US + Brazil Financial News (9/04)

So, last week’s NFP disappointed. Not only the headline (156k). There were downward revisions to previous months; unemployment increased a notch to 4.4%; and average hourly earnings increased only +0.1%momsa (2.5%yoy). For all this, the report says little about the labor market, which continues in full employment. 156k is more than enough to absorb new entrants into the labor force, and the variation in the unemployment rate is insignificant. It says little about the broader economy that showed vibrant growth in Q2/17, revised up to 3%saar. (The aftermath of Hurricane Harvey may disrupt the seasonality of growth in the quarters ahead, yet, even so, the economy is likely to grow 2.7-2.8% in Q3-Q4/17.) And it adds little to what we know about the outlook for monetary policy. In this regard, the most relevant events this week are several speeches by Fed-speakers, starting tomorrow morning with Leal Brainard. Minneapolis’ Kashkari speaks in the afternoon, and Dallas’ Kaplan, in the evening. Dudley speaks on Thursday and Philly’s Harker on Friday.  Brainard is more relevant for being a close follower of Yellen than for her own independent thoughts. Kashkari focuses on financial issues and could say something about the interplay of balance sheet adjustment and financial conditions. Otherwise, his view is that the FOMC should not increase rates until core PCE-inflation is at 2%, which may not happen until mid-to-late next year. Kaplan’s recent speeches, on the contrary, do not rule out rate hikes in 2017. Dudley’s talk is likely to be the most relevant, coming as it does, at the end of the week. He was one of the first to argue for the “two-track” strategy of balance sheet adjustment (financial conditions) with continued rate hikes (real economy). Lately, however, he took a more dovish view, impressed by the low inflation numbers. In the event, our view continues to be that the FOMC will announce tapering in September, with a hike in December.

The central government posted a R$20.2bn primary deficit in July; R$183.7bn (2.7% of GDP) in the last 12mo. The result repeats the same story: budget cuts fail to offset increases in mandatory spending and the decline in revenues. YTD, the deficit is constant, in real terms, to that observed in 2016 (if we exclude atypical once-off expenditures from the comparison)—and, remember, in 2016 the primary deficit was 2.9% of GDP. In July, with an unexpected drop, revenues were not enough to pay the subset of constitutionally-mandated expenditures, such as social security. The MoF has been unable to stop growth in real expenditure. Not for lack of trying! YTD, social security expenditures are up 6.9%yoy in real terms; payments for the civil service, 10.9%. The MoF slashed impiously all non-mandated expenditure. Investments, for example, are down 48%yoy. Even so, the fall in revenues, and relentless growth in mandated expenditures, renders these efforts insufficient. Likely, the central government will meet the just-revised 2017 target for the deficit, R$159bn. But that depends on income from extraordinary revenues, such as privatization proceeds. Without them, the deficit is running at R$230bn and there is only room for about R$20-30bn in additional expenditure cuts. The outlook for 2018 is even more difficult, despite the upward revision in the deficit target, also to R$159bn. The MoF has not yet sent the final 2018 budget (LOA) to Congress, for approval. The bottom line, of course, is that there is no end in sight to the upward climb in the Debt/GDP ratio. The good news last week came from the real side. GDP growth in Q2/17 was faster than anticipated: 0.2%qoqsa (0.3%yoy). This puts to rest fears of a return to recession and suggests that the economy is in slow but sustained recovery. Especially positive was the indication that private consumption started to recover. Nevertheless, even with an upward bias, growth in the years ahead will not be fast enough to neutralize the impact of large fiscal deficits in the escalation of the Debt/GDP ratio.