon, the good news will be about sustained growth with a moderating labor market. Headlines about new booms in the stock market may cause as much, or more, concern at the FOMC as those of a weakening market.

    The hope, of course, is for a “soft landing”. Orchestrating a steady pace of rate hikes (25bp per quarter as the FOMC has intermittently observed since December 2015) to the neutral rate (3.50-3.75% according to the median of their own forecasts) or slightly beyond, if forecasted inflation for the core PCE indicator surpasses the 2% target, as we expect it will. The problem may be a boom-and-bust mini cycle caused by the fiscal expansion: An explosion in demand late in 2018 followed by rapidly decelerating demand in late 2019 and through 2020. Against this, the FOMC is nearly powerless. If it acts preemptively today, given the leads-and-lags of policy, it surely would push the economy into recession sometime in 2019/20 when demand would be already adjusting down. If it attempts to rekindle economy when the mini-boom is over, it risks its medium-terms goals and, in the event, may achieve little. For either the fiscal deficit begins to adjust down, a contractionary force, or/and bond markets would force the long-end of the yield curve up as they face ever-rising demand for public financing, and this too would be contractionary.

    The main data out this week will be on inflation: producer prices on Wednesday, consumer prices on Thursday and consumer sentiment/inflation expectations on Friday.

    Tuesday, May 8: JOLTS Job Openings—Mar/2018. (Consensus 6.1k). Economic growth and corporate tax cut should keep the momentum of hiring. For the last three years, the number of job vacancies exceeds job offers, increasing hiring pressures in labor markets, and accentuating a skills miss-match between supply and demand. The quit rate—a key indicator of labor market tightness—could increase further, as workers, specially in skilled positions, feel confident to quit and search for better jobs.

    Wednesday, May 9: Producer Price Index (PPI)—Apr/2018. (Consensus. Final Demand 0.2%momsa; 2.8%yoy). Producer prices have raced ahead of consumer prices for some time. The dollar strength may have helped, conjecturally, but capacity constraints are driving up domestic production costs and enabling producers to pass-along higher prices. Meanwhile, trade tariffs, or their threat, may have been more important than the dollar in influencing import prices.

    Thursday, May 10: Consumer Price Index (CPI)—Apr/2018. (Consensus 0.3%momsa; 2.5%yoy). The thing to watch will be the gap between goods and services inflation. Rising labor costs should hit first domestic services, especially retail. The FOMC will be especially sensitive to this indicator.

    Friday, May 11: U-Michigan Expectations-Preliminary—May/2018. Sentiment has been buoyant and take a dip this month. Of interest will expectations about inflation, which are already running at 2.7%yoy.

    BRAZIL


    Currencies were in flux last week, indeed over the last month or so. The BRL reached a new low of 3.57/USD, before retreating towards the end of the week. The central bank intervened, supplying the market with a larger than anticipated quantity of BRL/USD swaps, effectively anticipating the rollover foreseen for June. Swaps are an effective way to supply the speculative demand for dollars and/or the demand for dollar-hedge by corporates. They cannot be substituted readily for dollar cash and are not, therefore, as effective in meeting debt repayment and/or dividend remittance demands. The recent turbulence was externally induced, however, aggravated by a dearth of inflows from external debt rollovers or new deals in the week. A circumstantial event. Total FX inflows were strongly positive in April, a total of $13.1bn. Meanwhile, new debt deals (including rollovers) sum to nearly $15bn so far in 2018. The outstanding stock of BRL/USD swaps is $24bn, down from $108bn at end 2015, and the central bank has said repeatedly that it feels comfortable offering this volume to the market, measured against its reserves of $382bn. Swaps due in June, which are being rollover, total $5.7bn. We are not concerned about the BRL, or with Brazil’s external position. The market sees the BRL/USD strengthening to 3.37/USD by yearend (FOCUS median forecast) and we agree.

    What is of concern is the situation in neighboring Argentina. Last week, the ARS was subject to a classic speculative attack as foreigners dismantled their speculative carry positions expressed in local bonds. What precipitated the move may have been the same pressures affecting the BRL (indeed, for most of March the BRL depreciated at a faster clip than the ARS) but, obviously, the upshot was different—for well-understood reasons.

    ÃÆ’¢â‚¬Â¢ Monetary policy is weak and was made weaker early in the year when arbitrary reductions in the inflation target were followed by precipitated cuts in the policy rate, when facing recalcitrant, possibly accelerating, inflation. 
    ÃÆ’¢â‚¬Â¢ Compounding this mistake, at first, the central bank (BCRA) sought to quash the movement in the ARS by intervening in the FX market; the BCRA lost $5.3bn in nine days and $7.8bn in the year, even though it operates with a relatively constrained level of reserves, on a net basis, about 5% of GDP. The ARS lost 11% in the 30 days to May 3rd; 20% in the year. 
    ÃÆ’¢â‚¬Â¢ The economic recovery in Argentina came with a surge of imports, impelled by freer trade and FX restrictions; meanwhile, the worst draught in 40 years curtailed export earnings. The upshot are current account deficits in the order of 4-4.5% of GDP. 
    • The transition to the Macri administration prompted a surge of optimism, including a burst of foreign capital from new investments and repatriated capital. The fisc also turned to foreign markets to finance its large deficits—and the markets were willing, past the settlement with the holdouts, and long abstinence during the Kirchner administrations. The outcome was a quick erosion of the protection afforded to the FX-regime, post-market liberalization, by the initial depreciation of the real effective exchange rate. Thus, when confidence turned, the FX market was stretched to the limit, unwisely long ARS and short USD.

    Most important, however, are underlying structural issues that separate the regimes of Brazil and Argentina. Through parallel crises, Brazil opted—at an enormous domestic cost—to protect its domestic financial system, creating a sophisticated and deep financial market built on barriers to FX transactions, market concentration, and high real interest rates—high enough to discourage even informal currency substitution to the dollar. Though it faced similar fiscal threats, it turned decidedly to local markets, accepting, at times, the burden of indexed money and near-hyper-inflation. The outcome was devastating to the poor; to investment and growth—but it saved the domestic financial system. Many years later, it made possible the current strange combination of a regime of low-savings and relatively low real interest rates even in the presence of mounting fiscal demands, with about 70% of all domestic financial resources used to finance the public debt.

    Argentina has always maintained parallel currencies, (in)famously, in the early 2000s, a dollar-convertibility regime. The domestic financial system is an afterthought, and financial repression has been used continuously to extract forced savings from domestic peso transactions to finance the budget, including direct access to central bank financing. As such, even in the post-convertibility years, currency substitution has remained prevalent, with savers quickly changing the currency composition of financial assets to arbitrage rates and/or protect their capital. Two consequences are notable. One is a lack of domestic financing for investment, indeed, of a significant domestic capital market—something the Macri administration is about to address with a bill pending in Congress. The other, more ominous for triggering currency crises, is a heavy reliance on external financing of budget deficits. Two-thirds of the Argentine public debt is in foreign currencies. A sudden depreciation increases the debt burden disproportionally. To boot, higher rates—post-stabilization—do the same for the local component of the debt. The combination of “gradual” fiscal adjustment with repressed monetary policy could not, and did not, work.

    In the end, the BCRA hiked the policy rate by 1,275bp. In fact, it did more. It set the one-day active (lending) rate at 57% and the passive (borrowing) rate at 28%. With such a gap, there will be few willing borrowers with access to the central bank’s window; agents ready to speculate against the currency, especially when the policy rate has a maximum of 47% and that is the rate the BCRA will target at its daily auctions for open-market-operations. Just in case, the BCRA also reduced the regulatory FX position of the banks. It is now 10% of assets; from 30%, and now computed daily; a tighter limit that reduces dollar demand and should produce about $1bn in new supply to the spot market. In all, from reaching a high of 22.4 on May 3rd the ARS/USD is trading at 21.8 on May 7th. The BCRA said that it would do whatever it takes to stabilize the market. And this time the warning comes with support from the Treasury, which promised to reduce its deficit and borrowing needs. Not much. Indeed, the main fiscal adjustment will come from higher inflation, following this instability, which will reduce real outlays while increasing nominal revenues and the nominal GDP (thus making it easier to achieve a nominal target set as a share of GDP). Nevertheless, the action shows that the macro team understands the root cause of the problem: an unsustainable fiscal position which, albeit smaller than Brazil’s, is more pressing given the shallowness of its domestic funding market.

    This week in Brazil we have data on inflation (CPI) and on retail sales.

    Thursday, May 10: Consumer Price Index (CPI)—Apr/2018. (Consensus 0.28%mom; 2.8%yoy). Inflation in Brazil has been so low it may soon approach that of the US, if US inflation does pick up, as we expect it will. What will do the COPOM when it meets next week? On the one hand, it pre-signaled a cut, looking at the trend on inflation. On the other, it intervened on the currency market to dampen FX volatility. The latter, most likely, will not influence monetary policy. The FX passthrough is low and, as we discussed above, the BRL may likely stabilize. So, on balance, the trend of lower than expected inflation should continue—even if a pickup is still expected later in the year. This points to another rate cut.

    Friday, May 11: Retail sales (IBGE)—Mar/2018. Retail sales have disappointed recently, as have, indeed, most indicators of activity. The market expects a pickup in March.
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    UNITED STATES


    This week we get the advanced estimate of Q1/18 GDP. The results will disappoint (see below) but they are not a good indication of near-term prospects. On the contrary. Last week’s numbers showed strong retail sales, after a streak of three weak monthly outcomes. Real incomes are up, and wage growth strengthening, after disappointing to the downside in 2017. The Atlanta Fed wage tracker shows a stronger pace of wage growth when re-weighted to be representative of the labor force (according to a new measure launched last week). Wage growth could well rise to 3% during 2018; for the labor market is at or somewhat beyond full employment. Trend payroll gains are running above 200k, more than double the estimate of the breakeven rate. There is little evidence that supply constraints will begin to bite soon. Instead, what is likely to happen is that labor demand will drive the unemployment rate to 3.6% by end-2018 and 3.3% by end-2019, the lowest rate since the Korean War, and substantially below the estimated neutral (NAIRU) rate of 4.5%.

    Given this, not surprisingly, inflation data firmed and the year-on-year core PCE inflation rate (the one favored by the FOMC) now looks likely to round up to 2.0% in March. Moreover, the risks to inflation are now asymmetrical to the upside. Some models show a 15% probability that core inflation will be above 2.5% a year from now; and the probability rises to 30% by Q1/2020.

    All of which points to continued FOMC action. Which may help explain why Treasury yields hit decades highs last week—and the market focused on the flattening of the yield curve. Since early February the 5yr/30yr Treasury curve has declined about 27bp, dipping below 30bp, and touching its lowest level since 2007. Markets are facing, again, and perhaps for the first time since the experience of 2004-06, a bear flattener driven by monetary policy. Although some version of flattening has been going on since 2015, the current episode really kicked-off following last Labor Day (9/7/17) as improving economic data and anticipation of tax reform pressured the curve flatter. Last week, front-end yields reached their highest levels in nearly a decade. Partly this is because markets caught-up with the FOMC: They are now pricing 70bp of hikes over the coming year, vs. the FOMC’s median forecast of 100bp. This suggests that front-end yields can stabilize over the near term.

    Nevertheless, there is increasing concern that, as in the past, the flattening is a harbinger of rising recession risks. We don’t think so. Not because the risks of recession in the near-term (beyond or near the end of 2020) are not large; rather, because we see them more associated with fiscal imprudence than with “true” surprises from the FOMC; i.e., a committee that is seriously “behind the curve” and needs to rush to catch-up with inflation expectations. While the yield curve has historically been a powerful forecaster of GDP growth and recession risks, changes in the FOMC’s reaction function and a lower term premium have made the slope less informative recently. The term premium (the difference between the yield of a Treasury bond and the average expected Fed funds rate over the maturity of the bond) has been on a downward trend for the past 30 years, and its behavior during monetary tightening regimes has changed. Recent analyses show that, first, “the term premium was 100bp higher, on average, prior to the tightening cycles of the 1980s and 1990s compared with the last two tightening cycles. Second, term premium tended to increase modestly in the first months of a Fed tightening cycle 20 to 30 years ago, while over the 2004-2006 period and the current cycle, term premium actually declined following the first rate hike.” Moreover, given structural changes in the global savings-investment balances and long-term inflation expectations, there is little reason to expect term premia to increase substantially in the months ahead.

    Next week brings a wide range of economic reports. Friday’s Q1/18 employment cost index will be an important signal on wage inflation. Also, on Friday, the BEA will release its first official estimate of Q1/18 GDP. Earlier in the week, we will get March reports on new home sales, existing home sales, durable goods, trade, and inventories.

    Friday, April 27: Employment Cost Index (ECI)—Q1/18. (Consensus: 0.7%qoqsa). Various indices are reporting stronger wage growth. This is backed by disaggregated administrative data showing strong wage and salary growth since 2017. Given these developments and the continued improvement in the labor market, expectations are moving to a healthy 3% growth during 2018, as noted.

    GDP-advanced estimate—Q1/18. (Consensus 1.7%saar). A number of idiosyncratic effects, including weather, affected GDP growth negatively in Q1/18. The recovery in Q2/18 is already palpable and, barring a disastrous impact from trade wars, GDP should average 2.8%yoy in 2018, considerably above potential—thus continuing to bring down the rate of unemployment, raising wages and inflation.

    BRAZIL


    Investors were bothered, some alarmed, last week by the volatility in the BRL/US. The currency pair devalued 3% in the first three weeks of April (1.4% in the same lapse during March) reaching R$3.41 on 04/20 from R$3.31 on 04/02; and the vol increased to a standard deviation of 3.9% in the period (2.6% in the earlier comparison). Analysts were quick to point out that the underperformance was misaligned with models, unlike what happened earlier in March. In Mar/18, the drop in iron prices pushed down Brazil’s terms-of-trade. Moreover, the COPOM came out with a more dovish statement indicating that the terminal rate in the cycle may be as low as 6.25% or barely 2.25% real, given inflation expectations for yearend. This would reduce considerably the profitability of the carry-trade on the BRL.

    So, what happened in April? The first reaction is to say that is was due to politics. Indeed, the last couple of weeks have been laden with political noise; from Lula’s imprisonment (in principle, positive for the market) to the rise of the so-called “alternative” candidates in the post-Lula-jailed polls (negative for the market). The difficulty with this interpretation is that political noise has been a constant over the last months. Perhaps it increased over the last weeks, but hardly noticeably. Consider that expectations for the yearend BRL/USD rate in the central bank’s FOCUS expectations hardly moved: the median has been at R$3.30 for the last 7 weeks! More likely, therefore, the increased vol had to do with so-called “technical” factors, such as the decrease in dollar inflows from corporate issuance abroad. This may signal a rebound in the currency over the coming weeks, or not. Short-term currency moves are the hardest to predict.

    What is certain is that political noise will increase in the months ahead. The market, if anything, has been oblivious to the consequences of the October election. It believes that a market-friendly, centrist and reformist candidate, such as Geraldo Alckmin (PSDB), will win the presidency. We hope so; but worry a lot more, especially if the number of no votes or null-votes increases to top 40% of potential votes as they did, for example, in the São Paulo mayoral elections in 2016. João Dória won that election with 3m valid votes; no shows or no-votes totaled 3.1m. The presidential campaign officially starts on August 16. The unofficial pre-campaign already started but will pick after July 20 when the party conventions begin. They must end by August 15. By then all candidates must be registered to be included in the ballot. So far, there are upwards of 20 potential candidates. The buildup of coalitions could reduce that number by half—still a very fractured scenario, pregnant with possible surprises, even more so if the no-shows top 40%. Who will be in the 2nd round of the election? Conceivably it could be someone with as little as 12-15% of the potential vote. We agree with pundits that, if a centrist, reformist candidate is in the 2nd round, he/she will most likely win. However, it seems clear that, as we approach August, if the center has not emerged united behind a single candidate, volatility will increase—this time, yes, for political reasons.

    Next week we get soft data on surveys from consumers and managers in construction, industrial and services firms. We get hard data on the current account, on NPLs and on the Treasury’s primary accounts for Mar/18. We also get the unemployment data for Mar/18.

    Thursday, April 26: Treasury accounts—Mar/18. (Consensus: Primary deficit R$21.6bn). In Feb/18 the primary deficit was R$19.3bn a strong improvement from Feb/17 (R$26.3bn). In real terms, the deficit fell nearly R$8bn or 29%. Accumulated over the past 12mo, the deficit summed to R$106.2bn in Feb/18 or 1.6% of GDP. As had been the norm, the total deficit was the result of a surplus in the Treasury’s own accounts, with a large deficit in Social Security. The same pattern should repeat in Mar/18, only the surplus of the Treasury could be smaller, hence the estimate of a larger overall deficit. The target primary deficit for 2018 is R$159bn, or 2.2% of GDP, which can be easily reached. The issue is the so-called “golden rule” which forbids government borrowing to fund current expenses. Given the large deficits, borrowing is scheduled to outpace capital expenditures, including the cost of servicing the debt, even after an expected R$30bn “repayment” from BNDES. Somehow, the Treasury will have to find wiggle room for an anticipated R$25-30bn in current expenditure beyond that allowed by the rule. And the problem is much worse for 2019. Which is why, in the budget proposal for 2019, the Treasury anachronistically specified an item of expenditure which will be allowed only against specific new legislation, which would bypass the limits imposed by the golden rule.

    Friday, April 27: Unemployment rate (PNAD)ÃÆ’¢â‚¬â€Mar/18. (Consensus: 12.9%). The increase from 12.6% in Feb/18 is likely due to seasonal factors. Slowly, the unemployment rate is falling from a peak of 13.2% in mid-2016.  

    ","preview":"UNITED STATES This week we get the advanced estimate of Q1/18 GDP. The results will disappoint (see below) but they are not a good indication..","url":"/US-Brazil-Financial-News-4-24","___id":6},{"title":"US + Brazil Financial News (4/16)","date":"16th April","content":"

    UNITED STATES


    The minutes of the FOMC’s March 21st meeting came out last week: The Committee was sanguine on growth and confident on the pickup on inflation. Of note: For the first time in this cycle it discussed the idea that sometime soon it could “move from an accommodative stance to being a neutral or restraining factor for economic activity.” The main reason? The fiscal impulse that is pushing the economy beyond full employment and into the territory of excess demand. The FOMC believes that tax cuts and increases in fiscal spending will lead to “a significant boost to output over the next few years.” Of concern are the effects on an economy already at “a high degree of resource utilization”; i.e., the fact that this time around fiscal policy is pro- and not counter-cyclical.

    These concerns were reinforced by the publication of the Congressional Budget Office (CBO) report, delayed from January to April to account for the changes introduced through three main bills: The 2017 Tax Act; the 2018 Budget; and the 2018 Consolidated Appropriations Act. The report notes: “Laws enacted since June 2017—above all, the three mentioned above—are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4%) and increasing outlays by $1.0 trillion (or 2%). The reduction in projected revenues stems primarily from the lower individual income tax rates that the tax act has put in place for much of the period. Projected outlays are higher mostly because the other two pieces of legislation will increase discretionary spending.”

    In the CBO’s estimate, changes in corporate and income taxes boosts real GDP by an average of 0.7pp over the 2018-28 period. They also contribute to increased productivity. “Growth in the supply of labor and the amount of investment, in particular, are boosted over the next few years in CBO’s forecast, as reductions in effective marginal tax rates raise the desired amounts of those inputs.” “The other two laws are estimated to increase output in the near term but dampen it over the longer term. The fiscal stimulus that they provide boosts GDP by 0.3 percent in 2018 and by 0.6 percent in 2019, in CBO’s assessment. However, the larger budget deficits that would result are estimated to reduce the resources available for private investment, lowering GDP in later years.” Bottom line: The combined effect is a 0.3pp boost to GDP in 2018 to 3%yoy; 0.6pp in 2019 to 2.9%yoy; and 0.7pp thereafter (an average of 2%yoy), if the negative impacts of the legislation don’t set in. These figures are on the high side. Most analysts expect 2.8%yoy in 2018; 2.2%yoy in 2019; and 1.5% thereafter—mainly because the desired “supply-side” effects are not likely to come.

    The growth in excess demand would call for countervailing monetary policy action, as sketched in the last FOMC’s minutes. “In CBO’s forecast, the federal funds rate reaches 2.4 percent in the fourth quarter of 2018, rises to 3.4 percent by the end of 2019, and then peaks at 4.0 percent in 2021.”

    The main point is that, much greater than the effects on growth is the impact on the fiscal deficits. “With adjustments to exclude the effects of timing shifts, this year’s deficit is projected to total 4.2% of GDP, well above last year’s level of 3.5%. … In CBO’s baseline projections, the budget deficit (adjusted to exclude shifts in timing) continues increasing after 2018, rising to 5.1% in 2022, a level exceeded only five times in the past 50 years. … Between 2022 and 2025, in CBO’s baseline, deficits remain at 5.1% before dipping at the end of the period, primarily because projected revenues increase more rapidly as many provisions of the 2017 tax act expire.” Obviously, if Congress acts to keep the cuts in the income tax, the deficits would continue to balloon. The impact on the debt is tremendous: A gain of $13trn in 10yrs, from $14.2trn at end 2017 to $27.1trn by 2018. As a share of projected GDP, the debt would grow from 76.5% to 96.2%. And, to be sure, the interest cost would increase in tandem: from 2% of GDP to 3.4% at the end of the period.

    By some estimates, the Treasury’s financing needs could strain markets. The estimated financing gap in FY2017 (the sum of the deficit and maturing debt) was $2.44trn; it could grow to $3.53trn in FY2021. Considering debt roll-overs and other sources of financing, in FY2017, the Treasury borrowed an additional $0.48trn from markets to close its financing gap. By 2021, it could be borrowing an additional $1.48trn during the fiscal year. Since Americans are not expected to increase their savings rate, the new flow would have to come either from foreigners and/or reductions in corporate savings otherwise directed to CAPEX—a clear sign of government overcrowding that would run directly against the lofty (unrealistic?) pretentions of the “supply siders”.

    Data this week should alley some of the concerns with weakness in Q1/18. After three quarters of GDP growth near 3%, growth slowed down closer to 2% in Q1/18. Much had to do with consumer weakness. The big data event this week is retail sales, a key indicator of consumption strength. We also get data on industrial and manufacturing production, and a slew of inputs from the Fed, including speeches and the publication on Wednesday of the Beige Book for Apr/18.

    Monday, April 16: Retail sales—Mar/18. (Consensus 0.4%momsa; Ex-autos 0.2%). We know that auto sales rebounded in March after three months of declines. The focus will be on the retail Control Group (0.3% vs. 0.1% in Feb/18) which excludes automobiles, building supplies and gasoline stations. It is the measure that goes into the GDP accounts. While the expectation is for a recovery in Mar/18, for the first quarter as whole, the series would be up only 1.7%saar, the weakest quarterly performance since Q3/16. Many idiosyncratic events explain the slowdown. However, most analysts see inflation-adjusted consumer spending to rebound closer to 3% over the next couple of quarters as the impact of the tax cuts begins to permeate through the economy. We agree.

    Tuesday, April 17: Industrial Production—Mar/18. (Consensus 0.3%momsa; Manufacturing 0.1%; CapU 77.9%). Expect a pause in Manufacturing, after a strong showing in Feb/18. Manufacturing output has been running at cyclical highs, and a correction would not be surprising. Heavy utility use due to the unusually cold weather should help push up the overall IP index.

    BRAZIL


    Last week’s data on retail sales was a disappointment, dropping 0.2%momsa. The CPI data was also weaker than expected: practically no headline inflation in the month and accumulating only 2.7%yoy. While this may be a credit to monetary policy, and while it may be due in part to the lingering effects of positive supply shocks, it is also an indication of weak demand. Last week’s data came after a series of other weaker than expected activity, employment, consumption, credit, and inflation data. New credit concessions to households dropped in Feb/18, notably for payroll earmarked credit (crédito consignado) which had been growing at the fastest rate. To this point, there are no indications of a recovery in mortgage credit.

    Overall, this has been the slowest post-recession recovery of the nine others dated by CODACE, the committee charged with dating economic cycles. One year after the end of the recession, GDP is only 2.2% higher than in Q4/16. Quarterly growth rates of GDP have decelerated since the second quarter of 2017. There is expectation of a rebound in Q1/18 but only to 0.5-0.7%. At this rate it is unlikely that the economy will reach the 3%yoy GDP growth target envisaged in the budget. Indeed, in the FOCUS surveys of the central bank, analysts’ forecasts for growth in 2018 have declined steadily over the last few weeks; the median forecast now is 2.8%yoy. While there has been a reduction in unemployment (to a still high 8.5% in Feb/18) much of the gain is due to a drop in the participation rate, as would-be-workers abandoned the labor force. Moreover, a large share of the gain in employment is in the informal market, where wages are lower and where uncertainty about job prospects reduces the propensity to consume. Note also that, in real terms, the gain in the real minimum wage in 2018 will be lower than in 2017.

    All of which points, indeed, to a slower recovery than first envisaged. Perhaps 2019 will be better, most likely so if a centrist political outcome supports it. For now, however, the market is focused on new data (see below). The weak patch in Q1/18 re-opens the discussion about monetary policy. The central bank had indicated that the 25bp rate reduction (to 6.25%) at its forthcoming May meeting would be the last in this cycle. It may reconsider. Or, we expect, more likely, it may begin to change the expected path of rate normalization in 2019, after a long interlude without rate changes during which the policy stance would remain highly accommodative, as it is now.

    Monday, April 16: Central Bank’s Monthly Activity Indicator—Feb/18. (Consensus 0.08%momsa; 0.8%yoyNSA). The reading for this measure, a proxy for GDP, declined in the last reading: -0.6%momsa, one of the reasons why the market brought down growth expectations for 2018. The expectation is that it will do little better in Feb/18, practically null growth. This would leave the yearly growth rate in the 12mo-moving average of the index (a better measure of the underlying GDP rate) at 1.7%yoy—recovering steadily from the recession, but perhaps too slowly to reach the 3%yoy GDP rate sought by the authorities.

    Friday, April 20: CPI/IPCA Inflation-Mid-month (IPCA-15)—Apr/18. (Consensus 0.25%mom; 2.84%yoy). Analysts expect a rebound in inflation in Apr/18 after the unexpected low readings in Mar/18. The full month in March closed at 0.09%mom and the mid-month expectation for April is 0.25%mom. The surprise in March was a continued deflation in food prices (-4.3%yoy) which brought down inflation in market/free prices to 1.3%yoy. Inflation in services, which is a better gauge of the underlying sources of inflation that the central bank targets, was 3.9%yoy. The expectation is that the deflation in food prices is waning and could show as a pickup in the headline. Nevertheless, as discussed above, the market is very attuned to the perspective of lower than forecasted inflation for the year. The median expectation in the FOCUS survey began the year at 3.85%. It is now at 3.50%.
    ","preview":"UNITED STATES The minutes of the FOMC's March 21st meeting came out last week: The Committee was sanguine on growth and confident on the pickup..","url":"/US-Brazil-Financial-News-4-16","___id":7},{"title":"US + Brazil Financial News (4/2)","date":"2nd April","content":"

    UNITED STATES


    The main event this week is Friday’s payroll report. Although some attenuation is likely, after February’s torrid pace, it still should be a positive reading (see below). Which will draw attention to Fed Chair’s Powell speech in Chicago about two hours after the report. The FOMC’s decision on March 21 to increase the policy rate 25bp to 1.75% was widely anticipated. It did not, however, signal a clear (or clearer) trajectory for future FOMC decisions.

    Admittedly, the new set of Fed staff forecasts, the FOMC participants’ “dot plots”, the post-meeting statement, and Powell’s statements at the Press Conference summarizing the views of the Committee, were all more bullish on the economic outlook. The “dot plots” showed that most FOMC participants now expect four hikes in 2018, up from three hikes in Jan/18. The post-meeting statement included a new and telling judgement: “The economic outlook has strengthened in recent months.” And at the press conference Powell acknowledged that, regarding the FOMC, “participants believe there will be meaningful increases in demand from the new fiscal policies for at least the next… three years”. Meanwhile, on tariffs, he noted that the participants did not see a meaningful negative impact on demand.

    Nevertheless, there is skepticism in the market. The Overnight Index Swap (OIS) implied probability of Fed-rate hikes shows a gain of only 46.84bp for the remainder of 2018, i.e., two additional hikes not three as signaled by the “dots plot”. Partly this is due to the soft-patch in Q1/18. GDP tracking measures show Q1/18 GDP growth down to as low as 2% (2.7% in the NY Fed’s estimate) from 2.9% in Q4/17. Consumer spending—the main engine of the economy—slowed, after a late-2017 surge. At its last reading, in Feb/18, real consumer spending grew 2.8%yoy—a firm level but slower than the 3%+ observed in 2017. Jan-Feb/18 were the weakest two-month performance in four years. Most likely, this effect is transitory. Confidence is high and, although inflation is rearing up, and may be behind the decline in real consumption in Jan-Feb/18, the gain in employment and wages should outstrip inflation leading to sustained gains in real income, and consumption.

    The main uncertainty, rather, is about the economy at end-2019 and into 2020; about the “meaningful increases in demand from the new fiscal policies” that Powell mentioned. There is uncertainty about the size and, importantly, about the effects. Even with a conservative estimate of fiscal multipliers at this point in the business cycle, the fiscal stimulus is likely to add around 70-100bp to growth in 2018-19 while adding $3.5 trillion to debt over the next ten years. This at a time when the economy is at full employment, with the unemployment rate expected to drop to 3.5% or less, significantly below the NAIRU. Hence, the “from headwinds to tailwinds” comment that Powell used in recent speeches. A situation where it could be difficult for the FOMC to set a policy path that prevents the fiscal boost from overheating the economy and de-anchoring inflation expectations, while also sustaining growth and employment for another five years or more. In this scenario, if the FOMC acts preemptively, the policy rate would increase not only four times in 2018 but also 2019—and could reach levels above 4%. A scenario where, instead of a desired soft-landing, the FOMC may fail to avoid a recession driven by growing macroeconomic imbalances caused by excess demand.

    Clearly, the market dismisses this scenario, at least as indicated by the low implied probability of even near-term rate hikes. Perhaps, not because it doubts that the Q1/18 slump is transitory; or that fiscal demand stimulus is for real. Rather, because it believes in a providential, quick, and robust supply-side response. The familiar (yet never documented) argument of “supply side economics”. A positive shock of lower taxes with a “pro-market” environment triggers new investment with and almost immediate (hence highly unlikely) effect of output and productivity. It may be wishful thinking but, right now, it seems to be the dominant story. Thus, the importance of statements and speeches by the FOMC to clarify where they stand. For, at the end, the FOMC may be more consequential that current bets by the market.

    Monday, April 2: ISM Manufacturing—Mar/18. (Consensus 60.0, -0.8pts). Expect some moderation from the cycle high reading in Feb/18. Even so, optimism should prevail, with readings well in expansion territory. Managers responding the survey approve the record of recent policies, even if they are unsustainable in the longer run (e.g., tax cuts); misdirected (e.g., regulatory reform); or plainly wrong and opportunistic (e.g., the recent imposition of aluminum and steel tariffs).

    Wednesday, April 4: ISM Non-Manufacturing—Mar/18. (Consensus 59.0, -0.5pts). New tariffs on aluminum and steel could impact negatively the response of managers in sectors such as transportation & warehousing and wholesale trade. Agricultural producers could also respond negatively to an environment where retaliatory action by major importers (e.g., China) is more likely.

    Friday, April 6: Non-Farm Payrolls/Unemployment—Mar/18. (Consensus 185k; unemployment Rate 4.0%). Expect some payback from February’s upward surprise. But, still, to a pace that exceeds the required to absorb new entrants into the labor force. Recent increases in labor force participation indicate that the FOMC’s policy of “lower-for-longer” did produce the desired effect. However, there is doubt about the remaining margins of cyclical slack. Likely, the participation rate will remain stable in the near term. The implication being that, with a tight labor market and continued growth in employment, the unemployment rate will continue to fall. For this report, a decline in the unemployment rate, below 4.0%, would be a surprise. But over time the unemployment rate could reach 3.5% or even lower, which should result in more noticeable wage pressures as the labor market tightens well below full employment.

    BRAZIL


    The central bank introduced last week a subtle but important change in the objective of monetary policy. The occasion was the presentation of the last Inflation Report which, from now on, will come together with a Press Conference with the governor (President) of the central bank. For years, perhaps because it was nearly always battling higher than expected inflation, the central bank affirmed its unwavering commitment to the one objective of monetary policy: restore inflation to the target. On this occasion, Governor Goldfajn noted that monetary policy must pursue, instead, a balance between inflation convergence to the target at a credible speed and maintaining a long-lasting low inflation scenario, even in the face of adverse shocks. This dual goal may seem obvious to most of us, and it is the purpose of most Inflation Targeting schemes in operation. It is novel in Brazil because inflation has been for a while below the target. Because, for the first time, the central bank is attempting to be transparent on the conditional path of future interest rate decisions—including not only the variables in its published forecasts of inflation (the paths of market expected interest rates and exchange rates) but also the elements of broader economic policy (e.g., the path of expected policy reform) that enter its decision making.

    This to buttress the central bank’s view that after a possible (likely) cut at the next COPOM meeting in May, which would bring the SELIC target rate to 6.25%, it would pause for an extended period—even if the inflation scenario continues to be benign and/or turns out to be even more benign than expected. Governor Goldfajn insinuated that, at this point, it is unlikely that the COPOM would be “frustrated about lack of continuity of needed reforms and adjustments (…) that may affect risk premiums and raise the inflation trajectory in the relevant horizon”. The onset of the political campaign and elections is already factored in. Whatever reforms could have been undertaken, and that could have reduced the real equilibrium neutral rate further, will not occur, at least not for the relevant inflation forecast periods. Thus, to “maintain a long-lasting low inflation scenario, even in the face of adverse shocks” the COPOM will look at and factor in new developments, including external developments, with the core assumptions and models it now has. The scope for structural improvements in inflation dynamics is at a standstill.

    Tuesday, April 3: Industrial Production—Feb/18. (Consensus 0.6%mom, 3.8%yoy). January saw a sudden drop in IP (-2.4%mom) that should be partly reversed in February. The culprit was an adjustment in durable goods, likely due to an adjustment in inventories. Over the cycle, durable goods is the subsector leading the recovery, a trend that should continue with, increasingly, a contribution from the capital goods subsector. The economy disappointed in Q1/18. However, it is still on track to grow at 2.5-3%yoy mainly through a cyclical pickup in underutilized capacity.
    ","preview":"UNITED STATES The main event this week is Friday's payroll report. Although some attenuation is likely, after February's torrid pace, it still should be a..","url":"/US-Brazil-Financial-News-4-2","___id":8},{"title":"US + Brazil Financial News (3/21)","date":"21st March","content":"

    UNITED STATES


    This will be Jerome Powell’s first FOMC as chairman. Regarding the rate decision, he made his views clear. “From headwinds to tailwinds” made—and stayed in—the headlines. The “tailwinds” theme sounds sharp, a hawkish signal. The surprise, therefore, would be if the Committee did not increase the target rate from 1.50% to 1.75%. And, barring a surprise, this being the meeting at end of the quarter, attention will focus, instead, on the new set of forecasts—and on the press conference, Powell’s first.

    The consensus view is that the median vote in the FOMC projections (SEP) will change to four rate hikes in 2018 (a total of 100bp) in the new forecast, from three previously. More hikes lead to faster “normalization” and this is what the market now expects: A final rate of 3% by Q4/19, with 3 hikes in 2019. The numbers speak for themselves. They are not, however, a statement of policy; of where and how the FOMC is directed; especially not now with new leadership. What we observe is not Powell alone but the entire FOMC “orchestra”: Chair, Directors, staffs, forecasts, working-papers, models, interviews, etc. The challenge for them will be how to transform this signal from a sound bite to a coherent message, if there is one. For us, how to read it. Does “headwinds to tailwinds” means success, at least, as seen by the Chair; the end-of-the-game with challenges overcome? Does it mean success within reach; a continuation, with the same approach (presumably, by now, well-conveyed to and understood by markets)? A simple change in pace to get to the destination in less time? Or does it, instead, signal the opposite? The need for a new approach, facing a different set of problems leaving behind the challenges of the zero-lower-bound (ZLB)?

    A key challenge in communication is that the Committee wants its messages, even forecasts, to be understood as contingent on expected outcomes, growth, inflation, and all the rest. In practice, the market understands them in terms of a timeline. A SEP table with “four hikes in 2018 and three hikes in 2019” means a robust economy in 2018, robust enough to take the four hikes. A median score of three hikes in 2019 means a more bullish (than “two hikes in 2019”) but still somewhat cautious view of 2019. It does not mean, “from a policy perspective, if we expect an overheated economy in 2020, with inflation a serious threat thereafter, the coherent policy today would be to implement four hikes in 2018”. We don’t know if that is what the FOMC wants to convey—but we believe it is plausible, and logical. Based on the forecasts we trust most, the outcomes by 2020 would be such that we would, in fact, expect four hikes in 2019, to 3.25%. And we wouldn’t be surprised if the FOMC continued to hike into 2020, to a peak rate closer to 4%. For we believe that, at current trends, the economy would be overheated in 2020, with a threat to medium-term inflation—and we think that this is the likely scenario that is shaping at the FOMC.

    An overnight rate of 4% would be restrictive—a clear indication that after (by then) 12 years of policy accommodation, the tide had turned. A 4% rate would be above the so-called neutral real rate, or r*, even though we also expect that by 2020 the FOMC’s preferred measure of inflation (the core PCE deflator) would be above its long-run target of 2%.

    The takeaway from the recent batch of data is that US economic growth still looks very firm. Yes, there is some concern with the soft patch in housing and retail sales. After last week’s data, most analysts revised down their forecasts for Q1/18 GDP. Yet they also feel confident that the US consumer—and the economy—will pick up speed in Q2, with growth accelerating to 3%pa or more in Q2-Q3 and averaging above 2% through 2020. This is appreciably faster than the potential rate of growth of the economy, even allowing for some pick up in productivity. Meanwhile, inflation is on the rise. Over the last three months the core CPI is increasing at a 3.1% annual rate, the fastest in over a decade; sequential readings including the previous 3mo are at 2.8%, the fastest pace of the expansion. Because the participation rate increased, bringing back to the labor force workers that were once thought to be unemployable, the unemployment rate has been stable at 4.1%. The FOMC has been cautious about showing too much labor market overheating in its projections, but this week it is likely to revise down its forecasts of the unemployment rate to 3.7% at end-2019. Several analysts show forecasts of 3.3-3.5% for end-2019. Whichever way you look, this is significantly below the NAIRU, even admitting, again, that estimates of the NAIRU may trend down with gains in productivity. The upshot is clear: The fiscal boost will push the economy into over-drive. An all-out trade war would stop this short, but it is not the base case scenario. Instead, we are looking at an FOMC that will be tasked, most likely, with helping engineer a slowdown of the economy.

    The question is how the Committee will signal this inflection. One way will be through changes in its forecasts. That is why most analysts expect that, when published on Wednesday, the new set will show higher GDP growth projections for 2018, 2019, and longer-run, as well as a lower unemployment path and a modest inflation overshoot in 2020. The forecasts are, however, an awkward tool. Introduced to reinforce the workings of forward guidance when the zero-lower-bound constrained policy, the SEP helped transform an unchanging (and, at the time, unchangeable) zero-policy rate into a stimulative signal. They may be the wrong tool, however, to signal a broader change in policy. They aggregate over several disparate policy views, one for each FOMC voter, some more influential than others. (The “median estimate” is a handy construct, but it may be misleading.) They are at once too explicit, rendering expected “states of the world” into a (sometimes unintended) timeline, and too vague. They don’t substitute for a carefully constructed policy proposition—built from the exchange of views within the more tightly-knitted and policy-focused Washington-based group of Directors and staff, under the leadership of the Chair. This is what Greenspan legendarily did, perhaps, to bad effect, and certainly what Bernanke did, to good effect. We now will begin to read the tea-leaves of the brew Powell makes.

    In addition to Wednesday’s meeting, there is data this week on housing and mortgages, and on durable goods orders.

    Wednesday, March 21: FOMC decision, SEP forecasts and press conference. See above.

    Friday, March 23: Durable goods orders—Feb/18 (Consensus 1.7%momsa; Ex-transportation 0.5%; Shipments-Capital goods non-defense ex-aircrafts 0.4%). Weak consumer retail and housing numbers cast a negative shadow on Q1 activity data. Not so in manufacturing, which is booming (1.1%momsa in Feb/18) with ever-higher rates of capacity utilization. Moreover, the various PMI surveys show consistently good new order numbers. This leads to optimistic forecast for durable orders.

    BRAZIL


    Earlier in the year, the COPOM gave us good reasons to expect that the policy rate could stay at 7%. Then came the Jan/18 meeting and it was clear to all that the rate would be reduced to 6.75%, possibly marking the bottom of the cycle. Now the consensus is that Committee will take the rate to 6.5%—and it may well signal another cut in May, should inflation expectations continue to fall. Over the past year, inflation consistently surprised to the downside, below the market and COPOM’s own forecasts. First it was, and is, food prices. Accumulated 12mo food inflation to Feb/18 is -2.1%. Admittedly, this effect is getting weaker (-2.3% to Jan/18 and -2.7% to Dec/17). However, even without food, looking at the core, it too fell 62bps year-to-date on the 12mo measure, to 3.2% in Feb/18.

    The macro scenario, and the steady conduct of monetary policy, help translate these idiosyncratic past trends into stable, lower inflation expectations. The global environment remains supportive. There have been recent gains in the terms-of-trade; and the outlook for capital flows and the BRL is positive. The economic recovery at home is persistent but weak. The output gap is closing, and the rate of potential output growth is barely above last yearÃÆ’¢â‚¬â„¢s sickly 1%. Nevertheless, after three years of recession, the accumulated gap in underutilized resources is vast. There still is a large mass of unemployed and underemployed workers. There are no signs of roadblocks on the supply side. Demand is insipidÃÆ’¢â‚¬â€notwithstanding large fiscal deficits. They too are narrowing, at a snailÃÆ’¢â‚¬â„¢s pace. Finally, what was once the biggest threat of all, namely, a collapse in the continuity of reforms, thus in longer-dated systemic expectations, is no longer a threat. Not because the reforms are implemented. On the contrary, because there is no hope for them at all. Right now, only an outsized political shock will destabilize systemic expectationsÃÆ’¢â‚¬â€and the market discounts heavily this possibility. It believes that, somehow, the next administration will carry-on and complete the fiscal adjustment, thus avoid the doomsday of unsustainable debt. This belief serves the COPOM well and it is not about to contradict it.  

    Wednesday, March 21: COPOM decision and press conference. See above. 

    Friday, March 23: CPI Inflation (IPCA) ÃÆ’¢â‚¬â€œ Mid month readingÃÆ’¢â‚¬â€Mar/18 (Consensus 0.12%mom; 2.83%yoy). Inflation remains well-behaved with forecasts for March month-end coming down from around 0.2% to the current low teens. Forecasts for yearend remain firmly below the inflation target, at about 3.5-3.6%yoy. 
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    UNITED STATES


    No shortage of economic and financial headlines last week. Tariffs; and, of course, non-farm payrolls (NFP): 313k in Feb/18—108k above consensus, the fastest pace since July 2016, and with a surprising gain in the participation rate. Janet Yellen had been right all along. Speaking at the 2014 Kansas City Fed Conference she said,\n

    “… profound dislocations in the labor market in recent years–such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment–may cause … higher real wages [to] draw workers back into the labor force … As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.”

    Which led the NY Fed’s William Dudley to say in 2015,

    “So if you can run the economy a little bit hot, and push the unemployment rate a little bit below what you think is sustainable in the long run, you might actually be able to pull those workers back into the workforce.”

    We know now that this is true—a good use of the Fed’s policy tools to prompt changes in longer-term economic behavior.

    The question on investorsÃÆ’¢â‚¬â„¢ minds was, however, is it overdone? Most investors believe that the unemployment rate will continue to drop; they agree with the consensus view that it will fall more than 1pp below its sustainable rate in 2019; meaning that the Fed will eventually need to do something it has never done before: achieve a soft landing from beyond full employment. Rising interest rates and escalating trade conflict have ended the ÃÆ’¢â‚¬Å“GoldilocksÃÆ’¢â‚¬Â environment of 2017. Have financial excesses moved the dial further and signal an oncoming blowup and recession? In this regard, arguably, the biggest headline last week was news from JP MorganÃÆ’¢â‚¬â„¢s leadership. The CNBC headline read: ÃÆ’¢â‚¬Å“JP Morgan co-president warns of ÃÆ’¢â‚¬Ëœdeep correctionÃÆ’¢â‚¬â„¢ for stocks totaling as much as 40% over next few years.ÃÆ’¢â‚¬Â 

    This, one week after the new Fed Chair, Jerome Powell, issued the new maxim: ÃÆ’¢â‚¬Å“headwinds becoming tailwindsÃÆ’¢â‚¬Â. He warned that ÃÆ’¢â‚¬Å“ÃÆ’¢â‚¬Â¦ with inÃÆ’¯Â¬â€šation under control, overheating has shown up in the form of ÃÆ’¯Â¬Ânancial excess.ÃÆ’¢â‚¬Â  

    After the financial crisis, Fed analysts, and several others, built new tools for examining, monitoring, and checking financial excess. The overall assessment is that, today, compared to long-term history, asset prices are generally ÃÆ’¢â‚¬Å“somewhere between expensive and extraordinarily expensive.ÃÆ’¢â‚¬Â Nevertheless, according to the tools, they are not yet at extreme points; i.e., financial vulnerability scores show controlled risk in the private sector, notably in housing and credit. Less vulnerability than in the years before the 2001 recession and less than in the years before the 2007-2009 recession. The implication is that the Fed is still ahead of the game. At least over the coming couple of years the US is not likely to have a textbook post-war recession in which overheating leads to high inÃÆ’¯Â¬â€šation, leading the Fed to tighten abruptly in response. The FedÃÆ’¢â‚¬â„¢s course of rate normalization will continue ÃÆ’¢â‚¬Å“at a measured paceÃÆ’¢â‚¬Â with balance sheet adjustment (i.e.: sales of slices of its stocks of Treasury and mortgage backed securities) and tightening policy elsewhere in the G3 helping to restore the term-premium in fixed-income yield curves. Stock-market ÃÆ’¢â‚¬Å“correctionsÃÆ’¢â‚¬Â, meanwhile, rarely have a broad macroeconomic impact.  

    Note, however, that by the same token, the Fed has never been able to produce a soft landing. And with mounting fiscal irresponsibility, rising deÃÆ’¯Â¬Âcits and federal government debt adding fuel to an overheating economy, macroeconomic imbalances are building up. So, the risks of a recession beyond the immediate near-term may also be building up, for other reasons.  

    The key economic releases this week are CPI on Tuesday and retail sales on Wednesday. We also have IP and consumer expectations on Friday.  

    Tuesday, March 13: CPIÃÆ’¢â‚¬â€Feb/18 (Consensus 0.1%momsa, 2.2%yoy; core 0.2%momsa, 1.8%yoy). No big headline expected, a continuation of trend with the yoy rates unchanged. There is some interest on medical care prices which had been in deflation through 2017 but are now rising. There is little doubt that prices are converging to the Fed target. The 3mo-saar was 2.90%yoy in January and its 6mo average was 2.25%. The issue is why not faster, with slow wage growth a possible explanation. Still, it would not surprise us if, at some point soon, we begin to see faster acceleration. The slope of the relationship between the level of activity (or the rate of unemployment) and prices is flat (notably when the explanatory variable is unemployment). Prices are relatively unsensitive to the tightness in labor markets. But we know from history (and from measurements across states) that the relationship is unsteady. It can change abruptly when the economy is above the level of potential outputÃÆ’¢â‚¬â€as we are at this stage. 

    Wednesday, March 14: Retail salesÃÆ’¢â‚¬â€Feb/18 (Consensus 0.4%momsa; ex-auto 0.4%; core/control 0.4%). Unexpectedly, in Jan/18 retails sales contracted on the momsa series and was flat for the core (i.e.: excluding sales of food, gas, building materials and automobiles). The point, however, is that even so, the 3mo-saar for the core series averaged 7.3%yoy, a much faster pace than its long-run average. Part of this may be an anticipation of the extra monies coming in from lower taxes. Indeed, analysts expect a strong number for Feb/18. The catch may be that delays in tax-refunds by the IRS could offset, in part, the boost from tax cuts in the month. 

    Friday, March 16: Industrial production (Consensus 0.3%; manufacturing 0.4%; capacity utilization 77.6%). The industrial, and manufacturing, recovery is well underway. Question is, will selected tariffs help or harm it? The latter is likely as downstream producers, dependent on steel and/or steel products, could be unable to compete with imports, given higher prices for inputs. The rate of capacity utilization is getting back to its long run average level, 80.3%ÃÆ’¢â‚¬â€and that means that, if tariffs donÃÆ’¢â‚¬â„¢t stop the trend, new investment (CAPEX) should continue at increasing speeds. 

    University of Michigan consumer sentiment index (preliminary)ÃÆ’¢â‚¬â€Mar/18 (Last 99.7). FebruaryÃÆ’¢â‚¬â„¢s index was, amazingly, resilient to the stock market decline. Likely, MarchÃÆ’¢â‚¬â„¢s preliminary reading will not be. Even so, strong consumer sentiment persists, notably for current conditions. This helps explain the equally strong retail sales numbers. 

    BRAZIL


    Product of accidents, tradition, and radical casuistry in the construction of precedents, the rules for political organization—electoral laws and legal instruments for dispute resolution; mechanisms for internal governance of political parties; funding practices and intra-party instruments for resource allocation; access to media; etc.—are eminently local, complex, and often haphazard if not corrupt. Nowhere less so than in Brazil where, for example, it is not only lawful but commonplace for representatives elected under one party to change affiliation to another, without penalty to their mandates. As of end-Jan/18, of the 513 federal deputies chosen in 2014, members of one of the 28 parties represented in the Lower House, 56 (11%) had changed affiliation. And more will change this month, ahead of the election in Oct/18.\n\n

    Congress voted in 2016 to amend the electoral law, and again in 2017. The 2016 reform created the so-called ÃÆ’¢â‚¬Å“janela partidÃÆ’Æ’¡riaÃÆ’¢â‚¬Â, a one-month window starting on March 7 during which deputies can, for the last time, change party affiliation before the election. At last count, 12-15 deputies will change from one party to another. Why will they change? Mainly for money. The 2017 change in the law proscribed corporate funding of political campaigns; limited private contributions; and vastly increased public funding. The public monies are distributed in proportion to the number of seats held by each party in the Lower House at the start of the Legislature. In this case, the distribution in January 2015. Accordingly, the 3 largest parties (PT, PSDB, MDB) receive 35% of the total. The next 5 parties in line receive 29%; the remaining 20 other parties, 36%. In the 2018 election, each party may spend up to R$1.5m on a candidate to the Lower House. Obviously, the larger parties have more to give. In theory, the PT could do a lot to attract; only, given its recent history, it is the party that lost the largest number of deputies. Moreover, a lot of its money will be used in legal defense fees for existing members. Likewise, the MDB is a powerhouse. However, given the electorateÃÆ’¢â‚¬â„¢s deep animosity to President Temer, it is expected to lose candidates during ÃÆ’¢â‚¬Å“the windowÃÆ’¢â‚¬Â. The medium-sized centrist parties will probably be the winners; none more so than the DEMÃÆ’¢â‚¬â€the former PFL, a right-leaning party once with strong ties to the military dictatorship but, in a re-invention, now the ideological backbone of the Temer administration, controlling the presidency of the Lower House. Indeed, some deputies may be attracted to the DEM not by money but outlook. Lacking workable candidates in some states or districts, the party may offer ambitious politicians greater electoral scope. The outcome, therefore, could be positive for the election; greater weight to a potential centrist coalition, more ideologically inclined and unified.  

    The reality, however, is that confusion reigns. The schedule does not help: Come April 7th, all potential candidatesÃÆ’¢â‚¬â€for the election of President, Governors, Senators and Deputies to the Lower HouseÃÆ’¢â‚¬â€must have defined their party of affiliation. Conventions to decide party candidates and alliances may stretch to August 5. Only by August 15, one day before the campaign officially begins, must candidacies be registered. This long interregnum is the substance for heavy-duty political bargaining. As in a poker play, at this stage, the main players prefer to hide their game. President Temer insists he will be a candidate when, most likely, he will not. Instead, likely, he will use his capital to influence the choice of who will be. His team includes some of the most experienced, shrewd, and (because in Brazil they often come together) opportunistic and corrupt politicians. They are a mighty force and are starting to build their case.  

    Speaking in New York last week, Minister Moreira Franco (MDB) made an argument for the ÃÆ’¢â‚¬Å“centristÃÆ’¢â‚¬Â position in the upcoming elections, marking a position for any future coalition. Expectedly, with outright ownership for what he ranked as ÃÆ’¢â‚¬Å“major achievementsÃÆ’¢â‚¬Â of the Temer administration; foremost, addressing excesses and mistakes of past PT administrations. The main points,  

    ÃÆ’¢â‚¬Â¢ A recognition that ÃÆ’¢â‚¬Å“voluntaristÃÆ’¢â‚¬Â fiscal policy was a disaster; that there is merit in fiscal adjustment. That the measures enacted, a ceiling on the growth of real expenditure and a reduction in discretionary spending, and proposed, a reform and rationalization of social security and a change in the tax system, are steps in the right direction. 
    ÃÆ’¢â‚¬Â¢ That these measures came with, and supported, an adjustment in monetary policy that reduced inflation and brought down real interest rates. Which, in turn, helped turnaround the economy and begin to grow employment. 
    ÃÆ’¢â‚¬Â¢ That alongside these broad macroeconomic trends, the administration dealt with the aftermath of the corruption scandals centered on Petrobras by implementing a new regime for the management of state-owned enterprises; by changing legislation in the oil and gas sectors; by designing and beginning to implement a privatization and concessions program that could radically change the electricity sector; and usher in much-needed transport infrastructure across all modes. 
    ÃÆ’¢â‚¬Â¢ That by approving in Congress measures to reduce a haphazard, inefficient, and inequitable maze of interest rate subsidies, the government aims to discipline and redirect the actions of the state-owned development banks. 

    In his view, the centrist agenda for the electorate should explicitly recognize and support these values and approaches; argue for the construction of a more rational fiscal regime; with a focus on social expenditure, poverty alleviation and, foremost, personal and property security. Cunningly, he thus tied the centrist position to support for the PresidentÃÆ’¢â‚¬â„¢s decision to intervene in the State of Rio de Janeiro for the provision of security services, including the use of the armed forces.  

    The arguments are well-known, certainly in the political realm. They go back to documents Moreira Franco produced for the FundaÃÆ’Æ’§ÃÆ’Æ’£o Ulysses GuimarÃÆ’Æ’£es, the political think-tank of the MDB: Ponte para o Futuro (2015) and Travessia Social (2016). The aim of repeating them in the particular context of a speech that served as a preamble to the campaign was to show the transition from concept to actionÃÆ’¢â‚¬â€œunder the Temer administration. Politically, to capture the agenda and slogans for the smaller centrist parties. By making explicit the link between these ideas for the future and the accomplishments of the Temer administration, it compels these parties, defined by specific interests, not broader political/policy goals, to a programmatic definitionÃÆ’¢â‚¬â€towards a coalition also in ideas and not only interests. For the larger centrist parties, the PSDB, the DEM and the PSD, whose programs are as well-developed and in the same direction as the Temer MDBÃÆ’¢â‚¬â„¢s, the aim is to make explicit the prior ownership of the program. More importantly, if a coalition happens, the aim is to give the entire centrist coalition a perspective of continuityÃÆ’¢â‚¬â€a recognition that the Temer MDB set the agenda for the new administration. The effort is aimed at spurring and cheering on the legacy of Temer and his allies. For them, the quid-pro-quo would be a bond of protection for their reputations when out of office. For their personal after-lives, when out of power.  

    Of course, this is precisely what many of the would be ÃÆ’¢â‚¬Å“coalitionersÃÆ’¢â‚¬Â fear and distrust. They are not sure that continuity with a deeply unpopular candidate is a winning strategyÃÆ’¢â‚¬â€even if they acknowledge that, programmatically, these are the right set of policies and programs to pursue. Hence, the confusion.  

    Turning to the economy, the main data this week are secondary, retail sales and IBGEÃÆ’¢â‚¬â„¢s survey of the services sector.  

    Tuesday, March 13: Retail salesÃÆ’¢â‚¬â€Jan/18 (Consensus 0.4%mom, 4.1%yoy; ÃÆ’¢â‚¬Å“ampliadoÃÆ’¢â‚¬Â 0.6%mom, 7.8%yoy). Retail sales slumped in Dec/17 and some payback is expected; likewise, for the ÃÆ’¢â‚¬Å“ampliadoÃÆ’¢â‚¬Â measure which includes vehicles and building materials. There is concern that recent numbers show a slowdown when GDP growth in 2018 is still heavily dependent on consumption expenditure, hence retail sales. Indeed, GDP data disappointed in Q4/17 and analysts are looking to affirming up of numbers in Q1/18. Thus, if anything, a bad number on Tuesday would be more consequential than a positive surprise. 

    Friday, March 16: Survey of the services sectorÃÆ’¢â‚¬â€Jan/18 (Consensus 0.9%mom). Unemployment peaked at 13.1% in mid-2017 and has been falling steadily since, absent seasonal variations. The trend should continue.The same arguments used for retail sales apply here. See above. 
    ","preview":"UNITED STATES No shortage of economic and financial headlines last week. Tariffs; and, of course, non-farm payrolls (NFP): 313k in Feb/18-108k above consensus, the fastest..","url":"/US-Brazil-Financial-News-3-13","___id":10},{"title":"US + Brazil Financial News (3/9)","date":"9th March","content":"

    UNITED STATES


    While the jobs report is the focal point of the week, the revised/final productivity numbers for 2017 also merit attention. The dip in productivity in Q4/17 was due, likely, to the lingering impact of hurricane disruptions. Still, the main concern is the long-run trend in productivity growth, that has averaged only 0.6%yoy over the last 8 quarters. From 1955-2005, productivity growth averaged 2.2%yoy; from 1996-2005, 3.0%yoy. The expectation, and fear, is that the new trend is half as fast, about 1.1%yoy.\n\n

    The productivity slowdown begun before the crisis. It is in part due to demographics; an aging labor force and the impact of the so-called ÃÆ’¢â‚¬Å“boomers generation.ÃÆ’¢â‚¬Â The share of young workers in the labor force (23-33 years old) increased in the late 1960s and peaked around 1980. This is when the boomers entered the labor force, not only men but also women, yielding a notable rise in the participation rate, i.e.: the number of workers as a percent of the total population. They are now retiring, after accumulating considerable human capital, of note, firm-specific on-the-job training, during a period of sustained expansion in manufacturing jobs, with prevalent increases in capital-per worker, and the rapid dissemination and adoption of productivity increasing innovations. As a generation, boomers profited from an environment with rapid investment in new plants and automation; they had more or better ÃÆ’¢â‚¬Å“tools,ÃÆ’¢â‚¬Â or capital, and were able to produce more. They also acquired new skills through education and experience. They are being replaced by better educated but less skilled younger workers, less experienced and working increasingly in lower-productivity jobs in services.  

    Another, perhaps more disturbing trend, is the slowdown in total factor productivity (TFP), or the share of output not explained by the amount of inputs used in production, be they capital or labor. Though estimated as a residual from the productivity of capital and/or labor, it is best thought of as a measure of how efficiently and intensely the inputs are utilized in production. It has a lot to do with incentives and policy. For example, productivity growth was generally slow in the 1970s, largely due to a slowdown in total factor productivity, thought to be related to the unstable macroeconomic environment, price-controls, and industrial policies of the period.  

    Again, it is not the case that the great recession caused the slowdown in TFP growth. It pre-dates it, from the mid-2000s, after a decade of extraordinary growth. The slowdown may be partially due to mismeasurement, for example, in the benefits of information technology (IT). But the evidence fails to show it. Others would like to attribute it to increased regulation and/or diminished creativityÃÆ’¢â‚¬â€another hypothesis without strong empirical verification. A final hypothesis suggests that TFP growth simply returned to normal, after the exceptional decade of growth linked to IT. This is most likely. It seems that the transformative role of IT led to a sequence of one-off gains. Afterward, the exceptional growth rate ended. Extensive statistical analysis of the post-great recession record shows that, relative to the recoveries of the 1980s, 1990s, and early 2000s, cyclically adjusted productivity grew about 1ÃÆ’‚¾pp/year more slowly since 2009. About a percentage point of this is explained by the shortfall in productivity growth and about ÃÆ’‚¾pp/year is explained by a decrease in labor force participation. Other factors are small and offsetting.  

    The question is, will productivity growth re-accelerate? Some believe that the recent deregulatory environment, and especially the change in corporate taxation, will usher a new boom in investment and associated growth in TFP. Likely, it will not happen. Demographic shifts will continue to reduce hours worked per capita. Educational attainment, a central driver of growth over the past century, is stagnant, with the US falling behind international measures. Larger fiscal deficits and haphazard deregulation could, in fact, increase economic uncertainty. Of course, innovations are notoriously hard to predictÃÆ’¢â‚¬â€and a new wave of disruptive and ÃÆ’¢â‚¬Å“creatively destructiveÃÆ’¢â‚¬Â innovations may be around the corner. Nevertheless, from the perspective of monetary policyÃÆ’¢â‚¬â€and this week payrolls numbersÃÆ’¢â‚¬â€the implication is that the relevant horizon is one of low potential GDP growth, substantially below 2%pa and closer to 1.5%pa. In this context, the economy is already at full employment. Meanwhile demand is recovering from the post-crisis legacy of relative pessimism. Consumer confidence is at record highs, the savings rate is down, and, despite some lingering blockages, the credit system is pumping at near full speed. The larger concentration of incomes limits the multiplier effects, but not enough to stop the overall boom. Core inflation is firming. Add to this the cyclically misadjusted fiscal stimulus and you have reason to believe that the Fed will be proactive. We are entering, again, a period of tighter money and loser fiscal, with all its implications.  

    Monday, March 5: ISM-Non-manufacturingÃÆ’¢â‚¬â€Feb/18. The headline index fell marginally to 59.5 (-0.4pts) but remains at near-record-high levels. New orders jumped to 64.8, highest since 2005. 

    Wednesday, March 7: Labor productivity and unit labor costs (ULC)ÃÆ’¢â‚¬â€Q4/17. (Consensus, productivity -0.1%qoqsa, 1.1%yoy; ULC 2.0%qoqsa; 1.3%yoy). See above. 

    Friday, March 9 Nonfarm payrollsÃÆ’¢â‚¬â€Feb/18. (Consensus, monthly change in NFP 200k; unemployment rate 4%; labor force participation rate 62.7%; average hourly earnings 0.2%momsa, 2.8%yoy). This should be another positive report; another data point adding certainty to the FOMC decision on March 21. Wages are increasing at a faster clip than inflation that, itself, is normalizing and approaching the target. The aggregate weekly payrolls (a measure of the total wage bill of production and non-supervisory workers) is growing 4.4%yoy (12mo-average rate), a good indication of the strength of personal income, and consumption. The unemployment rate is forecasted to edge down to 4% and is set to trend lowerÃÆ’¢â‚¬â€significantly below the FedÃÆ’¢â‚¬â„¢s own estimate of the NAIRU at 4.55% and the CBOÃÆ’¢â‚¬â„¢s estimate at 4.65%. 

    BRAZIL


    Inflation is news again—because it surprises on the lower side. This week we get, on Friday, the Feb/18 reading of the IPCA index. The Bloomberg consensus sees it at 2.8%yoy; 3.7%yoy for yearend inflation. When expectations were first measured, in March 2016, this same yearend consensus stood at 5.5%yoy. The decline is persistent and backed by detailed bottom up analyses. It is not only food inflation that remains low, despite a small pickup from the huge deflationary wave of 2017. It shows up also in the measures of core inflation, numbers around 3.3-3.4%yoy. And, most tellingly, in the measure of the diffusion of inflation, the underlying degree of price pressure across all items in the index. The index was down 17%yoy in Jan/18 on the 12mo-movavg. Early in 2016 it hovered around 78, showing that about 78% of the 465 products and/or services priced for the index (the consumption basket) had some price change during the month. In Jan/18, the percentage was down to 58%, having reached a low of 42% in mid-2017.\n\n

    The expectations are credible and, barring unexpected shocks, likely, stable; a dilemma for the central bank. Its yearend inflation target is 4.5%, falling to 4% only by end-2020. Meanwhile the policy rate stands at a record-low 6.75% nominal or about 3% real, if the yearend inflation forecast materializes. By all admissions this is below the equilibrium long-run neutral rate, even accepting that this rate could have fallen somewhat over the last year as macroeconomic fundamentals improved. Thus, policy remains accommodative at a time when activity expands, possibly to a pace of about 3%pa, significantly above the rate of potential GDP growth. Conjunctural measures of potential are very low, a legacy of the 2015-2016 recession. However, even forward-looking measures place it below 2%pa.  

    Moreover, fiscal policy is essentially unadjusted, with at best a marginal decline in the expected primary deficit. Given rigidities in social security spending, it will continue to increase in real terms, all of it spent on consumption. The external scenario could become less forgiving. And the domestic political scenario, even more turbulent as we approach the Oct/18 elections. Given this, at its last meeting early last month, the COPOM signaled that a pause could be justified. Now the Committee faces a different reality. The market assigns a 75% probability to another rate cut, to 6.5%. We will see what FridayÃÆ’¢â‚¬â„¢s CPI data shows. If it confirms inflation at a pace of 3-3.5%pa, it is indeed highly probable that rate will go down.  

    Tuesday, March 6: Industrial productionÃÆ’¢â‚¬â€Jan/18. (Consensus, -2.0%mom; 5.9%yoy). Averaged over the last 12mo, IP shows a stead recovery from the trough in mid-2016. The recovery is led by consumer durables, but at this stage, all categories show positive yoy growth on this measure. The trend is persistent and likely to continue, helped by increasingly buoyant demand and the first stirrings of investment. Exports also help, notably to Argentina. US tariffs on steel could have a negative impact, albeit small. 

    Friday, March 9: CPI (IPCA) inflationÃÆ’¢â‚¬â€Feb/18. (Consensus 0.3%mom, 2.8%yoy). See above. 
    ","preview":"UNITED STATES While the jobs report is the focal point of the week, the revised/final productivity numbers for 2017 also merit attention. The dip in..","url":"/US-Brazil-Financial-News-3-9","___id":11}],"articles_0_title":"

    UNITED STATES


    The main event this week is the May/18 jobs report, due out on Friday. US growth is accelerating after the Q1/18 slowdown. The second revision of the Q1/18 GDP report was out on May 30th. Growth in the quarter was revised down to 2.2%saar, but the composition of the revision was favorable. Growth in business fixed investment was revised higher, to 9.2%saar, reinforcing the belief that we are witnessing a cycle-within-the-cycle. While the broader post global recession cycle is on its 10th year of recovery, thus, expectedly, attenuating, a mini-cycle induced by fiscal policy is just beginning—and adding strength to the economy. Most analysts expect a strong growth performance in Q2/18 (up to 3.5-3.7%saar) and through yearend, with decelerating but still above potential growth in 2019 (around 2.4%yoy).

    Broadly, this is a supportive environment for the labor market. Friday’s numbers should confirm a pace of employment expansion that is well above what is needed to absorb new entrants. Expectations are for around 190k, pushing the 6mo average to 198k jobs/month. The upshot should be further declines in the unemployment rate towards 3.5% by yearend, a rate not seen in the US since the late 1960s. Inflation is also accelerating and should soon surpass the 2% target set by the Fed, even in its favorite measure, the core Private Consumption Expenditures (PCE) deflator. It is interesting to note that increases in housing prices in the US are already outstripping inflation—by large amounts. Since Aug/16 the national home price index produced by S&P/Case-Shiller has shown annual rates of inflation in excess of 5%, reaching 6.5% in Mar/18. Meanwhile annual inflation measured by the core PCE deflator was 1.9% in Mar/18. To be sure, house prices capture both the price of housing services (or shelter, which enters the CPI) and the value of housing as an asset—and it is the latter that is driving most of the change in house prices. Nevertheless, this trend underscores the fact that what keeps inflation low is the price of goods.

    There is an issue with the slow pace of wage gains. However, survey measures of wages are on the uptick, and close to the estimated full-employment trend, at 3-3.25%yoy. Moreover, there may be deep-rooted structural reasons why measured wage gains are lagging. All of which should lead to a continually active FOMC. The mini-cycle induced by fiscal policy is a problem. It leads to a temporary acceleration of activity, and inflation, in an otherwise “maturing” cycle, and thus poses a dilemma for monetary policy. Should policy “see-through-it” and err on the side of caution, concerned with the post-crisis experience of unprecedently low inflation within the longer post-WWII history? Or should it respond, looking at signs of financial excesses, possible destabilizing expectations, and a wish to avoid sudden measures when the onset of recession is on the horizon? We believe the FOMC will lean to the latter, first and foremost because its framework remains heavily accommodative and still too nearby the Zero Lower Bound. Bringing the rate closer to neutral is an imperative this far along the recovery. Thus we expect the FOMC to implement three additional hikes this year (Jun/18, Sep/18 and Dec/18) followed by another four in 2019. A terminal rate of 3.50% could still be low, 4% would not be inconceivable, but there is too much uncertainty ahead to specify now such a path.

    Friday, June 1: Non-Farm Payrolls (NFP)—May/18. (Consensus 190k; unemployment rate 3.9%; average hourly wages 0.2%momsa, 2.6%yoy). See above.

    BRAZIL


    A strike and/or lockout by truckers, with illegal blockage of main roadways, is the latest crisis which; by incompetence or misinformation; by political omission and opportunism of Federal, State and Municipal authorities; by the confrontation between corporations, venal politicians, and businesses addicted to subsidies and public concessions; erodes confidence, halts the recovery in economic growth and employment, and increases political risk ahead of the Presidential elections in Oct/18. There was cause for protest. Gasoline and diesel prices fluctuated widely, driven not only changes in world oil prices (oil prices have risen by 50% over the past year) but also by the gyrations in the exchange rate. Discontent is widespread and confidence in the government, and in the political class, is at near rock bottom. The condition of the trucking industry is poor. There is oversupply—an unintended byproduct of misguided subsidies for fleet expansion and renewal. The regulatory framework is inadequate, and the basic infrastructure of roadways, a perennial problem. The political appropriation of the conflict is, nevertheless, alarming. Undoubtedly, the main support for the strike came from the trucking industry, not from the truckers themselves.

    A Datafolha poll released on May 29th suggests that 87% of Brazilians supported the week-long strike; 56% of those polled thought the strike should continue. Belatedly, the Government responded: With new concessions; and Congress approved a repeal of tax deductions to help finance them. The same Datafolha poll showed that by the same overwhelming margin (87%) Brazilians oppose the concessions given to transport industry and to truckers. The contradiction suggests that the poll responses are really about sentiment: against current conditions, the outlook, “the system”. They are an indication of antiestablishment perception, against politicians and their policies, a reminder of what could happen at the Oct/18 elections. And, perhaps, because of this, markets responded abruptly, with a plunge in the currency (to BRL 3.77/USD) and a sudden spike in short-term rates (+14bp to 9.1% for the Jan/21 DI). Perhaps, markets are finally unscrambling what could happen, a populist victory, from what they wish for, a centrist victory with continuity in macro policies.

    The main data point out this week was Q1/18 GDP, a 0.4%qoq, 1.2%yoy, matching consensus expectations. Because investment continued to grow (0.6%qoq, 3.5%yoy) the numbers were not a total disappointment. But they are sobering, nonetheless. Given the strike, what could have been a dip is likely to become a trend. Analysts forecast the impact of the strike at around 0.7-0.8pp of GDP, combining the direct impact and the effects of the downturn in confidence. Forecasts for Q2/18 GDP are coming in at 0.2%qoq, from 0.8% earlier. For 2018 as a whole, GDP growth could be reduced to 2%yoy, or less, from the previous range of 2.8-3.2%. The impact on the fiscal account will be equally large. First, because of concessions and new subsidies to the transport industry, which could add R$15bn to expenditures. Second, because of the impact on revenues of the anticipated slowdown in growth. Together they could add to about 0.5% of GDP—which will demand countervailing measures by the Ministry of Finance to keep to the primary deficit target of $159bn (with the new GDP estimate, about 2.4% of GDP).

    We also got data unemployment, for the credit stock and for the public accounts.

    Unemployment—quarter ending in Apr/18. Unemployment dropped to 12.9%, 12.3% with seasonal adjustment. The drop, however, was due entirely to a reduction in the labor force with the participation rate down to 61.5%. Moreover, growth in informal employment continues to outpace formal jobs which helps explain a 0.3%qoq drop in the real wage bill.

    New Loans Flow and Credit Stock—Apr/18. The stock of loans from the banking system grew 1.1%yoy, the product of a 5.5%yoy contraction in loans outstanding to the corporate sector, and a 6.4%yoy expansion in the stock outstanding to households. In real terms (deflated by the IPCA) the stock diminished 1.7%yoy, driven mainly by a reduction in the stock from public banks. Meanwhile, measured by the 12month moving averages, the flow of new loans expanded 5.1%yoy, 7.6% to households and 1.9% to firms. Thus, while corporate deleveraging continued, at the margin, the credit system is in expansion, contributing to the, albeit weak, recovery in activity and employment. Nonperforming loans (over 90days overdue) are stable: 5.4% for households and 5% for firms.

    Consolidated public sector accounts—May/18. The consolidated public sector posted a R$2.9bn primary fiscal surplus in May/18. On a 12-month basis, the primary deficit measured 1.78% of GDP and the overall public deficit (primary balance plus net interest payments) 7.51% of GDP. The public debt dynamics continued to deteriorate. The stock of gross general government debt reached 75.9% of GDP in Apr/18, up from 74.0% in Dec/17. It goes without saying that without fiscal adjustment the debt is unsustainable. Even with fiscal adjustment, minimally, respect for the constitutionally mandated expenditure ceiling, which presupposes a reform of the social security systems and of earmarked taxes, the debt is not likely to begin stabilizing until 2022/23. This under the assumptions that grows accelerates to 3%pa; that the real interest rate on government debt remains low (it is now less than 3%); and that the global economic environment continues to be supportive. In short, a tall order—one that presumes a continuity in macro policy under a centrist coalition.
    ","articles_1_title":"

    UNITED STATES


    The main data this week will be retail sales for April, out on Tuesday. It should show healthy growth, with the “control group” growing 0.4%momsa or 3.6%yoy. The control group measures sales excluding both the more quotidian and cyclical items: food and gasoline; auto dealers and building materials. It is, thus, a better gauge of the underlying economic trend. Smoothing this trend over the past 12mo, yields a pace of 3.8%yoy in Mar/18 and, expectedly, the same for Apr/18. An even longer smoothing period (60mo) yields 3.5%yoy for both months. This is less than the rather torrid pace of growth in Q2/15 (4.5%yoy) but a lot faster than the trough in Q1/17 when growth decelerated to about 3.0%yoy. It is an indication that consumption growth is healthy and still leading the economic recovery; that the soft patch in Q1/18 was limited to that period. Retail sales is historically closely linked to disposable income (the long-run correlation between the series is 89.2%). So, the expected pick-up in disposable income growth, post-tax reform, should sustain growth in retail sales in 2018—pointing to an overall rate of GDP growth of 2.8-3% in 2018—significantly above the potential rate of growth of the US economy. Today, the US is a net exporter of refined petroleum products and the third largest producer of crude oil. This means that volatility with increases in oil prices, such as we have seen over the last few weeks, should not be a deterrent to overall growth.

    The latter matters, because, as we have noted repeatedly, the labor market is beyond full employment and we should soon begin to see signs of overheating for the entire economy. Price and wage inflation should follow, even if wage growth will be less than in the past, partly because we are dealing with an increasingly older, aging labor force. The other notable events this week will be Fed-speak, notably, on Tuesday, the Senate confirmation hearing for the nominee for Fed Vice-Chair, Richard Clarida. Although he has spent the last few years as a market economist, Dr. Clarida was for many years a distinguished academician with important contributions to post-Keynesian macroeconomics. Our sense is that he reaffirms the current main view: “from headwinds to tailwinds.” In other words, that it is important for the FOMC to normalize rates as quickly as possible, before the onset of the next downturn. The Treasury yield curve continued to flatten last week—and it could soon invert. This may not be, presently, a good predictor of a recession; and it’s far from certain the Fed will slow down as the curve flattens. On the contrary, we believe it is a sign that rates in the short-end will continue to rise—a point that, implicitly, we expect Dr. Clarida to make.

    Tuesday, May 15: Retail sales—April/18. (Consensus 0.3%momsa; Control group 0.4%momsa). See above.

    Wednesday, May 16: Industrial production—April/18. (Consensus 0.6%momsa; Manufacturing 0.5%momsa). A payback for the slump in Mar/18 is expected. The focus will be on the manufacturing details. Manufacturing production has accelerated continuously since late 2016 and is presently running at the fastest growth rate since 2012. This should lead to higher rates of capacity utilization, hence a demand for new CAPEX.

    BRAZIL


    The main event this week will be the COPOM meeting on Wednesday, May 16, and there is some uncertainty going into this meeting. Not because the main trends about the economy and inflation have changed. Rather, it is about the exchange rate: The real gained 5.5% vis-Ã -vis the US dollar between its level in the third week of April and the first week of May. The question is whether this movement will influence the decision. Our sense is that it will not. As such, as preannounced, the Committee will proceed with its final rate cut in this cycle, bringing the Selic rate down to 6.25%; 800bp below its level on Oct/16, to the lowest nominal rate on record.

    It is never clear whether an Inflation Targeting central bank should use the exchange rate as an intervening variable. Obviously, there is a close correlation between movements in the exchange rate and inflation—the so-called passthrough to prices. The passthrough, however, is not fixed. Importantly, it varies with the credibility of the regime. A regime operating with anchored inflation expectations, with credibility, and not facing a singular external shock, would operate with a low passthrough; in fact, with a passthrough that is fully incorporated into inflation expectations. Thus, the volatility in the exchange rate would not add any significant “new” information to what is already captured by the usual modeling framework.

    This is what Governor Ilan Goldfajn communicated to markets. When asked about the impact on monetary policy of the latest bout of exchange rate volatility, he said that it would depend on factors such as the level of activity and the anchoring of expectations. He stressed that the volatility in the exchange rate was, in this case, exogenous—the translation of global and regional (i.e.: Argentina) shocks to the domestic market. That, as such, questions of market illiquidity, or of changes in the demand for dollar-hedge, could be dealt with direct measures: the supply of hedging instruments to the market through the central bank’s ongoing dollar/interest-rate swap operations.\nIf anything, economic activity has been weaker than expected; as has been past inflation. The measure of inflation expectations in the longer run remains firmly anchored to the target. Admittedly, the country may be facing serious political volatility in the upcoming elections, in October. However, the indicators of fiscal policy—though not entirely comforting—have not changed, nor are they expected to change. In this circumstances, the political uncertainty may be, if anything recessionary and potentially deflationary. While it could be prudent to hold the rate, a possible inflation error, undershooting the target for a second year in a row, is a matter of concern. This is why we believe that, on balance, the COPOPM will vote for a final cut.

    Wednesday, May 16: Central Bank Index of Economic Activity—Mar/18. (Consensus -0.4%momsa; 0.3%yoy). Industrial production ticked down in March. The unemployment rate was stable but at a still very high 12.5%. Services output dropped in Feb/18 and, although retail sales expanded in Mar/18, the growth was weak and uneven. For these reasons, analysts expect a weak reading for this quasi-GDP indicator. In terms of YoY growth rates, the index peaked in Dec/17 and has been decelerating since—a clear indication that the recovery lost steam in Q1/18.

    Monetary Policy Committee (COPOM)—May/18. (Consensus: 25bp rate cut to 6.25%). See above.
    ","articles_2_title":"

    UNITED STATES


    What did we learn from last week’s FOMC meeting and NFP reading? First, we learned that the economy is doing well, and the FOMC agrees. Indeed, by some measures the labor market is beyond full-employment. The unemployment rate is down to 3.9% when the NAIRU or neutral rate is 4.5%; moreover, the rate came down even as the participation rate decreased—a clear indication that the pool of potentially usable labor resources is shrinking. Yes, yet again, the wage reading in the enterprise survey was disappointing. However, now there are contradictory signs. Other measures of wages and total compensation show growth at around 3%pa, significantly above inflation. Meanwhile the Treasury yield curve continues to flatten, as expectations of subsequent hikes by the FOMC firm-up in the short-end and the term-premium remains reduced in the long-end. Market pricing still must adjust; it remains backward-looking compared to the FOMC’s median projections, and we have little reason to doubt them. The market is at 2.6% for the 18mo2y OIS with the forwards inverted.

    It all points to a mature cycle, now in its 95th month of recovery, and likely to become the longest on record. It is, in short, “as good as it gets”. Which is why analysts foresee a change of tune at the FOMC. A change in the “balance of risks language”. If previously the good news was about a stronger economy with a healing labor market, soon, very soon, the good news will be about sustained growth with a moderating labor market. Headlines about new booms in the stock market may cause as much, or more, concern at the FOMC as those of a weakening market.

    The hope, of course, is for a “soft landing”. Orchestrating a steady pace of rate hikes (25bp per quarter as the FOMC has intermittently observed since December 2015) to the neutral rate (3.50-3.75% according to the median of their own forecasts) or slightly beyond, if forecasted inflation for the core PCE indicator surpasses the 2% target, as we expect it will. The problem may be a boom-and-bust mini cycle caused by the fiscal expansion: An explosion in demand late in 2018 followed by rapidly decelerating demand in late 2019 and through 2020. Against this, the FOMC is nearly powerless. If it acts preemptively today, given the leads-and-lags of policy, it surely would push the economy into recession sometime in 2019/20 when demand would be already adjusting down. If it attempts to rekindle economy when the mini-boom is over, it risks its medium-terms goals and, in the event, may achieve little. For either the fiscal deficit begins to adjust down, a contractionary force, or/and bond markets would force the long-end of the yield curve up as they face ever-rising demand for public financing, and this too would be contractionary.

    The main data out this week will be on inflation: producer prices on Wednesday, consumer prices on Thursday and consumer sentiment/inflation expectations on Friday.

    Tuesday, May 8: JOLTS Job Openings—Mar/2018. (Consensus 6.1k). Economic growth and corporate tax cut should keep the momentum of hiring. For the last three years, the number of job vacancies exceeds job offers, increasing hiring pressures in labor markets, and accentuating a skills miss-match between supply and demand. The quit rate—a key indicator of labor market tightness—could increase further, as workers, specially in skilled positions, feel confident to quit and search for better jobs.

    Wednesday, May 9: Producer Price Index (PPI)—Apr/2018. (Consensus. Final Demand 0.2%momsa; 2.8%yoy). Producer prices have raced ahead of consumer prices for some time. The dollar strength may have helped, conjecturally, but capacity constraints are driving up domestic production costs and enabling producers to pass-along higher prices. Meanwhile, trade tariffs, or their threat, may have been more important than the dollar in influencing import prices.

    Thursday, May 10: Consumer Price Index (CPI)—Apr/2018. (Consensus 0.3%momsa; 2.5%yoy). The thing to watch will be the gap between goods and services inflation. Rising labor costs should hit first domestic services, especially retail. The FOMC will be especially sensitive to this indicator.

    Friday, May 11: U-Michigan Expectations-Preliminary—May/2018. Sentiment has been buoyant and take a dip this month. Of interest will expectations about inflation, which are already running at 2.7%yoy.

    BRAZIL


    Currencies were in flux last week, indeed over the last month or so. The BRL reached a new low of 3.57/USD, before retreating towards the end of the week. The central bank intervened, supplying the market with a larger than anticipated quantity of BRL/USD swaps, effectively anticipating the rollover foreseen for June. Swaps are an effective way to supply the speculative demand for dollars and/or the demand for dollar-hedge by corporates. They cannot be substituted readily for dollar cash and are not, therefore, as effective in meeting debt repayment and/or dividend remittance demands. The recent turbulence was externally induced, however, aggravated by a dearth of inflows from external debt rollovers or new deals in the week. A circumstantial event. Total FX inflows were strongly positive in April, a total of $13.1bn. Meanwhile, new debt deals (including rollovers) sum to nearly $15bn so far in 2018. The outstanding stock of BRL/USD swaps is $24bn, down from $108bn at end 2015, and the central bank has said repeatedly that it feels comfortable offering this volume to the market, measured against its reserves of $382bn. Swaps due in June, which are being rollover, total $5.7bn. We are not concerned about the BRL, or with Brazil’s external position. The market sees the BRL/USD strengthening to 3.37/USD by yearend (FOCUS median forecast) and we agree.

    What is of concern is the situation in neighboring Argentina. Last week, the ARS was subject to a classic speculative attack as foreigners dismantled their speculative carry positions expressed in local bonds. What precipitated the move may have been the same pressures affecting the BRL (indeed, for most of March the BRL depreciated at a faster clip than the ARS) but, obviously, the upshot was different—for well-understood reasons.

    ÃÆ’¢â‚¬Â¢ Monetary policy is weak and was made weaker early in the year when arbitrary reductions in the inflation target were followed by precipitated cuts in the policy rate, when facing recalcitrant, possibly accelerating, inflation. 
    ÃÆ’¢â‚¬Â¢ Compounding this mistake, at first, the central bank (BCRA) sought to quash the movement in the ARS by intervening in the FX market; the BCRA lost $5.3bn in nine days and $7.8bn in the year, even though it operates with a relatively constrained level of reserves, on a net basis, about 5% of GDP. The ARS lost 11% in the 30 days to May 3rd; 20% in the year. 
    ÃÆ’¢â‚¬Â¢ The economic recovery in Argentina came with a surge of imports, impelled by freer trade and FX restrictions; meanwhile, the worst draught in 40 years curtailed export earnings. The upshot are current account deficits in the order of 4-4.5% of GDP. 
    • The transition to the Macri administration prompted a surge of optimism, including a burst of foreign capital from new investments and repatriated capital. The fisc also turned to foreign markets to finance its large deficits—and the markets were willing, past the settlement with the holdouts, and long abstinence during the Kirchner administrations. The outcome was a quick erosion of the protection afforded to the FX-regime, post-market liberalization, by the initial depreciation of the real effective exchange rate. Thus, when confidence turned, the FX market was stretched to the limit, unwisely long ARS and short USD.

    Most important, however, are underlying structural issues that separate the regimes of Brazil and Argentina. Through parallel crises, Brazil opted—at an enormous domestic cost—to protect its domestic financial system, creating a sophisticated and deep financial market built on barriers to FX transactions, market concentration, and high real interest rates—high enough to discourage even informal currency substitution to the dollar. Though it faced similar fiscal threats, it turned decidedly to local markets, accepting, at times, the burden of indexed money and near-hyper-inflation. The outcome was devastating to the poor; to investment and growth—but it saved the domestic financial system. Many years later, it made possible the current strange combination of a regime of low-savings and relatively low real interest rates even in the presence of mounting fiscal demands, with about 70% of all domestic financial resources used to finance the public debt.

    Argentina has always maintained parallel currencies, (in)famously, in the early 2000s, a dollar-convertibility regime. The domestic financial system is an afterthought, and financial repression has been used continuously to extract forced savings from domestic peso transactions to finance the budget, including direct access to central bank financing. As such, even in the post-convertibility years, currency substitution has remained prevalent, with savers quickly changing the currency composition of financial assets to arbitrage rates and/or protect their capital. Two consequences are notable. One is a lack of domestic financing for investment, indeed, of a significant domestic capital market—something the Macri administration is about to address with a bill pending in Congress. The other, more ominous for triggering currency crises, is a heavy reliance on external financing of budget deficits. Two-thirds of the Argentine public debt is in foreign currencies. A sudden depreciation increases the debt burden disproportionally. To boot, higher rates—post-stabilization—do the same for the local component of the debt. The combination of “gradual” fiscal adjustment with repressed monetary policy could not, and did not, work.

    In the end, the BCRA hiked the policy rate by 1,275bp. In fact, it did more. It set the one-day active (lending) rate at 57% and the passive (borrowing) rate at 28%. With such a gap, there will be few willing borrowers with access to the central bank’s window; agents ready to speculate against the currency, especially when the policy rate has a maximum of 47% and that is the rate the BCRA will target at its daily auctions for open-market-operations. Just in case, the BCRA also reduced the regulatory FX position of the banks. It is now 10% of assets; from 30%, and now computed daily; a tighter limit that reduces dollar demand and should produce about $1bn in new supply to the spot market. In all, from reaching a high of 22.4 on May 3rd the ARS/USD is trading at 21.8 on May 7th. The BCRA said that it would do whatever it takes to stabilize the market. And this time the warning comes with support from the Treasury, which promised to reduce its deficit and borrowing needs. Not much. Indeed, the main fiscal adjustment will come from higher inflation, following this instability, which will reduce real outlays while increasing nominal revenues and the nominal GDP (thus making it easier to achieve a nominal target set as a share of GDP). Nevertheless, the action shows that the macro team understands the root cause of the problem: an unsustainable fiscal position which, albeit smaller than Brazil’s, is more pressing given the shallowness of its domestic funding market.

    This week in Brazil we have data on inflation (CPI) and on retail sales.

    Thursday, May 10: Consumer Price Index (CPI)—Apr/2018. (Consensus 0.28%mom; 2.8%yoy). Inflation in Brazil has been so low it may soon approach that of the US, if US inflation does pick up, as we expect it will. What will do the COPOM when it meets next week? On the one hand, it pre-signaled a cut, looking at the trend on inflation. On the other, it intervened on the currency market to dampen FX volatility. The latter, most likely, will not influence monetary policy. The FX passthrough is low and, as we discussed above, the BRL may likely stabilize. So, on balance, the trend of lower than expected inflation should continue—even if a pickup is still expected later in the year. This points to another rate cut.

    Friday, May 11: Retail sales (IBGE)—Mar/2018. Retail sales have disappointed recently, as have, indeed, most indicators of activity. The market expects a pickup in March.
    ","articles_3_title":"


    ","articles_4_title":"

    UNITED STATES


    This week we get the advanced estimate of Q1/18 GDP. The results will disappoint (see below) but they are not a good indication of near-term prospects. On the contrary. Last week’s numbers showed strong retail sales, after a streak of three weak monthly outcomes. Real incomes are up, and wage growth strengthening, after disappointing to the downside in 2017. The Atlanta Fed wage tracker shows a stronger pace of wage growth when re-weighted to be representative of the labor force (according to a new measure launched last week). Wage growth could well rise to 3% during 2018; for the labor market is at or somewhat beyond full employment. Trend payroll gains are running above 200k, more than double the estimate of the breakeven rate. There is little evidence that supply constraints will begin to bite soon. Instead, what is likely to happen is that labor demand will drive the unemployment rate to 3.6% by end-2018 and 3.3% by end-2019, the lowest rate since the Korean War, and substantially below the estimated neutral (NAIRU) rate of 4.5%.

    Given this, not surprisingly, inflation data firmed and the year-on-year core PCE inflation rate (the one favored by the FOMC) now looks likely to round up to 2.0% in March. Moreover, the risks to inflation are now asymmetrical to the upside. Some models show a 15% probability that core inflation will be above 2.5% a year from now; and the probability rises to 30% by Q1/2020.

    All of which points to continued FOMC action. Which may help explain why Treasury yields hit decades highs last week—and the market focused on the flattening of the yield curve. Since early February the 5yr/30yr Treasury curve has declined about 27bp, dipping below 30bp, and touching its lowest level since 2007. Markets are facing, again, and perhaps for the first time since the experience of 2004-06, a bear flattener driven by monetary policy. Although some version of flattening has been going on since 2015, the current episode really kicked-off following last Labor Day (9/7/17) as improving economic data and anticipation of tax reform pressured the curve flatter. Last week, front-end yields reached their highest levels in nearly a decade. Partly this is because markets caught-up with the FOMC: They are now pricing 70bp of hikes over the coming year, vs. the FOMC’s median forecast of 100bp. This suggests that front-end yields can stabilize over the near term.

    Nevertheless, there is increasing concern that, as in the past, the flattening is a harbinger of rising recession risks. We don’t think so. Not because the risks of recession in the near-term (beyond or near the end of 2020) are not large; rather, because we see them more associated with fiscal imprudence than with “true” surprises from the FOMC; i.e., a committee that is seriously “behind the curve” and needs to rush to catch-up with inflation expectations. While the yield curve has historically been a powerful forecaster of GDP growth and recession risks, changes in the FOMC’s reaction function and a lower term premium have made the slope less informative recently. The term premium (the difference between the yield of a Treasury bond and the average expected Fed funds rate over the maturity of the bond) has been on a downward trend for the past 30 years, and its behavior during monetary tightening regimes has changed. Recent analyses show that, first, “the term premium was 100bp higher, on average, prior to the tightening cycles of the 1980s and 1990s compared with the last two tightening cycles. Second, term premium tended to increase modestly in the first months of a Fed tightening cycle 20 to 30 years ago, while over the 2004-2006 period and the current cycle, term premium actually declined following the first rate hike.” Moreover, given structural changes in the global savings-investment balances and long-term inflation expectations, there is little reason to expect term premia to increase substantially in the months ahead.

    Next week brings a wide range of economic reports. Friday’s Q1/18 employment cost index will be an important signal on wage inflation. Also, on Friday, the BEA will release its first official estimate of Q1/18 GDP. Earlier in the week, we will get March reports on new home sales, existing home sales, durable goods, trade, and inventories.

    Friday, April 27: Employment Cost Index (ECI)—Q1/18. (Consensus: 0.7%qoqsa). Various indices are reporting stronger wage growth. This is backed by disaggregated administrative data showing strong wage and salary growth since 2017. Given these developments and the continued improvement in the labor market, expectations are moving to a healthy 3% growth during 2018, as noted.

    GDP-advanced estimate—Q1/18. (Consensus 1.7%saar). A number of idiosyncratic effects, including weather, affected GDP growth negatively in Q1/18. The recovery in Q2/18 is already palpable and, barring a disastrous impact from trade wars, GDP should average 2.8%yoy in 2018, considerably above potential—thus continuing to bring down the rate of unemployment, raising wages and inflation.

    BRAZIL


    Investors were bothered, some alarmed, last week by the volatility in the BRL/US. The currency pair devalued 3% in the first three weeks of April (1.4% in the same lapse during March) reaching R$3.41 on 04/20 from R$3.31 on 04/02; and the vol increased to a standard deviation of 3.9% in the period (2.6% in the earlier comparison). Analysts were quick to point out that the underperformance was misaligned with models, unlike what happened earlier in March. In Mar/18, the drop in iron prices pushed down Brazil’s terms-of-trade. Moreover, the COPOM came out with a more dovish statement indicating that the terminal rate in the cycle may be as low as 6.25% or barely 2.25% real, given inflation expectations for yearend. This would reduce considerably the profitability of the carry-trade on the BRL.

    So, what happened in April? The first reaction is to say that is was due to politics. Indeed, the last couple of weeks have been laden with political noise; from Lula’s imprisonment (in principle, positive for the market) to the rise of the so-called “alternative” candidates in the post-Lula-jailed polls (negative for the market). The difficulty with this interpretation is that political noise has been a constant over the last months. Perhaps it increased over the last weeks, but hardly noticeably. Consider that expectations for the yearend BRL/USD rate in the central bank’s FOCUS expectations hardly moved: the median has been at R$3.30 for the last 7 weeks! More likely, therefore, the increased vol had to do with so-called “technical” factors, such as the decrease in dollar inflows from corporate issuance abroad. This may signal a rebound in the currency over the coming weeks, or not. Short-term currency moves are the hardest to predict.

    What is certain is that political noise will increase in the months ahead. The market, if anything, has been oblivious to the consequences of the October election. It believes that a market-friendly, centrist and reformist candidate, such as Geraldo Alckmin (PSDB), will win the presidency. We hope so; but worry a lot more, especially if the number of no votes or null-votes increases to top 40% of potential votes as they did, for example, in the São Paulo mayoral elections in 2016. João Dória won that election with 3m valid votes; no shows or no-votes totaled 3.1m. The presidential campaign officially starts on August 16. The unofficial pre-campaign already started but will pick after July 20 when the party conventions begin. They must end by August 15. By then all candidates must be registered to be included in the ballot. So far, there are upwards of 20 potential candidates. The buildup of coalitions could reduce that number by half—still a very fractured scenario, pregnant with possible surprises, even more so if the no-shows top 40%. Who will be in the 2nd round of the election? Conceivably it could be someone with as little as 12-15% of the potential vote. We agree with pundits that, if a centrist, reformist candidate is in the 2nd round, he/she will most likely win. However, it seems clear that, as we approach August, if the center has not emerged united behind a single candidate, volatility will increase—this time, yes, for political reasons.

    Next week we get soft data on surveys from consumers and managers in construction, industrial and services firms. We get hard data on the current account, on NPLs and on the Treasury’s primary accounts for Mar/18. We also get the unemployment data for Mar/18.

    Thursday, April 26: Treasury accounts—Mar/18. (Consensus: Primary deficit R$21.6bn). In Feb/18 the primary deficit was R$19.3bn a strong improvement from Feb/17 (R$26.3bn). In real terms, the deficit fell nearly R$8bn or 29%. Accumulated over the past 12mo, the deficit summed to R$106.2bn in Feb/18 or 1.6% of GDP. As had been the norm, the total deficit was the result of a surplus in the Treasury’s own accounts, with a large deficit in Social Security. The same pattern should repeat in Mar/18, only the surplus of the Treasury could be smaller, hence the estimate of a larger overall deficit. The target primary deficit for 2018 is R$159bn, or 2.2% of GDP, which can be easily reached. The issue is the so-called “golden rule” which forbids government borrowing to fund current expenses. Given the large deficits, borrowing is scheduled to outpace capital expenditures, including the cost of servicing the debt, even after an expected R$30bn “repayment” from BNDES. Somehow, the Treasury will have to find wiggle room for an anticipated R$25-30bn in current expenditure beyond that allowed by the rule. And the problem is much worse for 2019. Which is why, in the budget proposal for 2019, the Treasury anachronistically specified an item of expenditure which will be allowed only against specific new legislation, which would bypass the limits imposed by the golden rule.

    Friday, April 27: Unemployment rate (PNAD)ÃÆ’¢â‚¬â€Mar/18. (Consensus: 12.9%). The increase from 12.6% in Feb/18 is likely due to seasonal factors. Slowly, the unemployment rate is falling from a peak of 13.2% in mid-2016.  

    ","articles_5_title":"

    UNITED STATES


    The minutes of the FOMC’s March 21st meeting came out last week: The Committee was sanguine on growth and confident on the pickup on inflation. Of note: For the first time in this cycle it discussed the idea that sometime soon it could “move from an accommodative stance to being a neutral or restraining factor for economic activity.” The main reason? The fiscal impulse that is pushing the economy beyond full employment and into the territory of excess demand. The FOMC believes that tax cuts and increases in fiscal spending will lead to “a significant boost to output over the next few years.” Of concern are the effects on an economy already at “a high degree of resource utilization”; i.e., the fact that this time around fiscal policy is pro- and not counter-cyclical.

    These concerns were reinforced by the publication of the Congressional Budget Office (CBO) report, delayed from January to April to account for the changes introduced through three main bills: The 2017 Tax Act; the 2018 Budget; and the 2018 Consolidated Appropriations Act. The report notes: “Laws enacted since June 2017—above all, the three mentioned above—are estimated to make deficits $2.7 trillion larger than previously projected between 2018 and 2027, an effect that results from reducing revenues by $1.7 trillion (or 4%) and increasing outlays by $1.0 trillion (or 2%). The reduction in projected revenues stems primarily from the lower individual income tax rates that the tax act has put in place for much of the period. Projected outlays are higher mostly because the other two pieces of legislation will increase discretionary spending.”

    In the CBO’s estimate, changes in corporate and income taxes boosts real GDP by an average of 0.7pp over the 2018-28 period. They also contribute to increased productivity. “Growth in the supply of labor and the amount of investment, in particular, are boosted over the next few years in CBO’s forecast, as reductions in effective marginal tax rates raise the desired amounts of those inputs.” “The other two laws are estimated to increase output in the near term but dampen it over the longer term. The fiscal stimulus that they provide boosts GDP by 0.3 percent in 2018 and by 0.6 percent in 2019, in CBO’s assessment. However, the larger budget deficits that would result are estimated to reduce the resources available for private investment, lowering GDP in later years.” Bottom line: The combined effect is a 0.3pp boost to GDP in 2018 to 3%yoy; 0.6pp in 2019 to 2.9%yoy; and 0.7pp thereafter (an average of 2%yoy), if the negative impacts of the legislation don’t set in. These figures are on the high side. Most analysts expect 2.8%yoy in 2018; 2.2%yoy in 2019; and 1.5% thereafter—mainly because the desired “supply-side” effects are not likely to come.

    The growth in excess demand would call for countervailing monetary policy action, as sketched in the last FOMC’s minutes. “In CBO’s forecast, the federal funds rate reaches 2.4 percent in the fourth quarter of 2018, rises to 3.4 percent by the end of 2019, and then peaks at 4.0 percent in 2021.”

    The main point is that, much greater than the effects on growth is the impact on the fiscal deficits. “With adjustments to exclude the effects of timing shifts, this year’s deficit is projected to total 4.2% of GDP, well above last year’s level of 3.5%. … In CBO’s baseline projections, the budget deficit (adjusted to exclude shifts in timing) continues increasing after 2018, rising to 5.1% in 2022, a level exceeded only five times in the past 50 years. … Between 2022 and 2025, in CBO’s baseline, deficits remain at 5.1% before dipping at the end of the period, primarily because projected revenues increase more rapidly as many provisions of the 2017 tax act expire.” Obviously, if Congress acts to keep the cuts in the income tax, the deficits would continue to balloon. The impact on the debt is tremendous: A gain of $13trn in 10yrs, from $14.2trn at end 2017 to $27.1trn by 2018. As a share of projected GDP, the debt would grow from 76.5% to 96.2%. And, to be sure, the interest cost would increase in tandem: from 2% of GDP to 3.4% at the end of the period.

    By some estimates, the Treasury’s financing needs could strain markets. The estimated financing gap in FY2017 (the sum of the deficit and maturing debt) was $2.44trn; it could grow to $3.53trn in FY2021. Considering debt roll-overs and other sources of financing, in FY2017, the Treasury borrowed an additional $0.48trn from markets to close its financing gap. By 2021, it could be borrowing an additional $1.48trn during the fiscal year. Since Americans are not expected to increase their savings rate, the new flow would have to come either from foreigners and/or reductions in corporate savings otherwise directed to CAPEX—a clear sign of government overcrowding that would run directly against the lofty (unrealistic?) pretentions of the “supply siders”.

    Data this week should alley some of the concerns with weakness in Q1/18. After three quarters of GDP growth near 3%, growth slowed down closer to 2% in Q1/18. Much had to do with consumer weakness. The big data event this week is retail sales, a key indicator of consumption strength. We also get data on industrial and manufacturing production, and a slew of inputs from the Fed, including speeches and the publication on Wednesday of the Beige Book for Apr/18.

    Monday, April 16: Retail sales—Mar/18. (Consensus 0.4%momsa; Ex-autos 0.2%). We know that auto sales rebounded in March after three months of declines. The focus will be on the retail Control Group (0.3% vs. 0.1% in Feb/18) which excludes automobiles, building supplies and gasoline stations. It is the measure that goes into the GDP accounts. While the expectation is for a recovery in Mar/18, for the first quarter as whole, the series would be up only 1.7%saar, the weakest quarterly performance since Q3/16. Many idiosyncratic events explain the slowdown. However, most analysts see inflation-adjusted consumer spending to rebound closer to 3% over the next couple of quarters as the impact of the tax cuts begins to permeate through the economy. We agree.

    Tuesday, April 17: Industrial Production—Mar/18. (Consensus 0.3%momsa; Manufacturing 0.1%; CapU 77.9%). Expect a pause in Manufacturing, after a strong showing in Feb/18. Manufacturing output has been running at cyclical highs, and a correction would not be surprising. Heavy utility use due to the unusually cold weather should help push up the overall IP index.

    BRAZIL


    Last week’s data on retail sales was a disappointment, dropping 0.2%momsa. The CPI data was also weaker than expected: practically no headline inflation in the month and accumulating only 2.7%yoy. While this may be a credit to monetary policy, and while it may be due in part to the lingering effects of positive supply shocks, it is also an indication of weak demand. Last week’s data came after a series of other weaker than expected activity, employment, consumption, credit, and inflation data. New credit concessions to households dropped in Feb/18, notably for payroll earmarked credit (crédito consignado) which had been growing at the fastest rate. To this point, there are no indications of a recovery in mortgage credit.

    Overall, this has been the slowest post-recession recovery of the nine others dated by CODACE, the committee charged with dating economic cycles. One year after the end of the recession, GDP is only 2.2% higher than in Q4/16. Quarterly growth rates of GDP have decelerated since the second quarter of 2017. There is expectation of a rebound in Q1/18 but only to 0.5-0.7%. At this rate it is unlikely that the economy will reach the 3%yoy GDP growth target envisaged in the budget. Indeed, in the FOCUS surveys of the central bank, analysts’ forecasts for growth in 2018 have declined steadily over the last few weeks; the median forecast now is 2.8%yoy. While there has been a reduction in unemployment (to a still high 8.5% in Feb/18) much of the gain is due to a drop in the participation rate, as would-be-workers abandoned the labor force. Moreover, a large share of the gain in employment is in the informal market, where wages are lower and where uncertainty about job prospects reduces the propensity to consume. Note also that, in real terms, the gain in the real minimum wage in 2018 will be lower than in 2017.

    All of which points, indeed, to a slower recovery than first envisaged. Perhaps 2019 will be better, most likely so if a centrist political outcome supports it. For now, however, the market is focused on new data (see below). The weak patch in Q1/18 re-opens the discussion about monetary policy. The central bank had indicated that the 25bp rate reduction (to 6.25%) at its forthcoming May meeting would be the last in this cycle. It may reconsider. Or, we expect, more likely, it may begin to change the expected path of rate normalization in 2019, after a long interlude without rate changes during which the policy stance would remain highly accommodative, as it is now.

    Monday, April 16: Central Bank’s Monthly Activity Indicator—Feb/18. (Consensus 0.08%momsa; 0.8%yoyNSA). The reading for this measure, a proxy for GDP, declined in the last reading: -0.6%momsa, one of the reasons why the market brought down growth expectations for 2018. The expectation is that it will do little better in Feb/18, practically null growth. This would leave the yearly growth rate in the 12mo-moving average of the index (a better measure of the underlying GDP rate) at 1.7%yoy—recovering steadily from the recession, but perhaps too slowly to reach the 3%yoy GDP rate sought by the authorities.

    Friday, April 20: CPI/IPCA Inflation-Mid-month (IPCA-15)—Apr/18. (Consensus 0.25%mom; 2.84%yoy). Analysts expect a rebound in inflation in Apr/18 after the unexpected low readings in Mar/18. The full month in March closed at 0.09%mom and the mid-month expectation for April is 0.25%mom. The surprise in March was a continued deflation in food prices (-4.3%yoy) which brought down inflation in market/free prices to 1.3%yoy. Inflation in services, which is a better gauge of the underlying sources of inflation that the central bank targets, was 3.9%yoy. The expectation is that the deflation in food prices is waning and could show as a pickup in the headline. Nevertheless, as discussed above, the market is very attuned to the perspective of lower than forecasted inflation for the year. The median expectation in the FOCUS survey began the year at 3.85%. It is now at 3.50%.
    ","articles_6_title":"

    UNITED STATES


    The main event this week is Friday’s payroll report. Although some attenuation is likely, after February’s torrid pace, it still should be a positive reading (see below). Which will draw attention to Fed Chair’s Powell speech in Chicago about two hours after the report. The FOMC’s decision on March 21 to increase the policy rate 25bp to 1.75% was widely anticipated. It did not, however, signal a clear (or clearer) trajectory for future FOMC decisions.

    Admittedly, the new set of Fed staff forecasts, the FOMC participants’ “dot plots”, the post-meeting statement, and Powell’s statements at the Press Conference summarizing the views of the Committee, were all more bullish on the economic outlook. The “dot plots” showed that most FOMC participants now expect four hikes in 2018, up from three hikes in Jan/18. The post-meeting statement included a new and telling judgement: “The economic outlook has strengthened in recent months.” And at the press conference Powell acknowledged that, regarding the FOMC, “participants believe there will be meaningful increases in demand from the new fiscal policies for at least the next… three years”. Meanwhile, on tariffs, he noted that the participants did not see a meaningful negative impact on demand.

    Nevertheless, there is skepticism in the market. The Overnight Index Swap (OIS) implied probability of Fed-rate hikes shows a gain of only 46.84bp for the remainder of 2018, i.e., two additional hikes not three as signaled by the “dots plot”. Partly this is due to the soft-patch in Q1/18. GDP tracking measures show Q1/18 GDP growth down to as low as 2% (2.7% in the NY Fed’s estimate) from 2.9% in Q4/17. Consumer spending—the main engine of the economy—slowed, after a late-2017 surge. At its last reading, in Feb/18, real consumer spending grew 2.8%yoy—a firm level but slower than the 3%+ observed in 2017. Jan-Feb/18 were the weakest two-month performance in four years. Most likely, this effect is transitory. Confidence is high and, although inflation is rearing up, and may be behind the decline in real consumption in Jan-Feb/18, the gain in employment and wages should outstrip inflation leading to sustained gains in real income, and consumption.

    The main uncertainty, rather, is about the economy at end-2019 and into 2020; about the “meaningful increases in demand from the new fiscal policies” that Powell mentioned. There is uncertainty about the size and, importantly, about the effects. Even with a conservative estimate of fiscal multipliers at this point in the business cycle, the fiscal stimulus is likely to add around 70-100bp to growth in 2018-19 while adding $3.5 trillion to debt over the next ten years. This at a time when the economy is at full employment, with the unemployment rate expected to drop to 3.5% or less, significantly below the NAIRU. Hence, the “from headwinds to tailwinds” comment that Powell used in recent speeches. A situation where it could be difficult for the FOMC to set a policy path that prevents the fiscal boost from overheating the economy and de-anchoring inflation expectations, while also sustaining growth and employment for another five years or more. In this scenario, if the FOMC acts preemptively, the policy rate would increase not only four times in 2018 but also 2019—and could reach levels above 4%. A scenario where, instead of a desired soft-landing, the FOMC may fail to avoid a recession driven by growing macroeconomic imbalances caused by excess demand.

    Clearly, the market dismisses this scenario, at least as indicated by the low implied probability of even near-term rate hikes. Perhaps, not because it doubts that the Q1/18 slump is transitory; or that fiscal demand stimulus is for real. Rather, because it believes in a providential, quick, and robust supply-side response. The familiar (yet never documented) argument of “supply side economics”. A positive shock of lower taxes with a “pro-market” environment triggers new investment with and almost immediate (hence highly unlikely) effect of output and productivity. It may be wishful thinking but, right now, it seems to be the dominant story. Thus, the importance of statements and speeches by the FOMC to clarify where they stand. For, at the end, the FOMC may be more consequential that current bets by the market.

    Monday, April 2: ISM Manufacturing—Mar/18. (Consensus 60.0, -0.8pts). Expect some moderation from the cycle high reading in Feb/18. Even so, optimism should prevail, with readings well in expansion territory. Managers responding the survey approve the record of recent policies, even if they are unsustainable in the longer run (e.g., tax cuts); misdirected (e.g., regulatory reform); or plainly wrong and opportunistic (e.g., the recent imposition of aluminum and steel tariffs).

    Wednesday, April 4: ISM Non-Manufacturing—Mar/18. (Consensus 59.0, -0.5pts). New tariffs on aluminum and steel could impact negatively the response of managers in sectors such as transportation & warehousing and wholesale trade. Agricultural producers could also respond negatively to an environment where retaliatory action by major importers (e.g., China) is more likely.

    Friday, April 6: Non-Farm Payrolls/Unemployment—Mar/18. (Consensus 185k; unemployment Rate 4.0%). Expect some payback from February’s upward surprise. But, still, to a pace that exceeds the required to absorb new entrants into the labor force. Recent increases in labor force participation indicate that the FOMC’s policy of “lower-for-longer” did produce the desired effect. However, there is doubt about the remaining margins of cyclical slack. Likely, the participation rate will remain stable in the near term. The implication being that, with a tight labor market and continued growth in employment, the unemployment rate will continue to fall. For this report, a decline in the unemployment rate, below 4.0%, would be a surprise. But over time the unemployment rate could reach 3.5% or even lower, which should result in more noticeable wage pressures as the labor market tightens well below full employment.

    BRAZIL


    The central bank introduced last week a subtle but important change in the objective of monetary policy. The occasion was the presentation of the last Inflation Report which, from now on, will come together with a Press Conference with the governor (President) of the central bank. For years, perhaps because it was nearly always battling higher than expected inflation, the central bank affirmed its unwavering commitment to the one objective of monetary policy: restore inflation to the target. On this occasion, Governor Goldfajn noted that monetary policy must pursue, instead, a balance between inflation convergence to the target at a credible speed and maintaining a long-lasting low inflation scenario, even in the face of adverse shocks. This dual goal may seem obvious to most of us, and it is the purpose of most Inflation Targeting schemes in operation. It is novel in Brazil because inflation has been for a while below the target. Because, for the first time, the central bank is attempting to be transparent on the conditional path of future interest rate decisions—including not only the variables in its published forecasts of inflation (the paths of market expected interest rates and exchange rates) but also the elements of broader economic policy (e.g., the path of expected policy reform) that enter its decision making.

    This to buttress the central bank’s view that after a possible (likely) cut at the next COPOM meeting in May, which would bring the SELIC target rate to 6.25%, it would pause for an extended period—even if the inflation scenario continues to be benign and/or turns out to be even more benign than expected. Governor Goldfajn insinuated that, at this point, it is unlikely that the COPOM would be “frustrated about lack of continuity of needed reforms and adjustments (…) that may affect risk premiums and raise the inflation trajectory in the relevant horizon”. The onset of the political campaign and elections is already factored in. Whatever reforms could have been undertaken, and that could have reduced the real equilibrium neutral rate further, will not occur, at least not for the relevant inflation forecast periods. Thus, to “maintain a long-lasting low inflation scenario, even in the face of adverse shocks” the COPOM will look at and factor in new developments, including external developments, with the core assumptions and models it now has. The scope for structural improvements in inflation dynamics is at a standstill.

    Tuesday, April 3: Industrial Production—Feb/18. (Consensus 0.6%mom, 3.8%yoy). January saw a sudden drop in IP (-2.4%mom) that should be partly reversed in February. The culprit was an adjustment in durable goods, likely due to an adjustment in inventories. Over the cycle, durable goods is the subsector leading the recovery, a trend that should continue with, increasingly, a contribution from the capital goods subsector. The economy disappointed in Q1/18. However, it is still on track to grow at 2.5-3%yoy mainly through a cyclical pickup in underutilized capacity.
    ","articles_7_title":"

    UNITED STATES


    This will be Jerome Powell’s first FOMC as chairman. Regarding the rate decision, he made his views clear. “From headwinds to tailwinds” made—and stayed in—the headlines. The “tailwinds” theme sounds sharp, a hawkish signal. The surprise, therefore, would be if the Committee did not increase the target rate from 1.50% to 1.75%. And, barring a surprise, this being the meeting at end of the quarter, attention will focus, instead, on the new set of forecasts—and on the press conference, Powell’s first.

    The consensus view is that the median vote in the FOMC projections (SEP) will change to four rate hikes in 2018 (a total of 100bp) in the new forecast, from three previously. More hikes lead to faster “normalization” and this is what the market now expects: A final rate of 3% by Q4/19, with 3 hikes in 2019. The numbers speak for themselves. They are not, however, a statement of policy; of where and how the FOMC is directed; especially not now with new leadership. What we observe is not Powell alone but the entire FOMC “orchestra”: Chair, Directors, staffs, forecasts, working-papers, models, interviews, etc. The challenge for them will be how to transform this signal from a sound bite to a coherent message, if there is one. For us, how to read it. Does “headwinds to tailwinds” means success, at least, as seen by the Chair; the end-of-the-game with challenges overcome? Does it mean success within reach; a continuation, with the same approach (presumably, by now, well-conveyed to and understood by markets)? A simple change in pace to get to the destination in less time? Or does it, instead, signal the opposite? The need for a new approach, facing a different set of problems leaving behind the challenges of the zero-lower-bound (ZLB)?

    A key challenge in communication is that the Committee wants its messages, even forecasts, to be understood as contingent on expected outcomes, growth, inflation, and all the rest. In practice, the market understands them in terms of a timeline. A SEP table with “four hikes in 2018 and three hikes in 2019” means a robust economy in 2018, robust enough to take the four hikes. A median score of three hikes in 2019 means a more bullish (than “two hikes in 2019”) but still somewhat cautious view of 2019. It does not mean, “from a policy perspective, if we expect an overheated economy in 2020, with inflation a serious threat thereafter, the coherent policy today would be to implement four hikes in 2018”. We don’t know if that is what the FOMC wants to convey—but we believe it is plausible, and logical. Based on the forecasts we trust most, the outcomes by 2020 would be such that we would, in fact, expect four hikes in 2019, to 3.25%. And we wouldn’t be surprised if the FOMC continued to hike into 2020, to a peak rate closer to 4%. For we believe that, at current trends, the economy would be overheated in 2020, with a threat to medium-term inflation—and we think that this is the likely scenario that is shaping at the FOMC.

    An overnight rate of 4% would be restrictive—a clear indication that after (by then) 12 years of policy accommodation, the tide had turned. A 4% rate would be above the so-called neutral real rate, or r*, even though we also expect that by 2020 the FOMC’s preferred measure of inflation (the core PCE deflator) would be above its long-run target of 2%.

    The takeaway from the recent batch of data is that US economic growth still looks very firm. Yes, there is some concern with the soft patch in housing and retail sales. After last week’s data, most analysts revised down their forecasts for Q1/18 GDP. Yet they also feel confident that the US consumer—and the economy—will pick up speed in Q2, with growth accelerating to 3%pa or more in Q2-Q3 and averaging above 2% through 2020. This is appreciably faster than the potential rate of growth of the economy, even allowing for some pick up in productivity. Meanwhile, inflation is on the rise. Over the last three months the core CPI is increasing at a 3.1% annual rate, the fastest in over a decade; sequential readings including the previous 3mo are at 2.8%, the fastest pace of the expansion. Because the participation rate increased, bringing back to the labor force workers that were once thought to be unemployable, the unemployment rate has been stable at 4.1%. The FOMC has been cautious about showing too much labor market overheating in its projections, but this week it is likely to revise down its forecasts of the unemployment rate to 3.7% at end-2019. Several analysts show forecasts of 3.3-3.5% for end-2019. Whichever way you look, this is significantly below the NAIRU, even admitting, again, that estimates of the NAIRU may trend down with gains in productivity. The upshot is clear: The fiscal boost will push the economy into over-drive. An all-out trade war would stop this short, but it is not the base case scenario. Instead, we are looking at an FOMC that will be tasked, most likely, with helping engineer a slowdown of the economy.

    The question is how the Committee will signal this inflection. One way will be through changes in its forecasts. That is why most analysts expect that, when published on Wednesday, the new set will show higher GDP growth projections for 2018, 2019, and longer-run, as well as a lower unemployment path and a modest inflation overshoot in 2020. The forecasts are, however, an awkward tool. Introduced to reinforce the workings of forward guidance when the zero-lower-bound constrained policy, the SEP helped transform an unchanging (and, at the time, unchangeable) zero-policy rate into a stimulative signal. They may be the wrong tool, however, to signal a broader change in policy. They aggregate over several disparate policy views, one for each FOMC voter, some more influential than others. (The “median estimate” is a handy construct, but it may be misleading.) They are at once too explicit, rendering expected “states of the world” into a (sometimes unintended) timeline, and too vague. They don’t substitute for a carefully constructed policy proposition—built from the exchange of views within the more tightly-knitted and policy-focused Washington-based group of Directors and staff, under the leadership of the Chair. This is what Greenspan legendarily did, perhaps, to bad effect, and certainly what Bernanke did, to good effect. We now will begin to read the tea-leaves of the brew Powell makes.

    In addition to Wednesday’s meeting, there is data this week on housing and mortgages, and on durable goods orders.

    Wednesday, March 21: FOMC decision, SEP forecasts and press conference. See above.

    Friday, March 23: Durable goods orders—Feb/18 (Consensus 1.7%momsa; Ex-transportation 0.5%; Shipments-Capital goods non-defense ex-aircrafts 0.4%). Weak consumer retail and housing numbers cast a negative shadow on Q1 activity data. Not so in manufacturing, which is booming (1.1%momsa in Feb/18) with ever-higher rates of capacity utilization. Moreover, the various PMI surveys show consistently good new order numbers. This leads to optimistic forecast for durable orders.

    BRAZIL


    Earlier in the year, the COPOM gave us good reasons to expect that the policy rate could stay at 7%. Then came the Jan/18 meeting and it was clear to all that the rate would be reduced to 6.75%, possibly marking the bottom of the cycle. Now the consensus is that Committee will take the rate to 6.5%—and it may well signal another cut in May, should inflation expectations continue to fall. Over the past year, inflation consistently surprised to the downside, below the market and COPOM’s own forecasts. First it was, and is, food prices. Accumulated 12mo food inflation to Feb/18 is -2.1%. Admittedly, this effect is getting weaker (-2.3% to Jan/18 and -2.7% to Dec/17). However, even without food, looking at the core, it too fell 62bps year-to-date on the 12mo measure, to 3.2% in Feb/18.

    The macro scenario, and the steady conduct of monetary policy, help translate these idiosyncratic past trends into stable, lower inflation expectations. The global environment remains supportive. There have been recent gains in the terms-of-trade; and the outlook for capital flows and the BRL is positive. The economic recovery at home is persistent but weak. The output gap is closing, and the rate of potential output growth is barely above last yearÃÆ’¢â‚¬â„¢s sickly 1%. Nevertheless, after three years of recession, the accumulated gap in underutilized resources is vast. There still is a large mass of unemployed and underemployed workers. There are no signs of roadblocks on the supply side. Demand is insipidÃÆ’¢â‚¬â€notwithstanding large fiscal deficits. They too are narrowing, at a snailÃÆ’¢â‚¬â„¢s pace. Finally, what was once the biggest threat of all, namely, a collapse in the continuity of reforms, thus in longer-dated systemic expectations, is no longer a threat. Not because the reforms are implemented. On the contrary, because there is no hope for them at all. Right now, only an outsized political shock will destabilize systemic expectationsÃÆ’¢â‚¬â€and the market discounts heavily this possibility. It believes that, somehow, the next administration will carry-on and complete the fiscal adjustment, thus avoid the doomsday of unsustainable debt. This belief serves the COPOM well and it is not about to contradict it.  

    Wednesday, March 21: COPOM decision and press conference. See above. 

    Friday, March 23: CPI Inflation (IPCA) ÃÆ’¢â‚¬â€œ Mid month readingÃÆ’¢â‚¬â€Mar/18 (Consensus 0.12%mom; 2.83%yoy). Inflation remains well-behaved with forecasts for March month-end coming down from around 0.2% to the current low teens. Forecasts for yearend remain firmly below the inflation target, at about 3.5-3.6%yoy. 
    ","articles_8_title":"

    UNITED STATES


    No shortage of economic and financial headlines last week. Tariffs; and, of course, non-farm payrolls (NFP): 313k in Feb/18—108k above consensus, the fastest pace since July 2016, and with a surprising gain in the participation rate. Janet Yellen had been right all along. Speaking at the 2014 Kansas City Fed Conference she said,\n

    “… profound dislocations in the labor market in recent years–such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment–may cause … higher real wages [to] draw workers back into the labor force … As a consequence, tightening monetary policy as soon as inflation moves back toward 2 percent might, in this case, prevent labor markets from recovering fully and so would not be consistent with the dual mandate.”

    Which led the NY Fed’s William Dudley to say in 2015,

    “So if you can run the economy a little bit hot, and push the unemployment rate a little bit below what you think is sustainable in the long run, you might actually be able to pull those workers back into the workforce.”

    We know now that this is true—a good use of the Fed’s policy tools to prompt changes in longer-term economic behavior.

    The question on investorsÃÆ’¢â‚¬â„¢ minds was, however, is it overdone? Most investors believe that the unemployment rate will continue to drop; they agree with the consensus view that it will fall more than 1pp below its sustainable rate in 2019; meaning that the Fed will eventually need to do something it has never done before: achieve a soft landing from beyond full employment. Rising interest rates and escalating trade conflict have ended the ÃÆ’¢â‚¬Å“GoldilocksÃÆ’¢â‚¬Â environment of 2017. Have financial excesses moved the dial further and signal an oncoming blowup and recession? In this regard, arguably, the biggest headline last week was news from JP MorganÃÆ’¢â‚¬â„¢s leadership. The CNBC headline read: ÃÆ’¢â‚¬Å“JP Morgan co-president warns of ÃÆ’¢â‚¬Ëœdeep correctionÃÆ’¢â‚¬â„¢ for stocks totaling as much as 40% over next few years.ÃÆ’¢â‚¬Â 

    This, one week after the new Fed Chair, Jerome Powell, issued the new maxim: ÃÆ’¢â‚¬Å“headwinds becoming tailwindsÃÆ’¢â‚¬Â. He warned that ÃÆ’¢â‚¬Å“ÃÆ’¢â‚¬Â¦ with inÃÆ’¯Â¬â€šation under control, overheating has shown up in the form of ÃÆ’¯Â¬Ânancial excess.ÃÆ’¢â‚¬Â  

    After the financial crisis, Fed analysts, and several others, built new tools for examining, monitoring, and checking financial excess. The overall assessment is that, today, compared to long-term history, asset prices are generally ÃÆ’¢â‚¬Å“somewhere between expensive and extraordinarily expensive.ÃÆ’¢â‚¬Â Nevertheless, according to the tools, they are not yet at extreme points; i.e., financial vulnerability scores show controlled risk in the private sector, notably in housing and credit. Less vulnerability than in the years before the 2001 recession and less than in the years before the 2007-2009 recession. The implication is that the Fed is still ahead of the game. At least over the coming couple of years the US is not likely to have a textbook post-war recession in which overheating leads to high inÃÆ’¯Â¬â€šation, leading the Fed to tighten abruptly in response. The FedÃÆ’¢â‚¬â„¢s course of rate normalization will continue ÃÆ’¢â‚¬Å“at a measured paceÃÆ’¢â‚¬Â with balance sheet adjustment (i.e.: sales of slices of its stocks of Treasury and mortgage backed securities) and tightening policy elsewhere in the G3 helping to restore the term-premium in fixed-income yield curves. Stock-market ÃÆ’¢â‚¬Å“correctionsÃÆ’¢â‚¬Â, meanwhile, rarely have a broad macroeconomic impact.  

    Note, however, that by the same token, the Fed has never been able to produce a soft landing. And with mounting fiscal irresponsibility, rising deÃÆ’¯Â¬Âcits and federal government debt adding fuel to an overheating economy, macroeconomic imbalances are building up. So, the risks of a recession beyond the immediate near-term may also be building up, for other reasons.  

    The key economic releases this week are CPI on Tuesday and retail sales on Wednesday. We also have IP and consumer expectations on Friday.  

    Tuesday, March 13: CPIÃÆ’¢â‚¬â€Feb/18 (Consensus 0.1%momsa, 2.2%yoy; core 0.2%momsa, 1.8%yoy). No big headline expected, a continuation of trend with the yoy rates unchanged. There is some interest on medical care prices which had been in deflation through 2017 but are now rising. There is little doubt that prices are converging to the Fed target. The 3mo-saar was 2.90%yoy in January and its 6mo average was 2.25%. The issue is why not faster, with slow wage growth a possible explanation. Still, it would not surprise us if, at some point soon, we begin to see faster acceleration. The slope of the relationship between the level of activity (or the rate of unemployment) and prices is flat (notably when the explanatory variable is unemployment). Prices are relatively unsensitive to the tightness in labor markets. But we know from history (and from measurements across states) that the relationship is unsteady. It can change abruptly when the economy is above the level of potential outputÃÆ’¢â‚¬â€as we are at this stage. 

    Wednesday, March 14: Retail salesÃÆ’¢â‚¬â€Feb/18 (Consensus 0.4%momsa; ex-auto 0.4%; core/control 0.4%). Unexpectedly, in Jan/18 retails sales contracted on the momsa series and was flat for the core (i.e.: excluding sales of food, gas, building materials and automobiles). The point, however, is that even so, the 3mo-saar for the core series averaged 7.3%yoy, a much faster pace than its long-run average. Part of this may be an anticipation of the extra monies coming in from lower taxes. Indeed, analysts expect a strong number for Feb/18. The catch may be that delays in tax-refunds by the IRS could offset, in part, the boost from tax cuts in the month. 

    Friday, March 16: Industrial production (Consensus 0.3%; manufacturing 0.4%; capacity utilization 77.6%). The industrial, and manufacturing, recovery is well underway. Question is, will selected tariffs help or harm it? The latter is likely as downstream producers, dependent on steel and/or steel products, could be unable to compete with imports, given higher prices for inputs. The rate of capacity utilization is getting back to its long run average level, 80.3%ÃÆ’¢â‚¬â€and that means that, if tariffs donÃÆ’¢â‚¬â„¢t stop the trend, new investment (CAPEX) should continue at increasing speeds. 

    University of Michigan consumer sentiment index (preliminary)ÃÆ’¢â‚¬â€Mar/18 (Last 99.7). FebruaryÃÆ’¢â‚¬â„¢s index was, amazingly, resilient to the stock market decline. Likely, MarchÃÆ’¢â‚¬â„¢s preliminary reading will not be. Even so, strong consumer sentiment persists, notably for current conditions. This helps explain the equally strong retail sales numbers. 

    BRAZIL


    Product of accidents, tradition, and radical casuistry in the construction of precedents, the rules for political organization—electoral laws and legal instruments for dispute resolution; mechanisms for internal governance of political parties; funding practices and intra-party instruments for resource allocation; access to media; etc.—are eminently local, complex, and often haphazard if not corrupt. Nowhere less so than in Brazil where, for example, it is not only lawful but commonplace for representatives elected under one party to change affiliation to another, without penalty to their mandates. As of end-Jan/18, of the 513 federal deputies chosen in 2014, members of one of the 28 parties represented in the Lower House, 56 (11%) had changed affiliation. And more will change this month, ahead of the election in Oct/18.\n\n

    Congress voted in 2016 to amend the electoral law, and again in 2017. The 2016 reform created the so-called ÃÆ’¢â‚¬Å“janela partidÃÆ’Æ’¡riaÃÆ’¢â‚¬Â, a one-month window starting on March 7 during which deputies can, for the last time, change party affiliation before the election. At last count, 12-15 deputies will change from one party to another. Why will they change? Mainly for money. The 2017 change in the law proscribed corporate funding of political campaigns; limited private contributions; and vastly increased public funding. The public monies are distributed in proportion to the number of seats held by each party in the Lower House at the start of the Legislature. In this case, the distribution in January 2015. Accordingly, the 3 largest parties (PT, PSDB, MDB) receive 35% of the total. The next 5 parties in line receive 29%; the remaining 20 other parties, 36%. In the 2018 election, each party may spend up to R$1.5m on a candidate to the Lower House. Obviously, the larger parties have more to give. In theory, the PT could do a lot to attract; only, given its recent history, it is the party that lost the largest number of deputies. Moreover, a lot of its money will be used in legal defense fees for existing members. Likewise, the MDB is a powerhouse. However, given the electorateÃÆ’¢â‚¬â„¢s deep animosity to President Temer, it is expected to lose candidates during ÃÆ’¢â‚¬Å“the windowÃÆ’¢â‚¬Â. The medium-sized centrist parties will probably be the winners; none more so than the DEMÃÆ’¢â‚¬â€the former PFL, a right-leaning party once with strong ties to the military dictatorship but, in a re-invention, now the ideological backbone of the Temer administration, controlling the presidency of the Lower House. Indeed, some deputies may be attracted to the DEM not by money but outlook. Lacking workable candidates in some states or districts, the party may offer ambitious politicians greater electoral scope. The outcome, therefore, could be positive for the election; greater weight to a potential centrist coalition, more ideologically inclined and unified.  

    The reality, however, is that confusion reigns. The schedule does not help: Come April 7th, all potential candidatesÃÆ’¢â‚¬â€for the election of President, Governors, Senators and Deputies to the Lower HouseÃÆ’¢â‚¬â€must have defined their party of affiliation. Conventions to decide party candidates and alliances may stretch to August 5. Only by August 15, one day before the campaign officially begins, must candidacies be registered. This long interregnum is the substance for heavy-duty political bargaining. As in a poker play, at this stage, the main players prefer to hide their game. President Temer insists he will be a candidate when, most likely, he will not. Instead, likely, he will use his capital to influence the choice of who will be. His team includes some of the most experienced, shrewd, and (because in Brazil they often come together) opportunistic and corrupt politicians. They are a mighty force and are starting to build their case.  

    Speaking in New York last week, Minister Moreira Franco (MDB) made an argument for the ÃÆ’¢â‚¬Å“centristÃÆ’¢â‚¬Â position in the upcoming elections, marking a position for any future coalition. Expectedly, with outright ownership for what he ranked as ÃÆ’¢â‚¬Å“major achievementsÃÆ’¢â‚¬Â of the Temer administration; foremost, addressing excesses and mistakes of past PT administrations. The main points,  

    ÃÆ’¢â‚¬Â¢ A recognition that ÃÆ’¢â‚¬Å“voluntaristÃÆ’¢â‚¬Â fiscal policy was a disaster; that there is merit in fiscal adjustment. That the measures enacted, a ceiling on the growth of real expenditure and a reduction in discretionary spending, and proposed, a reform and rationalization of social security and a change in the tax system, are steps in the right direction. 
    ÃÆ’¢â‚¬Â¢ That these measures came with, and supported, an adjustment in monetary policy that reduced inflation and brought down real interest rates. Which, in turn, helped turnaround the economy and begin to grow employment. 
    ÃÆ’¢â‚¬Â¢ That alongside these broad macroeconomic trends, the administration dealt with the aftermath of the corruption scandals centered on Petrobras by implementing a new regime for the management of state-owned enterprises; by changing legislation in the oil and gas sectors; by designing and beginning to implement a privatization and concessions program that could radically change the electricity sector; and usher in much-needed transport infrastructure across all modes. 
    ÃÆ’¢â‚¬Â¢ That by approving in Congress measures to reduce a haphazard, inefficient, and inequitable maze of interest rate subsidies, the government aims to discipline and redirect the actions of the state-owned development banks. 

    In his view, the centrist agenda for the electorate should explicitly recognize and support these values and approaches; argue for the construction of a more rational fiscal regime; with a focus on social expenditure, poverty alleviation and, foremost, personal and property security. Cunningly, he thus tied the centrist position to support for the PresidentÃÆ’¢â‚¬â„¢s decision to intervene in the State of Rio de Janeiro for the provision of security services, including the use of the armed forces.  

    The arguments are well-known, certainly in the political realm. They go back to documents Moreira Franco produced for the FundaÃÆ’Æ’§ÃÆ’Æ’£o Ulysses GuimarÃÆ’Æ’£es, the political think-tank of the MDB: Ponte para o Futuro (2015) and Travessia Social (2016). The aim of repeating them in the particular context of a speech that served as a preamble to the campaign was to show the transition from concept to actionÃÆ’¢â‚¬â€œunder the Temer administration. Politically, to capture the agenda and slogans for the smaller centrist parties. By making explicit the link between these ideas for the future and the accomplishments of the Temer administration, it compels these parties, defined by specific interests, not broader political/policy goals, to a programmatic definitionÃÆ’¢â‚¬â€towards a coalition also in ideas and not only interests. For the larger centrist parties, the PSDB, the DEM and the PSD, whose programs are as well-developed and in the same direction as the Temer MDBÃÆ’¢â‚¬â„¢s, the aim is to make explicit the prior ownership of the program. More importantly, if a coalition happens, the aim is to give the entire centrist coalition a perspective of continuityÃÆ’¢â‚¬â€a recognition that the Temer MDB set the agenda for the new administration. The effort is aimed at spurring and cheering on the legacy of Temer and his allies. For them, the quid-pro-quo would be a bond of protection for their reputations when out of office. For their personal after-lives, when out of power.  

    Of course, this is precisely what many of the would be ÃÆ’¢â‚¬Å“coalitionersÃÆ’¢â‚¬Â fear and distrust. They are not sure that continuity with a deeply unpopular candidate is a winning strategyÃÆ’¢â‚¬â€even if they acknowledge that, programmatically, these are the right set of policies and programs to pursue. Hence, the confusion.  

    Turning to the economy, the main data this week are secondary, retail sales and IBGEÃÆ’¢â‚¬â„¢s survey of the services sector.  

    Tuesday, March 13: Retail salesÃÆ’¢â‚¬â€Jan/18 (Consensus 0.4%mom, 4.1%yoy; ÃÆ’¢â‚¬Å“ampliadoÃÆ’¢â‚¬Â 0.6%mom, 7.8%yoy). Retail sales slumped in Dec/17 and some payback is expected; likewise, for the ÃÆ’¢â‚¬Å“ampliadoÃÆ’¢â‚¬Â measure which includes vehicles and building materials. There is concern that recent numbers show a slowdown when GDP growth in 2018 is still heavily dependent on consumption expenditure, hence retail sales. Indeed, GDP data disappointed in Q4/17 and analysts are looking to affirming up of numbers in Q1/18. Thus, if anything, a bad number on Tuesday would be more consequential than a positive surprise. 

    Friday, March 16: Survey of the services sectorÃÆ’¢â‚¬â€Jan/18 (Consensus 0.9%mom). Unemployment peaked at 13.1% in mid-2017 and has been falling steadily since, absent seasonal variations. The trend should continue.The same arguments used for retail sales apply here. See above. 
    ","articles_9_title":"

    UNITED STATES


    While the jobs report is the focal point of the week, the revised/final productivity numbers for 2017 also merit attention. The dip in productivity in Q4/17 was due, likely, to the lingering impact of hurricane disruptions. Still, the main concern is the long-run trend in productivity growth, that has averaged only 0.6%yoy over the last 8 quarters. From 1955-2005, productivity growth averaged 2.2%yoy; from 1996-2005, 3.0%yoy. The expectation, and fear, is that the new trend is half as fast, about 1.1%yoy.\n\n

    The productivity slowdown begun before the crisis. It is in part due to demographics; an aging labor force and the impact of the so-called ÃÆ’¢â‚¬Å“boomers generation.ÃÆ’¢â‚¬Â The share of young workers in the labor force (23-33 years old) increased in the late 1960s and peaked around 1980. This is when the boomers entered the labor force, not only men but also women, yielding a notable rise in the participation rate, i.e.: the number of workers as a percent of the total population. They are now retiring, after accumulating considerable human capital, of note, firm-specific on-the-job training, during a period of sustained expansion in manufacturing jobs, with prevalent increases in capital-per worker, and the rapid dissemination and adoption of productivity increasing innovations. As a generation, boomers profited from an environment with rapid investment in new plants and automation; they had more or better ÃÆ’¢â‚¬Å“tools,ÃÆ’¢â‚¬Â or capital, and were able to produce more. They also acquired new skills through education and experience. They are being replaced by better educated but less skilled younger workers, less experienced and working increasingly in lower-productivity jobs in services.  

    Another, perhaps more disturbing trend, is the slowdown in total factor productivity (TFP), or the share of output not explained by the amount of inputs used in production, be they capital or labor. Though estimated as a residual from the productivity of capital and/or labor, it is best thought of as a measure of how efficiently and intensely the inputs are utilized in production. It has a lot to do with incentives and policy. For example, productivity growth was generally slow in the 1970s, largely due to a slowdown in total factor productivity, thought to be related to the unstable macroeconomic environment, price-controls, and industrial policies of the period.  

    Again, it is not the case that the great recession caused the slowdown in TFP growth. It pre-dates it, from the mid-2000s, after a decade of extraordinary growth. The slowdown may be partially due to mismeasurement, for example, in the benefits of information technology (IT). But the evidence fails to show it. Others would like to attribute it to increased regulation and/or diminished creativityÃÆ’¢â‚¬â€another hypothesis without strong empirical verification. A final hypothesis suggests that TFP growth simply returned to normal, after the exceptional decade of growth linked to IT. This is most likely. It seems that the transformative role of IT led to a sequence of one-off gains. Afterward, the exceptional growth rate ended. Extensive statistical analysis of the post-great recession record shows that, relative to the recoveries of the 1980s, 1990s, and early 2000s, cyclically adjusted productivity grew about 1ÃÆ’‚¾pp/year more slowly since 2009. About a percentage point of this is explained by the shortfall in productivity growth and about ÃÆ’‚¾pp/year is explained by a decrease in labor force participation. Other factors are small and offsetting.  

    The question is, will productivity growth re-accelerate? Some believe that the recent deregulatory environment, and especially the change in corporate taxation, will usher a new boom in investment and associated growth in TFP. Likely, it will not happen. Demographic shifts will continue to reduce hours worked per capita. Educational attainment, a central driver of growth over the past century, is stagnant, with the US falling behind international measures. Larger fiscal deficits and haphazard deregulation could, in fact, increase economic uncertainty. Of course, innovations are notoriously hard to predictÃÆ’¢â‚¬â€and a new wave of disruptive and ÃÆ’¢â‚¬Å“creatively destructiveÃÆ’¢â‚¬Â innovations may be around the corner. Nevertheless, from the perspective of monetary policyÃÆ’¢â‚¬â€and this week payrolls numbersÃÆ’¢â‚¬â€the implication is that the relevant horizon is one of low potential GDP growth, substantially below 2%pa and closer to 1.5%pa. In this context, the economy is already at full employment. Meanwhile demand is recovering from the post-crisis legacy of relative pessimism. Consumer confidence is at record highs, the savings rate is down, and, despite some lingering blockages, the credit system is pumping at near full speed. The larger concentration of incomes limits the multiplier effects, but not enough to stop the overall boom. Core inflation is firming. Add to this the cyclically misadjusted fiscal stimulus and you have reason to believe that the Fed will be proactive. We are entering, again, a period of tighter money and loser fiscal, with all its implications.  

    Monday, March 5: ISM-Non-manufacturingÃÆ’¢â‚¬â€Feb/18. The headline index fell marginally to 59.5 (-0.4pts) but remains at near-record-high levels. New orders jumped to 64.8, highest since 2005. 

    Wednesday, March 7: Labor productivity and unit labor costs (ULC)ÃÆ’¢â‚¬â€Q4/17. (Consensus, productivity -0.1%qoqsa, 1.1%yoy; ULC 2.0%qoqsa; 1.3%yoy). See above. 

    Friday, March 9 Nonfarm payrollsÃÆ’¢â‚¬â€Feb/18. (Consensus, monthly change in NFP 200k; unemployment rate 4%; labor force participation rate 62.7%; average hourly earnings 0.2%momsa, 2.8%yoy). This should be another positive report; another data point adding certainty to the FOMC decision on March 21. Wages are increasing at a faster clip than inflation that, itself, is normalizing and approaching the target. The aggregate weekly payrolls (a measure of the total wage bill of production and non-supervisory workers) is growing 4.4%yoy (12mo-average rate), a good indication of the strength of personal income, and consumption. The unemployment rate is forecasted to edge down to 4% and is set to trend lowerÃÆ’¢â‚¬â€significantly below the FedÃÆ’¢â‚¬â„¢s own estimate of the NAIRU at 4.55% and the CBOÃÆ’¢â‚¬â„¢s estimate at 4.65%. 

    BRAZIL


    Inflation is news again—because it surprises on the lower side. This week we get, on Friday, the Feb/18 reading of the IPCA index. The Bloomberg consensus sees it at 2.8%yoy; 3.7%yoy for yearend inflation. When expectations were first measured, in March 2016, this same yearend consensus stood at 5.5%yoy. The decline is persistent and backed by detailed bottom up analyses. It is not only food inflation that remains low, despite a small pickup from the huge deflationary wave of 2017. It shows up also in the measures of core inflation, numbers around 3.3-3.4%yoy. And, most tellingly, in the measure of the diffusion of inflation, the underlying degree of price pressure across all items in the index. The index was down 17%yoy in Jan/18 on the 12mo-movavg. Early in 2016 it hovered around 78, showing that about 78% of the 465 products and/or services priced for the index (the consumption basket) had some price change during the month. In Jan/18, the percentage was down to 58%, having reached a low of 42% in mid-2017.\n\n

    The expectations are credible and, barring unexpected shocks, likely, stable; a dilemma for the central bank. Its yearend inflation target is 4.5%, falling to 4% only by end-2020. Meanwhile the policy rate stands at a record-low 6.75% nominal or about 3% real, if the yearend inflation forecast materializes. By all admissions this is below the equilibrium long-run neutral rate, even accepting that this rate could have fallen somewhat over the last year as macroeconomic fundamentals improved. Thus, policy remains accommodative at a time when activity expands, possibly to a pace of about 3%pa, significantly above the rate of potential GDP growth. Conjunctural measures of potential are very low, a legacy of the 2015-2016 recession. However, even forward-looking measures place it below 2%pa.  

    Moreover, fiscal policy is essentially unadjusted, with at best a marginal decline in the expected primary deficit. Given rigidities in social security spending, it will continue to increase in real terms, all of it spent on consumption. The external scenario could become less forgiving. And the domestic political scenario, even more turbulent as we approach the Oct/18 elections. Given this, at its last meeting early last month, the COPOM signaled that a pause could be justified. Now the Committee faces a different reality. The market assigns a 75% probability to another rate cut, to 6.5%. We will see what FridayÃÆ’¢â‚¬â„¢s CPI data shows. If it confirms inflation at a pace of 3-3.5%pa, it is indeed highly probable that rate will go down.  

    Tuesday, March 6: Industrial productionÃÆ’¢â‚¬â€Jan/18. (Consensus, -2.0%mom; 5.9%yoy). Averaged over the last 12mo, IP shows a stead recovery from the trough in mid-2016. The recovery is led by consumer durables, but at this stage, all categories show positive yoy growth on this measure. The trend is persistent and likely to continue, helped by increasingly buoyant demand and the first stirrings of investment. Exports also help, notably to Argentina. US tariffs on steel could have a negative impact, albeit small. 

    Friday, March 9: CPI (IPCA) inflationÃÆ’¢â‚¬â€Feb/18. (Consensus 0.3%mom, 2.8%yoy). See above. 
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