US + Brazil Financial News (10/16)

Data and events last week did not change expectations for a December Fed hike. The impasse continued, nonetheless, between weak inflation with a strong economy. The FOMC dismissed lasting impacts from recent natural disasters. In their view, the outlook remains firm and upbeat. There was a lengthy discussion about inflation. Nothing that changes the view that, by 2019, inflation will be at the target; that, given the lags, it calls for immediate policy action. The highlight of last week’s data was the weakness in core goods inflation: A reduction of 0.2%mom; -1.0%yoy, the lowest since Aug/2004. The core goods vs. USD disconnect continues as secular stories dominate. Meanwhile, the upbeat retail sales report led to higher Q3/GDP trackings, now at 3%saar or more. With wage growth in the 2¾-3% range the pace of disposable income growth seems firm, on track for yet another quarter of consumption-led growth. By some estimates the pace is close to the longer-run equilibrium, assuming a 2% inflation trend and productivity growth of 1-1¼%. It suggests, therefore, that the labor market is at, or close to, full employment.

No major data releases are scheduled for the week. Of relevance, industrial production and speeches by Yellen. Perhaps, more critically, the outcome of NAFTA negotiations. As reported, they are not going well. A press conference is scheduled for Tuesday. (This is not, however, the final round. Three are three more before a conclusion in December.)

Expectations for a cyclical rebound are firmer. They suggest a range of 3-4%pa in 2018-20, well above the rate of potential growth, variously estimated at 2%pa or less. With this, revisions for growth in fiscal revenues are on the positive side. We should get confirmation sometime this week, with the reading for Sep/2017. There is also a growing consensus that the last cycle caused a 1.5pp of GDP equivalent transitory increase in the fiscal deficit, mainly because of the revenue effect. This means that the current “running rate” of the fiscal deficit is not the observed 2.6% of GDP but 1.1% of GDP. Moreover, we are entering a period of lower real interest rates, perhaps a regime shift if current policies remain. It could push down the real rate, cyclically, to about 3-3.5%pa. The combination—cyclical growth of 3-4%pa; cyclical real interest rates of 3-3.5%pa; cyclically-adjusted deficit of 1.1% of GDP—drastically reduces the change in the fiscal result required to begin to stabilize the ratio of Debt-to-GDP. It seems more doable, especially with the help of the new ceiling on the growth of real public expenditures, which could be limiting already in 2019. This, together with expectations of a stable real exchange rate, and of inflation at the target, helps explain the widespread optimism of fixed-income investors—amply on display at the investors’ meetings in Washington DC last week.

Also in Brazil, there are few relevant indicators this week, other than the already mentioned result for fiscal revenue in Sep/2017. We get new data for the central bank’s measure of monthly GDP, and the mid-month reading of CPI inflation. Attention will focus on a vote in the Lower-House: To indict the President for corruption and mismanagement. He is expected to win this fight, the second in succession.