Latam Weekly: CPI Week, BCRP Cut

ECONOMIC OVERVIEW

• Colombia, Chile, Mexico, Brazil, and the US all publish September CPI figures this week. All but Brazil are expected to show a comforting deceleration in inflation that may help offset the negative mood in debt markets of the past few days.

• Chile’s print may be of greater relevance for medium-term cut bets while Colombia’s is unlikely to motivate a 75bps cut by BanRep. Hawkish comments by a Banxico official have perhaps increased anxiety regarding inflation stickiness and rate expectations, and the BCB is clearly on track for another rate hike with inflation rising to the mid-4s.

• Peru’s central bank decides on policy on Thursday, with now a 25bps cut expected following the release of weaker than expected September inflation data—in headline and core terms—that gives them the green light to (again) match the Fed’s upper limit of 5.00%. An expected inflation rebound and solid growth suggest the tone won’t be dovish, however. 

PACIFIC ALLIANCE COUNTRY UPDATES

• We assess key insights from the last week, with highlights on the main issues to watch over the coming fortnight in the Pacific Alliance countries: Chile, Mexico and Peru.

MARKET EVENTS & INDICATORS

• A comprehensive risk calendar with selected highlights for the period October 5–18 across the Pacific Alliance countries and Brazil.

Charts of the Week

ECONOMIC OVERVIEW: CPI WEEK, BCRP CUT

Juan Manuel Herrera, Senior Economist/Strategist
Scotiabank GBM
+44.207.826.5654
juanmanuel.herrera@scotiabank.com

• Colombia, Chile, Mexico, Brazil, and the US all publish September CPI figures this week. All but Brazil are expected to show a comforting deceleration in inflation that may help offset the negative mood in debt markets of the past few days.

• Chile’s print may be of greater relevance for medium-term cut bets while Colombia’s is unlikely to motivate a 75bps cut by BanRep. Hawkish comments by a Banxico official have perhaps increased anxiety regarding inflation stickiness and rate expectations, and the BCB is clearly on track for another rate hike with inflation rising to the mid-4s.

• Peru’s central bank decides on policy on Thursday, with now a 25bps cut expected following the release of weaker than expected September inflation data—in headline and core terms—that gives them the green light to (again) match the Fed’s upper limit of 5.00%. An expected inflation rebound and solid growth suggest the tone won’t be dovish, however.

It’s (mostly) all about inflation data this week, with Colombia, Chile, Mexico, Brazil, and the US all releasing September CPI data over the coming days. Across all of these countries except Brazil (where higher prints are driving BCB hikes), economists expect headline inflation to decelerate in year-on-year terms, which may provide some relief for debt markets that took a harsh hit from Friday’s strong US jobs report. On the other hand, continued upward pressure on oil prices amid geopolitical risks and China rebound optimism risks a slower deceleration in headline inflation over the coming months—if this rise in energy prices proves sustained.

Chile’s calendar is the busiest in Latam this week, with international trade, copper exports, and nominal wages figures all due for release on Monday morning, but with the market’s and economists’ attention centred on tomorrow’s CPI data. In today’s report, our team in Chile preview this week’s prices figures, forecasting a 0.28% m/m rise in headline CPI (roughly in line with the 0.26% Bloomberg median) and a similar 0.3% increase in ex-volatiles CPI. Food prices, and shelter and housing expenses (reflecting June/July electricity tariff hikes) will be behind the bulk of the increase in headline CPI. As of Friday’s close, Chilean markets were roughly pricing in a 25bps BCCh rate cut at each of its five next meetings, and it may take a large beat tomorrow (especially in ex-volatiles) for one of these to be reduced closer to toss-up odds.

Colombia’s DANE release September CPI data at 19ET on Monday, well after markets have closed and thus possibly teeing up a sharp market open on Tuesday. With little else on the local calendar this week, it will be today’s print that drives the net out/underperformance of Colombian assets this week—aside from possible political noise as President Petro and Fin Min Bonilla ready the passage of their budget by decree. Our economists project a decent deceleration in headline inflation from 6.12% to 5.79% and for core prices growth to drop to the mid-6s from about 6.8%. It’s progress but, unfortunately, it’s not fast enough progress to see BanRep cut by 75bps just yet (note that after the latest meeting, we now think officials will also opt for a 50bps in late-October, postponing the first 75bps to December).

In Mexico, the week starts with the closely-watched Citibanamex economists survey with a focus on Banxico and inflation expectations, before a quiet Tuesday and then the release of bi-weekly/full-month September CPI on Wednesday that our team previews in today’s report. In line with data for H1-Sep, economists expect that core inflation for the whole of the month will fall inside the 2–4% target range, just about at 3.94% , while headline comes in closer to the mid-4s. Given the positive mid-month data, it may be that markets react more aggressively to surprising strength in core inflation (i.e. still at a 4-handle) than they would in the other direction—especially after Banxico’s Heath’s recent hawkish comments and also the front-end selloff globally on US data. Industrial and manufacturing production data are also on tap on Friday, but should not materially move markets.

Last but not least in the Pacific Alliance, Peru’s week has ‘but’ the BCRP’s decision on Thursday, after hours. The median economist and us expect that the central bank led by Julio Velarde will lower its reference rate by 25bps to 5.00%, with the latest CPI data for September released last week surprising to the downside to allow additional easing by Peru’s central bank—to match the Fed’s upper target level of 5.00% . Maybe don’t expect a dovish message, however, as our team highlights in today’s report that September’s 1.8% inflation print likely marked the near-term low for prices growth before rebounding into year-end and as early GDP indicators for August point to another strong month for growth, somewhere between 3.5% and 4.0%. 

PACIFIC ALLIANCE COUNTRY UPDATES

Chile—We Project September CPI of 0.28% m/m (4.2% y/y)

Anibal Alarcón, Senior Economist
+56.2.2619.5465 (Chile)    
anibal.alarcon@scotiabank.cl

• We expect limited inflationary pressures in the absence of an electricity fare increase

We project September CPI of 0.28% m/m (4.2% y/y), below the Economist’s Survey projections but in line with market expectations expressed in forwards and the Traders’ Survey (0.3%). Likewise, we project that the CPI ex-volatiles would increase 0.3% m/m (3.8% y/y), due to the contribution of both its goods (+0.4% m/m) and services (0.3% m/m) components. On the other hand, we project a limited increase in volatile items (0.2% m/m), which would be mainly due to increases in food prices compensated by decreases in fuel prices.

By divisions (table 1), the main positive impacts would come from food and housing. In food, we detected price increases mainly in fresh fruits and vegetables, which would be partially offset by declines we observed in meat prices. In addition, we detect moderate increases in some dairy products and vegetable oils, which would be in line with the increases reported for international prices of these foods. We also project increases in the housing division due to the positive impact of the rise in shelter and common expenses, the latter influenced by the increase in electricity rates in June and July. On the other hand, the increase we project for prices in the clothing and footwear division would be similar to that observed in May, which occurred before CyberDay held in June.

The transportation division would have no impact on the September CPI. We detected increases in the prices of new automobiles, which would be explained by the change in the tax year for registering new vehicles. This would be more than compensated by the drop in gasoline and diesel prices that occurred at the beginning of September, whose incidence would be -0.1 ppts. To this we would add the increases we detected in international air transport fares, as well as seasonal increases in inter-urban bus transport fares.

Our projection assumes an acceleration in the inflationary diffusion of goods, while the diffusion of services would return to historical averages. Specifically, we work with an inflationary diffusion of goods (ex-volatiles) that would be above historical averages, similar to what happened during the month of May, before CyberDay.

Mexico—CPI Preview

Brian Pérez, Quant Analyst 
+52.55.5123.1221 (Mexico)
bperezgu@scotiabank.com.mx

Miguel Saldaña, Economist
+52.55.5123.1718 (Mexico)
msaldanab@scotiabank.com.mx

Next Thursday, October 9^th, inflation figures will be released, where consensus according to the Banxico Survey anticipates that headline inflation will stand at 4.68% y/y from 4.99% in August (0.14% m/m), while also anticipating that the core component will maintain its downward trend, now at 3.93% from 4.00% (0.30% m/m), which implies that the non-core component—mainly the agricultural items—will continue to fall, although there is a risk that this component may be affected in the second half of September by the recent adverse weather events throughout the country, specifically floods in some regions.

As for core inflation, it is expected to drop below the 4.0% threshold, after rounding in a 4.0%–5.0% range during the year. The deceleration is coming from goods while services remain above 5.0%, and we do not expect this trend to change in the coming months; on the contrary, we believe that some of the most relevant risks on the horizon are further tightening in services and rising wage cost pressures.

The market could take these figures as a signal for the next monetary policy moves, as the expectation right now is that Banxico will cut the rate in the November–December meeting closing the year at 10.0%, as shown in the latest surveys. For now, we do not believe that the central bank is considering larger cuts amid uncertainty regarding the inflation trajectory, exchange rate levels, and an uncertain economic environment.

Peru—BCRP Policy Rate Next Week: To Pause or Not to Pause (Hint: Not)

Guillermo Arbe, Head Economist, Peru
+51.1.211.6052 (Peru)
guillermo.arbe@scotiabank.com.pe

Earlier this week we modified our expectations regarding the BCRP policy rate decision next week. Whereas previously we expected the BCRP to maintain the reference rate at 5.25%, we now expect it to lower the rate to 5.0% (chart 1). 

The reason for the change is the following. The BCRP Inflation Report from September 20^th seemed to be signaling that there would be a pause in October. Specifically, the report and BCRP discussion of it, suggested the following: 1. The market should not expect the BCRP to be in a hurry to lower rates; 2. The reference rate was closer to its terminal level than the market was expecting.

Thus, to lower the rate in October right after having done so in September, seemed like a decision that would negate this narrative.

However, the context has shifted. The Fed’s recent decision to reduce its policy rate by 50bps, has given the BCRP space to lower its rate again without reversing the rate differential between the two.

But, more importantly, inflation numbers released on October 1^st show headline inflation declining to 1.8% in September, from 2.0% in August. Inflation is, therefore, now below the midpoint of the BCRP target range. That alone should be enough to encourage the BCRP to lower the reference rate. There is more, however. First, monthly inflation was negative, down 0.2%, and core inflation fell to 2.6%, from 2.8%, and is now comfortably inside the target range.

Timing is an issue as well. The 1.8% inflation in September is likely to be the low point in the current short-term inflation cycle. Inflation in October through December is likely to rise mildly, in line with our forecast of 2.5% inflation at the end of the year (albeit, with a downward bias). The reason for the increase is that monthly inflation was negative in October–November 2023, a situation that is not likely to be repeated in 2024 (although the negative monthly figure for September makes one wonder), see chart 2. The BCRP knows this. Therefore, even if the BCRP is in no hurry to continue lowering its rate, the path of least resistance going forward would seem to be to lower the rate to 5.0% in October, and then leave it there, unchanged, throughout the rest of the year. 

GDP Growth Continues Robust

Meanwhile, early August GDP sector data was released on October 1^st. The data was encouraging, leading us to raise our forecast for August aggregate GDP growth to 3.7% YoY, from 3.0% (chart 3).

The main reason behind the change was the surprising 8.9% YoY increase in mining GDP. This greatly surpassed our expectation of 1% growth. Copper, which had been underperforming during most of the year, was up nearly 12% in August (chart 4). 

Other sector growth figures were more in line with expectations. Fishing fell 28%, YoY, but this was inconsequential, as August is not a fishing season month. Electricity demand rose 3.1%, in line with GDP growth. Cement demand rose 0.1%, YoY. This was weak, yes, but it was also positive, which has not occurred very frequently this year. Construction GDP growth will be higher, however, as public investment rose 24%, YoY.

August, together with July, are the two months with the greatest impact of pension fund withdrawals on household consumption. In July, GDP rose 4.5%, YoY, led by domestic demand sectors, which were driven by the AFP withdrawals. We expect similar robust growth in domestic demand sectors in August, but the magnitude is unclear, which means there is a large margin of error around our 3.7% aggregate growth forecast for August.

The bottom line is that GDP growth, which was 2.8% in the January–July period, continues to trend towards our full-year forecast of 3.0%.