US + Brazil Financial News (8/28)

Yellen’s remarks at Jackson Hole did not add to what we knew about monetary policy, nor whey they expected to. They did show, however, a feisty defense of the work done by the Fed in buttressing the safety of the financial system, post-crisis. President Trump may well choose to replace her, but her speech was undaunted. She firmly believes that financial regulation is essential, as it obviously is. That the rules and requirements introduced since 2008 are not only correct. They are, already, empirically significant and effective. She singled out the Volker rule for her most spirited defense. In her words, “There may be benefits to simplifying aspects of the Volcker rule, which limits proprietary trading by banking firms, and to reviewing the interaction of the enhanced supplementary leverage ratio with risk-based capital requirements. At the same time, the new regulatory framework overall has made dealers more resilient to shocks, and, in the past, distress at dealers following adverse shocks has been an important factor driving market illiquidity. As a result, any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years.” We agree and believe that, even if her mandate is terminated, the regulatory legacy of the Bernanke-Yellen years will survive.

The week is full of new data, some of the peak empirical markers of the month. The August jobs (NFP) report will be the most watched, but there is also data on Q2/17 personal consumption, including the PCE deflator, and revisions to Q2/17 GDP. Looking to Q3, there will be data on July’s personal income and consumption; on August’s manufacturing ISM, on consumer confidence, and on consumer sentiment. There are also new indicators for the housing markets, and several Fed speakers.

It was the longest recession in Brazil. Admittedly, reliable quarterly data stretches back only to 2000. Even so, the loss is staggering. According to the official data (IBGE) it started in Q2/2014 and likely ended in Q4/2016, measured by the seasonally adjusted quarter-on-quarter changes in GDP. By that measure, GDP contracted 8.6% in the period. Using a smoother measure, based on FGV’s monthly estimate of GDP, considering the average of the last 12mo over the average of the previous 12mo, the loss began in March 2014 and did not stop in December 2016. It continues to the last measurement in June 2017, accumulating -7.7% in the period. Of note, using the same metrics, investment in the period loss 28% of its initial real value. In Q1/2014 the share of investment in GDP was 20.7%. By Q1/2017 it has dropped to 15.6%, and likely it dropped further in Q2/2017.

IBGE data for Q2/2017 is due out next Friday. The consensus expects 0.1%qoqsa—a sharp deceleration from the 1.1%qoqsa observed in Q1, but still positive and thus signaling the end of the recession. The result in Q1 was due entirely to agriculture—a bumper crop with higher real prices—the accounting of which fell in the first quarter. All other items, except for exports (themselves, largely of agricultural or semi-agricultural products) had mediocre, if not negative, performances. This quarter it seems that household consumption is, finally, on the uptick—very modestly, after declining for 9 quarters and accumulating a loss of more than 10%. Partly this results from a policy measure: The release of compulsory savings funds under the so-called FGTS program. Meanwhile, investments should continue to decline—extending a drop over the last 15 quarters! For the year, we expect growth of 0.5%, in line with consensus. 2018 should be better, possibly 2-2.5% which is higher than current potential GDP variously estimated at 1-1.5%pa, at best.

 In the week, in addition to GDP, we will get the fiscal results for July. On the political front, the debate about Political Reform will continue. In a welcome outturn, a generalized uproar stopped the scandalous, self-serving proposal by leaders at the Lower House to create a public campaign fund equivalent to 0.5% of total fiscal revenues in 2018 (estimated at R$36.5bn) to help finance the elections. Because Congress must approve changes to the Electoral Law before October 10, if they are to have effect in the 2018 elections, most likely it will fail to pass any change. It is a missed opportunity. However, considering the tenor of some of the proposals, this may not be a bad outcome.