UNITED STATES
In a short week, we’ll have two key indicators ahead of the June 14 FMOC meeting, where we expect a 25bp increase in the IORR (the interest rate paid on required reserves) to 1.25%.
(Tuesday, May 30) The core PCE deflator for April
Expect 0.1%momsa, reversing last month’s deflation and bringing the YoY rate to 1.5%. Admittedly, the running rate on this, the FMOC’s preferred measure of inflation, is substantially below the 2% target. Nevertheless, at its last meeting, the committee largely dismissed the slowdown in March; “most” members viewed it as primarily a transitory phenomenon and only a “few” expressed concern about missing further on the inflation mandate. Only another negative surprise (i.e., another momsa deflation) would cause markets to think a June hike is off the table, on this account.
(Friday, June 2) May-2017 non-farm payrolls
The consensus is for a slowdown in hiring to 185k, with a steady rate of unemployment at 4.4%, also, underemployment, at 8.6%. Possibly, the participation rate edged back up to 63%. Earnings could accelerate mildly, to a 2.6%yoy rate, with steady hours worked. This would bring the nominal increase in payrolls (wage bill) to 5.3-5.4%yoy, a very healthy rate. Indeed, all indicators of the labor market continue to point at full employment, with the risk of labor market overheating.
The FMOC will act in June to pursue its goal of bringing the policy rate back to neutral territory within the next two years, hopefully well ahead of the next downturn. Previously, we were considering that it could even do two further hikes in September and December. However, we now think that the FMOC may pause in September. The May minutes, and subsequent Fed-talk, suggest that, in September, the FMOC will announce the start of tapering, i.e., a change in their reinvestment policy.
Given the Committee’s concerns about a subsequent over-tightening of financial conditions once the process of reinvestment tapering begins, it is unlikely that the Fed will raise the fed funds rate at the same meeting when they announce a change in reinvestment policy.
Personal Income and House Prices (05/30) & the ISM-Manufacturing (06/01)
We do not expect a change in trend in any of these indicators.
BRAZIL
Political developments will continue to dominate newscasts and sentiment. And, now, both S&P and Moody’s have a negative watch. On the economy, two critical benchmarks for the week:
We expect the committee to reduce the policy rate 100bp to 10.25%, maintaining the pace of cuts set at the last meeting. There were expectations of a larger cut, but that was before the political bombshell of May 18th. Conditions for a rate cut are ample: The disinflationary process endures, helped last week by a cut in gasoline prices and by an expected reduction in electricity tariffs, given a change in supply conditions for water reservoirs from “yellow” to “green.” Wholesale prices continue to signal deflation in the price of inputs. Activity, meanwhile, remains weak (see below) and may take another blow from the current political stability, if it persists. Even with very low potential growth, the output gap is sizeable.
Thus, the issue for the COPOM is how fast to implement an expected budget of rate cuts that, before the crisis, was possibly in the range of 650-700bp starting from the 14.25% rate in Sep/2016. Given current volatility, and pending the effect of the exchange rate pass-through, this budget may be smaller now, yet still in the order of at least 600bp, of which only half are in place. The market is now expecting an end-rate of 8.25%, which, with a reduced inflation target of 4% would leave the policy rate at slightly above neutral. But, then, the target may stay at 4.50%—if volatility persists—and, in this case, the real rate would be at about neutral (i.e., close to 3.50%).
What I don’t expect is the COPOM to try to undershoot, on the argument that the degree of slack in the economy is large and persistent. This may be the case; probably it is. But there are two strong arguments against undershooting. First, the growth potential in the short-term is very low, and now lower still, given that an uptick in investment will not happen. Second, and more important, it would be risky to have an active monetary policy ahead of the elections in Oct/2018. Whatever rate the COPOM settles on at the end of this cutting cycle, it better be a rate it can live with through 2018.
(Thursday, June 1) GDP-Q1/2017
The market expects 1%qoq, interrupting a sequence of eight negative quarterly readings, and reducing the YoY change to -0.5% from -2.5% in the previous quarter. We have argued that Q1 would be the turning point of the recession, and this reading should confirm it. The main contribution will be from agriculture (expect something close to 10%yoy) which, likely, will contribute to 70% of the growth. Industry should show positive quarterly growth, finally, in the range of 0.7%qoq, with a smaller growth in services, 0.5%qoq. The problem is that this positive reading could stop already in Q2. Not only will agriculture slowdown, but, on the demand side, investment will surely reflect the political uncertainty.
Other indicators for the week will be Unemployment (5/31) and Industrial Production (6/2)
IP likely was stable in April momsa, accumulating a 5.5-6% drop in the YoY comparison. Unemployment in April, certainly, will increase: close to 14%. Unemployment is a lagging indicator of the recession and we don’t expect a downturn until well into 2018, possibly in the second-half.
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.
Comments are closed.