US + Brazil Financial News (10/9)

The Baker-Bloom-Davis index measures policy-related economic uncertainty from three types of underlying components. “One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty.” The index gained attraction (and traction among investors) in 2011, when Baker-Bloom-Davis argued that uncertainty was chocking the recovery. After peaking in Nov/16 at the time of the elections, it has since declined to about its average level since 1985. This at a time when, admittedly, the recovery is doing well, however, uncertainty about the Fed (who will lead it?) and about the budget (what will be the impact of the tax reform?) is increasing and, arguably, introducing real unpredictability to forecasts.

This week we get data on inflation and retail sales, two key components of the forecast. The controversy on inflation is endless. The NY-Fed has a measure of “underlying inflation”. Measured in yoy terms it reached a trough in Feb/16 (1.81%) and rose since, to 2.7% in Aug/17. This is of course well above the CPI or the PCE. Core CPI was at 1.7%yoy in August, 100bp below the “underlying” measure. Meanwhile, retail sales remain buoyant. In the first 8mo of 2017, retail sales growth averaged 4.2%yoy, roughly the same with or w/o motor vehicles and parts. It is decelerating along that path, notably in the “control group” that measures items used to prepare the estimates of PCE. Nevertheless, it is still forecasted to outgrow GDP. Expectedly, the measure of employment from the NFP-Establishment Survey disappointed last week, showing a standstill in job growth, mostly because of weather effects (hurricanes). The Household Survey, in contrast, was strong, with another fall in unemployment, to 4.2%. Wages/average hourly earnings were strong in Sept and wages are now up almost 3% in the last 12mo. Data from the JOLTS survey, out this week, should show a strong labor market, in full employment. Thus, on balance, as we approach the December-Fed, the same contrast persists: strong activity, expectations, and asset prices; weak inflation. It is a recipe for continued, gradual, policy rate hikes, and long-rates will be higher. On Wednesday, we get the minutes from the last FOMC.

Confidence indices are on the upswing, sustaining the momentum for the recovery. FGV’s business confidence index is up 8%yoy in Sep/17, reaching its highest value since Dec/14. The same is true for other indices, such as consumer, retail sales and industrial confidence. The picture they paint is of increasing wellbeing and optimism, despite the political maelstrom, and this is particularly the case for smaller businesses. The first impetus, in Q1, was the bumper crop and gain in terms of trade. However, in Q2 and early Q3, growth spread to other sectors. No one would have expected, after a recession that brought per-capita incomes down nearly 15% and unemployment up to 14%, but consumption is leading the recovery. This is in part due to faster than expected disinflation, with a fillip to real incomes. It is also due to a positive global environment. The combination of faster growth and still near record low interest rates is doubly advantageous for Brazil. It is also due to better policies. Notwithstanding the overwhelmingly negative political environment, there is confidence in the economic team. And the administration was capable to move forward on several important items, including reforms that sped up deleveraging and the recovery of credit. Analysts are revising up their forecasts. The central bank’s latest survey of expectations shows 2017 GDP growth at 0.7%; 2.4% for 2018. Meanwhile, the CAD shows a sharp contraction this year (to $15bn or 0.7% of GDP) with a modest expansion next year (to $31bn or 1.6% of GDP) given the pickup in imports. In either case, FDI inflows vastly overfund the gap. Employment begins to grow and inflation is, and likely will remain low, below the midpoint of the target. All in, a goldilocks scenario, were it not for the fiscal deterioration and the upheaval of next year’s election.