Oct 30

US + Brazil Financial News (10/30)

UNITED STATES  

A very busy data week ahead, with PCE data out already. The headline deflator came in on target, a high figure of 0.40%momsa—still reflecting hurricane-related seasonality. Core-PCE was only 0.10%momsa (1.30%yoy) thus below the rate that would be consistent with the Fed’s forecast for yoy inflation at end-2017. The surprise came on the other indicators of personal consumption. Spending grew 0.60%momsa in real terms or at 2.40%saar based on the 3-mo average. In part, this is post-hurricanes: a jump in the demand for consumer durables, etc. And this aseasonality is underscored by a flat real disposable income with a significant drawdown in personal savings, to a rate of only 3.1% of disposable income. Nevertheless, the rebound in consumption, taken together with other indicators of household spending, and the positive trend in homebuying and improvements, underscore the key role of positive consumer/household sentiment in sustaining the recovery.

  • Monday, October 30: PCE deflator, Personal Income, Spending – September. (Consensus: PCE deflator 0.4%momsa; Core 0.1%; Income 0.4%; Spending 0.9%; Real spending 0.5%; PCE deflator). Attention will focus on the deflator, even though the quarterly outcome is already known from the Q3 GDP report. If it comes at the consensus (0.4%momsa) it would be a positive mark, despite arguments about the lingering impact of the hurricanes. To hit the Fed’s projection for 2017 (1.5%yoy) monthly gains in the deflator must average at least 0.16%momsa through Q4/17.
  • Wednesday, November 1: ISM Manufacturing – October. (Consensus: 59.4). Surprisingly, surveys from the regional Feds strengthened in the aftermath of recent hurricanes. Indeed, the September ISM climbed to 60.8, the highest figure in over a decade of data. If the consensus is reached, the manufacturing index will remain in solidly expansionary territory, reflecting the strength of the domestic manufacturing recovery.
    FOMC Rate decision. (Consensus: No change @ 1.25% upper bound). There is no reason to expect a change in policy at this meeting. Also, few changes to the statement. Perhaps a slightly more upbeat tone on growth, post-the hurricanes. The economy is doing well, and Fed speakers have variously acknowledged it. Moreover, despite the lower-than-expected September CPI, inflation remains on the Fed’s expected cruising speed. Contrary to what the market is pricing in, the odds still are that the current Fed is comfortable with its suggested path for future rates, including a hike in Dec/2017. The question is, what will the Fed look like in December?
  • Thursday, November 2: Nonfarm Productivity & Unit Labor Costs – Q3/17 preliminary. (Consensus: Productivity 2.5%saar; ULC 0.4%). Recent hurricanes distorted data on output, thus, productivity. Output (including an accumulation of inventories) was relatively stable following the hurricanes. Meanwhile, hours worked decreased, temporarily. And, of course, a lower denominator boosts the headline figure. Recall that low productivity is the hallmark—and a bane—of this recovery, averaging only 0.75%saar growth. There is no reason to expect that a sudden structural shift took place in recent months.
  • Friday, November 3: Nonfarm Payrolls, Unemployment, Earnings, etc. – October. (Consensus: NFP 310k; Urate 4.2%; Average hourly earnings 0.2%momsa, 2.7%yoy; LFP 63.1%). After September’s dismal outcome (-33k) a rebound is likely, even more so because the impact of the hurricanes was smaller. Businesses continue to hire in anticipation of growing demand, notably for consumer goods. Household incomes remain on a solid upward trend, and consumption remains the driver of this long, albeit somewhat flat, recovery, now entering its 8th year. Moreover, as forecasters have emphasized, the pace of jobless claims fell to a 44-year low in the survey week for October’s NFP.
    ISM Non-Manufacturing – October (Consensus: 58.5). As we have repeatedly observed, growth in services have persistently spearheaded growth in this recovery, moving the ISM indicator to record highs. For example, there was a 4.5pt gain in September, to 59.8! An adjustment is expected. The underlying positive momentum remains unscathed, nonetheless. It is not only that 68% of core PCE (ex. food and energy) is spent on services. It is that, proportionately, US consumers consume more-and-more services.
    Factory Orders, Cap Goods Shipments Nondefence Ex-Aircrafts – September. (Consensus: Orders 1.2%momsa). We know that data for durables goods output was strong in the month. We also know that, in September, surveys of expectations showed strong new orders. The conclusion is that this final number should also be strong. If, in addition, we also see a strong core (Cap Goods Shipments Nondefence Ex-Aircrafts) it could be the beginnings of a turnabout in the trend of CAPEX, perhaps in anticipation of expected changes in corporate taxes.

 

BRAZIL

Out this morning are the fiscal numbers for the consolidated public sector in Sep/2017. On the positive side, there is an improvement in the primary performance. Over the last 12-months, the primary balance improved to a deficit of -2.4% of GDP, compared with -2.5% of GDP at end 2016. The nominal balance (the sum of the primary balance and interest payments) decreased to a deficit of -8.75% of GDP in September from -9.0% in December. The interest bill is lower. The 12-mo implicit interest rate on total net public debt stood at 15.0%, down from nearly 18% in Dec/2016. As a result, the 12-mo interest bill summed to the equivalent of 6.4% of GDP, compared with 6.5% in Dec/2016. It would have been even lower had net debt not expanded. But it did—a relentless climb to finance the primary deficits. The net debt to GDP ratio reached 50.9% in Sept/2017, the highest level since Aug/2004.

It is better to focus of the gross debt numbers. Admittedly, they do not net out the stock of foreign reserves which, in principle, could be used to offset the debt. In practice, however, they are not—and the net debt concept, as used by the authorities, is plagued by accounting inconsistencies. The point is that gross debt reached 74% of GDP, up from 52% in Apr/2014. In other words, over the last 3.5years, the public debt expanded by more than half a percentage point of GDP each month! Obviously, this is an unsustainable rate.

As we wrote in our comment for October 16th, because expectations for a cyclical rebound are firmer, thus for a recovery in fiscal revenues, and because we may be entering a period of lower real interest rates, the combination—higher growth, lower real interest rates, and lower cyclically-adjusted primary fiscal deficit—reduces the change in the fiscal result required to stabilize debt-to-GDP. Ultimately, this expectation, or hope, is what keeps investors holding on to the public debt. It works but the arrangement is tenuous, heavily dependent on political expectations. There was good news on this front last week. President Temer succeeded in deflecting the second and last of the charges against him that could have forced him to abandon the Presidency. Perhaps he now has the wherewithal to continue implementing reforms, most critically that of the social security regime. Most likely, he does not. If a reform is approved, it would be minimal. The crucial question remains; Will the next administration (2019-2022) continue and deepen the fiscal adjustment, enough to prevent a debt implosion?

  • Monday, October 30: Primary & Nominal Budget Balance, Public Debt – September. (Consensus: Debt (net) 50.8% GDP). See above.
  • Wednesday, November 1: Industrial Production – September. (Consensus: 0.6%mom; 3.1%yoy). IP growth continues, supporting our belief that this recovery has momentum and will continue to produce growth in 2018 at a rate above the underlying potential rate. We expect growth closer to 3%pa; the potential rate is certainly below 2%pa, most likely closer to 1%pa.
    Unemployment rate (PNAD Contínua) – September. Consensus: 12.50%). Unemployment peaked mid-year and is now on a steady march down. This, together with marginal improvements in real incomes, and the end of the household deleveraging cycle, sustain consumption—and the expansion of activity.
    COPOM Minutes. Last week, as expected, the committee decelerated the pace of rate cuts to 75bp from 100bp/meeting, bring the rate to 7.50% from 8.25% in September. The post-meeting communique was clear in suggesting that this decelerating pace would continue, now to 50bp at the December meeting, bring the rate down to 7%. What is not clear at all is what happens after that. One way to read the communique is to suppose that the same process would continue, to 25bp in Jan/2018, to 6.75%. But certain key word changes could also indicate that 7% is the rate where the COPOM would stay for the time being, perhaps through 2018. This is our interpretation. We shall have more to say after the minutes are out.

 

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.