While Peru maintains a high growth rate (above expectations), in Brazil the data for 2Q10 shows that the economy continues growing at a high pace, though lower than 1Q10. The Central Bank of Brazil kept its policy rate at 10.75%. There was a setback to confidence among manufacturers in Mexico as a result of worse news about the US, while consumer confidence remained stable. In Peru, consumers’ confidence dropped to neutral levels due to concerns about inflation. In Argentina and Mexico, tax revenues have been boosted by value added tax. Unemployment has increased in Colombia, signaling a weakening of the labor market, while in Chile it fell, supported by the strong growth of economic activity and employment.
Perceptions of global risk are having a negative effect on financial markets, but this depends on the degree of exposure to the global cycle and local factors.
There is a positive differential in the currencies of Brazil and Chile, relative stability in the case of Colombia, Peru and Argentina, and a negative differential in the Mexican peso. The prospects for higher growth in the region with respect to other parts of the world have led to stock markets performing relatively better.
Markets
Global risk premium remains the main determinant of currencies in the region. A positive differential can be seen in the BRL and CLP, relative stability in the COP, PEN and ARS, and a negative differential in the MXN
Last week Latin American currencies were once more subject to movements in global risk, which fell at the close on positive manufacturing and employment results in the U.S. In this global context, we continue to divide the crosses into different groups based on particular factors in domestic markets. In the first group are the BRL and CLP, with a positive differential, which in our opinion could increase in the short term. In the case of the BRL this is due to optimism with respect to the Petrobras issue on the Bovespa Exchange. In the case of the CLP, there is a local environment of positive expectations for economic activity and outstanding performance of copper prices (boosted by positive manufacturing data from China).
In the second group are the COP, PEN and ARS, which will continue relatively stable, as they are governed by the degree of intervention by the monetary authorities. In the case of the PEN, in addition to the dollar purchases by the Central Bank there have been measures affecting bank reserves, resulting in a negative profile in the NDF curve which should not be sustainable for a long period of time. Any rise in the COP will depend on more than verbal interventions. Finally, the MXN continues with its negative differential resulting from its greater exposure to the U.S. cycle. The current levels of this cross are attractive for long-term positions.
The growth differential in the region has led to Latin American stock markets performing slightly better than those in developed countries.
In a context dominated by the movement of the risk premium, we consider that the relative performance of the stock markets in the region will continue to be favorable with respect to other developed economies. The agreement this week between Petrobras and the Brazilian government on the transfer of oil in exchange for shares helped in Brazil. The deal clarifies the circumstances, although the price set for the exchange was higher than expected by analysts, it marks the start of the process of the company's capital increase planned for this month.
Highlights
Peru and Brazil at different stages of the recovery cycle
While in Peru the GDP data for 2Q10 were above forecast, with a year-on-year growth of 10.1% boosted by a strong performance from internal demand (14%), in Brazil the GDP for the second quarter decelerated, even though far less than expected, from a quarter-on-quarter rate of 2.7% in 1Q to 1.2% in 2Q. Brazilian industrial output increased by 0.4% q/q in July after three months of falls, and could continue to grow slightly for the rest of the year. In Chile, data from the different sectors in July continued to be strong, with annual growth in manufacturing (3.3%), mining (7.6%) and retail trade (18.5%), while in Colombia, the number of construction permits granted suggests more work will be undertaken in the second half of the year.
Unemployment rates increase in Colombia and fall swiftly in Chile
The sluggish recovery of employment in Colombia in the formal sectors and increased participation in the labor market led to a rise in the unemployment rate to 13.3% in July (12.8% one year ago). In Chile the improved economic activity has been accompanied by increased employment, with a fall to 8.3% in the unemployment rate in the moving quarter April-June (down 3.2 percent points from a year ago).
End of the monetary adjustment cycle in Brazil
As expected, the Central Bank maintained the SELIC at 10.75%. This marks the end of the upward cycle. The recent tone of the Central Bank’s statements and a growing concern with the appreciation of the Brazilian real limit the possibilities of a new upward cycle in 2011 (consensus for the SELIC at the end of 2011 is at 11.5%).
Signs of confidence in the region begin to moderate
In Mexico, the indicators of manufacturer confidence fell in August, as a result of the slowdown in manufacturing industry in the U.S., while consumers’ confidence remained stable. In Peru, the index of consumer confidence fell by 3 points in the month (to 50 p, the neutral level), due to greater inflationary concerns following price rises in some foodstuffs.
Increased tax revenues in Argentina and Mexico
In Mexico, the accumulated budget balance to July remains stable (up 5% on the same period in 2009) as a result of increases in both revenues and expenditures. This figure is rather modest given the economic recovery and the increased rates of some of the main taxes, VAT and the ISR. Until the second quarter the budget deficit remained at around 2% of GDP. In Argentina revenues increased 36.7% year-on-year, a slowdown compared with previous months. Taxes on foreign trade continue firm (69% y/y), followed by VAT (37.2% y/y).
Calendar: Events
Peru: Monetary Policy Rate. (September, 9 September)
Forecast: 3.00% Previous: 2.50%
In its next monetary policy meeting, we expect the Central Bank Board (BCR) to raise the policy rate by 50bp, taking it to 3.0%. This would be the second time in a row in which the BCR makes a 50bp-hike since the monetary policy tightening cycle began last May. The faster stimulus removal takes place in a context of strong domestic demand (+14%yoy in 2Q10) and delays in fiscal policy moving to a more neutral stance.
Calendar: holidays
Brazil: Tuesday, September 7.
