US + Brazil Financial News (8/14)

• Tuesday, August 15: Retail sales, July (consensus +0.4%momsa); core retail sales, July (consensus +0.4%momsa). Core retail sales are the most important data point of the week. They decelerated in May-June, sowing doubt about the above 2%pa path for the remainder of the year. Nevertheless, most forecasters expect consumption to rebound: Real income growth is steady (in large part because inflation is lower than anticipated) and there is no indication that household savings will increase. Consumption should continue to underpin overall growth in 2H/17.

• Thursday, August 17: Philadelphia Fed manufacturing index, August (consensus +18.5, last +19.5). The Philly index is the most watched survey because, historically, it best correlates with actual future IP. The index climbed to a cycle high in May and could continue to soften, gently. Conditions may have deteriorated in recent months, but continue to imply a positive pace of production. Focus on the new orders index, which collapsed to a 2.1 reading in July from 25.9 prior.Industrial production, July (consensus +0.3%momsa). Manufacturing production (consensus +0.3%momsa). July’s NFP report showed growth in manufacturing employment and this, together with positive indicators from utilities, support a positive performance for both overall IP and manufacturing in the month.

• Friday, August 18: University of Michigan consumer sentiment, August (consensus 94.0, last 93.4). The index declined in June-July following a rebound in May and a cyclical peak in January. Analysts believe that negative political sentiment caused the down readings. While those persist, higher frequency consumer surveys and decent stock market performance over the last two weeks suggest a rebound.

BRAZIL

Today we should get revised fiscal targets for 2018, possibly also for 2017. In the first half of 2017, the primary deficit of the central government (inc. Social Security) was R$56bi against a yearend target of R$139bn. It may not look bad, but it is. The 12mo sum of the deficit to June was R$182.8bn, or 2.8% of GDP. The target for yearend is to reach the R$139bn, or 2.1% of GDP. The increase in the real deficit is due to the uncoupling of the trends between revenues and expenditures. There was a reduction in real expenditure. However, while real revenues are down 3.1%yoy, expenditure fell 0.8%yoy. The main culprit is social security. In real terms, expenditure on social security benefits increased 7.6%yoy in the 12mo to Jun/2017. Drastic cutbacks elsewhere are not enough to compensate. And the MoF is running against the limit of what it can cut. “Non-obligatory expenditures” are down 37%yoy in real terms; investments, 51%; defense spending, 42.5%. Moreover, even after the additional R$10bn expected from the taxes announced in the last couple of weeks, revenues may disappoint. The Treasury is counting on R$28bn from the sale of new concessions, R$11bn alone from CEMIG, a utility company in Minas Gerais. The money may not come in, not in time for this year’s budget. Thus, despite best efforts, the government must return to Congress to get an approval for a larger deficit target. At this point, it looks like the 2017 primary deficit will be about as large as last year’s—2.5% of GDP. Given lower interest rates, the interest bill on the public debt will be smaller, less than 5% of GDP. Nevertheless, the debt dynamics are bad. By yearend gross debt will be about 76-77% of GDP, 20pp up from the ratio at end 2014, and on an unsustainable
upward spiral.

The government’s proposal is to revise up the 2017 primary target to R$159bn, the same size in nominal terms as in 2016. It plans, also, to keep this target in 2018. Under current law (LDO) the target for 2018 is $129bn. Because inflation in June was 3%yoy, a surprisingly low outcome, there was the expectation that 2018 would be a first test for the so-called New Fiscal Regime (NFR) created by the constitutional reform of December 2016, and which, for 10-years, sets a ceiling to the growth of real primary expenditures. This is a misunderstanding. The ceiling the NFR refers to is not last year’s expenditure but “real” expenditure realized in 2016, with some exclusions. 2016 was a year with an extraordinary increase in expenditure. Thus, it happens that, for several years to come, the ceiling is not binding. There is another binding rule: The ceiling set by the rolling multi-year budget (LDO) that Congress must approve in accordance to the Fiscal Responsibility Law, and which aims to keep/bring the debt/GDP ratio in/to a sustainable path. It stipulates a primary deficit target of 1.8% of GDP in 2018. This is what now needs to change. The test will be to see if, in setting for itself a wider limit on the deficit, the government also takes back the increase in civil service pay promised for 2018 and which could add as much as 0.5-0.6% of GDP to expenditure.

On economic activity, the key releases for the week will be June’s retail sales (Wednesday) and the Service Sector Survey (PMS) on the following day, two important indicators for 2Q17 GDP forecast. On Friday, the central bank publishes it monthly GDP indicator for June.