US + Brazil Financial News (9/11)

There is considerable uncertainty about the impact of the last two major hurricanes on the economy. The tragedy on individuals and families may take years to heal, and economic statistics silence and miss the suffering. What forecasters know is that major natural disasters cause temporary slowdowns in most major growth indicators. There are large declines in economic activity, but also sharper subsequent rebounds. The emerging consensus is that the twin hurricanes could reduce Q3/17 GDP growth by as much as 1 percentage point. Q3/17 GDP tracking estimates are down by 0.6-0.8pp to around +2.0%. Conversely, given the recovery effort, growth in the following two-to-three quarters should be somewhat stronger than previously expected; perhaps as much as 0.2-0.4pp in Q4/17-Q2/18. On balance 2017 growth could be marginally down (to 2.3%) and 2018, up (to 2.6%). In the event, the impact on monetary policy is likely to be small. However, this, low inflation, and pending departures from the FOMC (with Stanley Fischer gone in October, four of the seven Fed-Board chairs will be vacant) make a hike in December harder to deliver.

 The week is full of new data. On Thursday, we get August’s reading of the CPI. Possibly, part of the impact of Hurricane Harvey (last week of the month) could be present, with a blip up on the index. Otherwise, the long-run story of subdued inflation should continue. Producer prices are down in the year and the by-now stale (but still relevant) finding is that wage pressure is small and absent from current inflation. On Friday, August retail sales, and consumption is still the driver of growth. In between, we get new data on the job market (JOLTS report) and IP for August.

• Tuesday, September 12: July JOLTS Job Openings (consensus +5975k change in the month, SA). JOLTS data for June showed a surge in job openings and vacancies. The level of openings was the highest since the BLS began collecting data in 2000. And the payroll print for July was strong (189k after revisions). Thus, the level of openings should remain high, with H2/17 larger than in the first half. The quit rate is stable at a very favorable level: workers are confident and consumer surveys show record satisfaction with employment and personal finances. All reasons why the FOMC believes that the economy is at full employment. This reading should not contradict this view.

• Tuesday, September 14: August Consumer Price Index (consensus 0.3%momsa; 1.7%yoy); Core CPI Index (consensus 0.2%momsa; 1.7%yoy). Hurricane Harvey will have some impact via energy prices (seasonally-adjusted gasoline prices rose 5% in August, due to the late-month price surge). Food and commodities ex-food drive down the index. Inflation for food at home is running at 0.3%yoy; commodities ex-food & energy,  -0.6%yoy. Services (ex-energy services) is what drives it up (+2.5%yoy) together with housing (+2.8%yoy). Despite the hurricanes-related disruptions, this broad picture should continue in the months ahead. Considering their remarks last week, it is obvious that FOMC members worry about the continued undershooting of their inflation objective. They do not have, however, a simple explanation for it. For example, St. Louis’ Bullard (a voter) wrote last week: “In my view, …low unemployment readings do not appear to be an indicator of substantially higher inflation to come … Inflation expectations, for instance, are probably a more important determinant of inflation outcomes than unemployment … For monetary policy purposes, we should not base our notions of what will happen with inflation solely on ideas related to low unemployment. While we certainly want to keep an eye on inflation readings, there seems to be no strong case for being pre-emptive with respect to inflation simply because the unemployment rate is low.” The NY-Fed’s forecast model, revised in August, forecasts Core CPI inflation of 1.5% in 2017 and 1.3% in 2018. These are low-ball estimates and likely off the mark. They are indicative, nonetheless.

• Friday, September 15: August Retail Sales (consensus 0.1%momsa; 3.8%yoy); Control group (consensus 0.2% momsa; 3.6%yoy). Retail feels first the impact of natural disasters. Among other things, August retail sales will hurt from a decline in auto sales: Lost selling days at the end of the month (Harvey). September sales should suffer a similar effect (Irma).  Rebuilding activity should lift the October index, as well as subsequent months. Consumption is driving the economy: up to July, core retail sales (excluding restaurant & bars, autos, food & beverage, and gasoline) was growing at 8.1%saar based on its average monthly performance in 2017.

August Industrial Production (consensus 0.1%momsa; 2.0%yoy). Manufacturing production turned upwards in Oct/16 and has not stopped since. Although growing at a slower clip than total IP it should contribute positively to a good performance in August, offset by softer utility and mining activity, resulting from Hurricane Harvey.

Politics will dominate again. Last week, not one but two well-regarded political commentators spontaneously reached back to Garcia Marquez’s “magical realism” to describe what was happening in Brazil: “Surrealism runs through the streets.” This after the incredulous but verified recording of a drunken conversation between Joesley Batista and his second-in-command where, in-between the vilest comments, they boasted of “taking down the Presidency and the Judiciary,” after “Odebrecht took down the Legislative.” After the mid-boggling find of R$57bn in cash hidden away in an apartment connected with Temer’s once chief-of-staff, and long-standing confidence person, Geddel Vieira Lima, the product of unimageable bribes. The quantity of cash, in relatively small denomination bills, was so large that it took more than 18hrs to count it! After Lula and other PT luminaries were indicted for the third time in masterminding wholesale corruption. After his once-trusted advisor, minister, and über-strategist, Antonio Palocci, denounced him as the architect and chief instigator behind the draining operations at Petrobras. Fiction became reality. The after-effects will come this week. The Supreme Court rescinded the plea-bargaining agreement with Joesley Batista & Co. and they are now in prison. Meanwhile, the man responsible for it, and sitting at the top of the entire Lava-Jato undertaking, Rodrigo Janot, the country’s General Prosecutor, leaves office this week. The demise of Joesley Batista and Janot’s leaving are seen as positives for Temer, hence for the market. It is a myopic, short-sighted view. Political instability only increased and yet Congress faces a daunting agenda. Before leaving Janot is almost certain to indict, again, Temer. The Political Reform must be approved to minimally reign-in potential chaos ahead of the 2018 elections. The 2018 fiscal program is in shambles and Congress has yet to consider it.

 Against this drama, the economic data to be released may seem pale but it is, nonetheless, relevant. Tomorrow we have July’s retail sales and, more importantly, the minutes of last week’s COPOM meeting. On Wednesday, IBGE’s survey of the services economy for July. On Thursday, the central bank’s monthly activity indicator for July.