UNITED STATES
Not much on the docket for the shortened week. The main items will be the minutes of the last FOMC, new data on durable goods orders, and the U-Michigan consumer survey. In one way or another, all will point to a strong economy with a steady if hawkish pace of monetary policy, at least as seen from current market perspective. The minutes, out on Wednesday, should add to expectations of a rate hike in the December meeting. Meanwhile, recent data point to an economy in full employment, with negligible excess capacity, and, perhaps, at the brink of a new investment cycle. The latter is the key question. The outlook for 2018 looks good: 2.5%yoy growth with lower unemployment, around 3.7%, possibly as low as 3.5%. The rate of growth is above potential and the u-rate below NAIRU. If, in addition, the proposed corporate tax rate cut is approved, without noteworthy damage to regulatory and tax policy uncertainty, a big unknown, perhaps investment will begin to respond. Yes, tax-incentives is but one of a list of preconditions for new investment, and, on balance, not the most critical. Expectations about future demand and market share head the list. And it is not clear that a change in the tax code will change that, materially. Most empirical analyses of the impact of corporate tax changes find significant results only for large regime shifts, and then, in the space of decades, not years. The most immediate impact is on profits. Yet, increased profitability is already part of the current conundrum: Larger profits have not induced faster and/or larger investment. Instead, to widespread share buybacks, higher executive compensation, M&A and, sometimes, dividend distributions. Nevertheless, it could be that this tax change produces something positive on the economy’s supply response. Clearly, this is the expectation of its proponents. For the future Fed, however, it could produce something else: A standoff between the underlying fiscal and monetary stances; having to use monetary policy against the imbalances caused by large and unsustainable fiscal deficits. For we in the market, focused on monetary policy and its dénouements, this will be the detail to follow in 2018.
On another note, the 5th round of NAFTA negotiations ends Tuesday in Mexico City. The US proposals under discussion are controversial, including regional content rules for the auto sector, dispute-resolution, and the sunset clause. The news-flow is negative. Talks could extend through Q1/18. The question is, will there be time to sign a deal ahead of the July 1 Mexican presidential election?
- Wednesday, November 22: Durable Goods—October (Consensus, Core orders 0.4%momsa). Core orders and shipments are higher in recent months, and the momentum should extend to October: the new order indexes of the regional surveys remained in expansionary territory, as did the ISM new orders index.
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U. Mich. Sentiment—November, Final (Consensus, unchanged at 98). Question is, are consumers buoyed by the tax outlook? With so much confusion, not surprisingly, surveys fail to find a clear answer. There was a 3-point drop in the U-M index in early November (first reading). On the other hand, since then, new data show job vacancies at record levels and the unemployment rate at new lows. Analysts like to point out that consumers appear to be satisfied with their financial situation. Of course, this is positive for sentiment.
BRAZIL
For the first time ever, The Ministry of Finance published a comprehensive report on the myriad of subsidies hidden in the Brazilian fiscal accounts. There are subsidies on the expenditure side (subsidized credit and other forms of financing) and on the revenue side (foregone taxes), explicit and implicit, a total of 50 accounted for. On the expenditure side, the explicit subsidies are in the form of cheaper financing for designated activities, mainly agriculture, and through Banco do Brasil (with the interest rate differential accounted for in the budget). The implicit subsidies for cheaper-than-market credit are much larger. They include all programs under the national development bank (BNDES) and under the national housing and mortgage bank (Caixa Econômica Federal). On the revenue side, subsidies include designated reductions in taxes, such as free trade zones, or simplified regimes for small-and-medium-enterprises. They also include the infamous programs of sectoral subsidies granted during the Rousseff administrations, to spur domestic sales, for example of cars and white goods. These are being phased-out. All told, subsidies summed to 6.2% of GDP in 2016, up from 3% in 2003. In 2016, credit and financing subsidies were 1.9% of GDP; revenue foregone, 4.3%. What is most relevant is the period 2010-2014 during the first Rousseff administration. In that period alone, real subsidies doubled, expanding, on average, at a rate of nearly 15%pa. What grew faster were implicit subsidies for credit operations under the BNDES: at an average annual rate of 28.4%pa. We now know what happened to them: Wasted in corruption and misguided business decisions. The reason for the publication is that, finally, the administration and the MoF are serious about measuring, controlling and designing subsidies. It is not clear they will be able to revert them quickly, but it is an important start, and in 2016 subsidies were down 18% in real terms.
- Monday, November 20: Central Bank Index of Economic Activity—September (Consensus 0.3%momsa; 1.3%yoy). Signs that the recovery is on track are ever more widespread. Data for September was positive, for example, last week’s numbers on retail sales and on output in the service sector.
- Thursday, November 23: IPCA-15 (CPI) – First half, November (Consensus 0.4%momsa; 2.9%yoy). Given a significant deflation in food prices, CPI inflation should remain low through 2017, despite rising electricity tariffs. (The national electricity regulator raised a “red flag” for hydroelectric supply in coming months, and this will lead to higher tariffs.) Indeed, core inflation (ex-food and administered prices) should be around 3.2% in 2017 and 3.0% in 2018. If the consensus forecast is right, inflation will have reached 2.6%ytd, well below the 6.4% recorded during the same time last year.
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Current Account Balance (CAB) – October (Consensus -$0.6bn). The central bank’s BoP report should confirm a much-diminished CAD, well below last year’s deficit of $3.3bn for the same month. The trade surplus will contribute positively, but the deficit on the income (mainly interest expenses) and service accounts (especially international travel and transportation expenses) will keep the current account under pressure. If the consensus forecast is right, the CAD should sum $10.1bn on a 12mo rolling sum basis; only about 0.5% of GDP. FDI is forecasted at $7.0bn in October, about $80 on a 12mo rolling sum—more than enough to finance the CAD.
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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