On Wednesday evening, we brought you [11] the latest economic data out of Brazil.
It was a disaster.
For anyone who missed it, we got a look at the IBC-Br monthly real GDP indicator yesterday and to quote Barclays, output is in “free fall mode.” In annual terms, economic activity declined 6.1% Y/Y in September. It was the worst print in series history.
Unfortunately, for Brazil, IBC-Br wasn't the only piece of important economic data due out this week. Also on the docket were IPCA-15 inflation, and the IBGE October labor market report.
As we noted last night, the GDP data comes against a backdrop of worsening inflation. For his part, Goldman's Alberto Ramos said on Sunday that IPCA-15 inflation should come in at 0.87% in November, suggesting that inflation would print somewhere in the neighborhood of 10.3% y/y (the worst in more than 10 years). When you put that together with everything noted above you get a stagflationary nightmare.
Well, the data are out and sure enough, annual headline IPCA inflation accelerated to 10.28% yoy. Here's Goldman's breakdown and forecast (note the bit about lagged FX pass through):
Inflation remains high and disseminated: six of the nine IPCA groups have inflation running at or above 9.0% yoy, with three of them with inflation already in double digits (e.g., housing expenses are up a large 18.5% yoy).
We expect annual headline inflation to end 2015 slightly above 10%. Furthermore, the lagged pass-through from BRL depreciation, pass-through (second-round effects) from the large shock from administered prices to freely determined prices, inertia, and formal and informal indexation mechanisms are also likely to keep inflation under significant pressure in 2016 despite the projected severe contraction of real GDP in 2015 and 2016. Sticky above-target inflation should limit the capacity of the central bank to cut rates significantly in 2016.
What should jump out at you here (besides the creepy photobomb) is that Copom is powerless to stop this given the state of the economy. That is, they can't hike without endangering an already fragile economic situation. As Jason Vieira, chief-economist at Infinity Asset Management told Bloomberg by phone on Wednesday, the "BCB will keep Selic unchanged at 14.25% next week and may [stay] on-hold through 2016 despite the worsening outlook on inflation. "There’s great uncertainty on monetary policy," he said, adding that the current stagflationary environment will likely to continue in 2016, the activity outlook risks further deterioration." Here's a bit more from Bloomberg [12]:
Brazil’s inflation exceeded 10 percent for the first time in 12 years, complicating President Dilma Rousseff’s efforts to revive an economy that is also battling higher-than-forecast unemployment.
As consumer prices in Latin America’s biggest economy continue to accelerate, Brazil’s central bank has delayed its plan of slowing inflation to its 4.5 percent target to 2017 from 2016. The bank has signaled it will keep rates on hold for a third consecutive meeting next week as it is caught between higher living costs and the deepest recession in 25 years.
Policy makers "of course will tread carefully, because Brazil GDP data on Dec. 1 are going to be quite dire,” said Edward Glossop, emerging market economist at Capital Economics in London. “Interest rates probably will remain at their current level for a prolonged period, possibly into 2017 at this stage.”
Meanwhile, the unemployment data (also out this morning) underscore our contention [13] from August that Brazil's economy has morphed into a veritable jobs destruction machine. As Goldman notes, "employment declined 3.5% yoy and real wages declined by a large 7.0% yoy in October. Hence, the real wage bill of the economy shrank by a large 10.3% yoy in October; the largest decline since October 2003." The unemployment rate hit 7.9% in August, up from just 4.7% a year ago, and far higher than consensus. A bit more color from Ramos:
Employment plunged 8.7% yoy (-305K jobs) in the industrial sector and by 5.2% yoy (-94K) in the construction sector. Employment in commerce (-1.5% yoy) and in companies that provide services to corporates (-3.7% yoy) also declined at the margin. Furthermore, wages declined significantly across several sectors: industry (-10.3% yoy), construction (-9.4% yoy), commerce (-8.8% yoy), etc.
Yes, "etc."
But even as the economic picture gets worse literally by the day, the BRL has had a nice run of late:
This, presumably, is due to the perception that political risks are moderating. Here's the lateest bullet point summary from Bloomberg:
- Contrasting with BZ mkt relief, economy keeps deteriorating, with inflation reaching two digits for 1st time since 2003
- IPCA-15 for Nov. 10.28% y/y vs est. 10.29%, prior 9.77%; Nov. 2nd preview IGP-M 1.45%, est. 1.3
- Unemployment rate for Oct. at 7.9%, est. 7.6%, prior 7.6%, 4.7% in Oct. 14
- Brazil mid-Nov. core CPI gauges slow, diffusion rises: Ibiuna
- BCB meets next wk; weak economic activity will keep central bank from raising Selic despite inflation more than twice the 4.5% target
- Congressmen yday afternoon ratified a presidential veto that prevents govt pension obligations from rising in coming years; vote followed similar Rousseff wins on Tue. when two other vetoes on measures that could hinder the fiscal adjustment were upheld
- While tight wins in votes mean Rousseff’s power is still limited, analysts see reduced political risk favoring BRL
- Easing political tensions also seen in lawmakers saying that House’s head Cunha may delay for 2016 the decision on Rousseff impeachment process (ZH: incidentally, Cunha has denied that he said he will delay the decision)
- Cunha seeks to raise lawmakers’ spending limit in a exchange for his support for law that gives govt flexibility on budget management, known as DRU: Valor
So there you go. Soaring inflation, soaring unemployment, a "terrible" outlook for growth, and a glimmer of hope on the political front.
Trade accordingly.
