UNITED STATES
On the data front, the main indicator this week is CPI inflation—and although the market expects a relatively high number (0.2%momsa to 1.8%yoy) no one will cry if it disappoints, as it has for the last four months. The Fed seems to have taken this already into account. In fact, only a surprise to the upside would be a real surprise. We will also have new labor market data: The JOLTS series, which brings relevant information about how confident workers are to quit jobs. They more confident they are, the more likely it is that the job market is at or beyond full-employment. Recall that NFP increased by 209k in July – 29k above consensus forecasts and higher than the prior three-month average of 194k. The unemployment rate edged down, and earnings increased at a faster rate than expected. The labor market is hot, but still controversial. For one, productivity remains low—and this week brings a new reading, the first for Q2/17, together with unit labor costs. There will be data on wholesale prices, and several Fed speakers.
- Friday, August 11: CPI, July (Headline consensus +0.2%momsa; 1.8%yoy – Core consensus +0.2%momsa; 1.7%yoy). Readings back to March are weak, below expectations. First dismissed as transitory (largely related to cell phone contracts and prescription drugs) they proved to be pervasive. Core goods prices remain in outright deflation. Core services prices decelerated to the slowest growth rate in two-years. And, not surprisingly, some at the FOMC are worried. Nevertheless, it would have to be a big miss down for the Board to express formal concern. Continue to expect an announcement of tapering in September and a rate hike in December.
BRAZIL
The market will remain focused on politics. After the Lower House absolved Temer, in a show of force of the recomposed albeit diminished ruling coalition, the government resumed discussions on the reform agenda. Its aim is to approve Social Security reform this year; in practice, by end-October. Also, the reform of the system of government subsidized interest rates. A final vote on this reform may happen in August. Congress, however, has a different agenda. First, urgent agreement on the 2018 budget, including a by now inevitable revision of the 2017 targets. This must happen in August. Second, political reform. It must be law on or before October 7th, one-year ahead of next year’s election. Without it, campaign financing is undefined (inexistent?). And the political class wants—and should—change some of the rules; e.g., (a) the geography of the vote for the Lower House, from state-wide to district-based voting; (b) a minimum threshold of votes required for the establishment and/or continued operation of a political party with access to government funding; (c) more power to the national party leadership in the allocation of campaign money distributed by the government.
On the data side, the only relevant indicator is CPI inflation, on Wednesday. Other data include, the July indices of traffic of heavy vehicles on toll roads (ABCR) and of paper & cardboard sold (ABPO); both used as inputs into the coincident index for industrial production. IBGE will release its monthly update of agricultural output, on Thursday.
- Wednesday, August 9: July IPCA consumer inflation (0.2%mom; 2.6%yoy, from 3.0% in June). Housing costs will shoot up, the result of higher electricity tariffs. Transportation, healthcare and personal expenses likewise, to a lesser degree. Food prices will drop, however, as should services inflation, driven by the recession. The undershooting of the target (4.5% for 2017) is a welcome novelty, and it could well last until yearend. Nevertheless, inflation should reaccelerate into 2018. Driving it faster will be, likely, higher regulated prices (e.g., electricity tariffs, gasoline and alcohol—the latter driven up in part by higher taxes) the end of the positive shock to food prices and, yes, some accommodation in demand. The question for the COPOM is whether to look to inflation as it may be in 2019. Alternatively, to focus on the shorter-term; hence, to cut more radically its policy rate. It is confusing, in part because no one is certain about where is the neutral rate. In the event, we are still some months away from the end of the cycle. And the inflation data in July should continue to support expectations of another 100bp cut at the next COPOM meeting, in September.
IMPORTANT NOTICES:
This report is a general discussion of certain economic and geopolitical trends and forecasts. It does not constitute investment advice of any kind or constitute a recommendation to buy or sell any security or other financial instrument. Investors may not rely upon any of the conclusions or other statements contained herein.
Certain of the factual information contained herein was obtained from third party sources which the author considers reliable, but the accuracy of such information cannot be guaranteed.
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