Emerging Markets: The Week Ahead (Feb 25-Mar 1), Brazil's Economic Recovery Gains Further Ground

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Includes: BRF, BRZU, BZF, BZQ, EWZ, EWZS, FBZ, UBR
by: Interactive Brokers
Summary

Brazil’s calendar will be somewhat light on economic releases in the week ahead, with updates that include unemployment, GDP, consumer confidence and manufacturing.

However, some political risk appears to have risen to the fore, amid reports that Secretary General Gustavo Bebianno – a close ally of far-right President Jair Bolsonaro – has resigned.

The shift could throw a wrench into the country’s reform agenda – notably around the issue of pensions.

Meanwhile, recent economic data suggests the country continues its gradual recovery from its 2015–16 recession.

Also, should Brazil’s local currency continue to gain ground, it will likely alleviate pressure on producers to export their supplies to non-domestic customers.

Brazil’s calendar will be somewhat light on economic releases in the week ahead, with updates that include unemployment, GDP, consumer confidence and manufacturing. However, some political risk appears to have risen to the fore, amid reports that Secretary General Gustavo Bebianno – a close ally of far-right President Jair Bolsonaro – had resigned Monday over alleged improper use of campaign funds during the 2018 election.

The shift could throw a wrench into the country’s reform agenda – notably around the issue of pensions.

Marc Chandler, chief market strategist at Bannockburn Global Forex, noted “Bebianno may be sorely missed as the government tries to ensure that pension reform stays on track.” He said that pension reform is “seen as key to a host of other reforms, but in order to secure it, the government is willing to tactically retreat on measures so as not to antagonize the needed support.”

Chandler added that this “includes shelving plans to cut subsidies and open the economy to more foreign competition.”

Against this backdrop, he observed the dollar testing BRL3.80, after forging what seemed to be a “good base” near BRL3.70.

The pension reform may be submitted as soon as Wednesday to the lower house, which some analysts have said could produce around US$350bn in cost savings for the country over the next ten years.

Brazil’s real has risen over 4% against the U.S. dollar year-to-date, and futures market analyst Stephen Maass noted in a recent Hightower Report that while “Brazilian economic data has been lukewarm at best, many investors are hopeful that new President Bolsonaro will be able to enact reforms.”

Maass added that if Brazil’s local currency continues to gain ground, it will alleviate pressure on producers to export their supplies to foreign customers. He said this would impact export of soybeans and coffee, both of which have significant domestic consumption. “The strength of the real will also play into calculations for Brazil’s sugar mills before they start operations in April, as a rising currency combined with stronger energy prices could help to keep ethanol’s share of crushing above the 60% level.”

In the meantime, upcoming releases in Brazil through mid-week include:

Monday, February 25

  • Current Account - Jan
  • Foreign Direct Investment (FDI) – Jan
  • Federal Taxes - Jan

Tuesday, February 26

  • Bank Loans – Jan

Wednesday, February 27

  • Unemployment Rate - Jan

Thursday, February 28

  • GDP Growth (Q4’18)

In the latter part of the week, Brazil will offer an updated report on its rate of GDP growth for the fourth quarter of 2018.

Recent economic data suggests the country continues its gradual recovery from its 2015–16 recession. However, Brazil’s central bank said at its latest monetary policy meeting earlier in February that the global outlook “remains challenging,” amid headwinds such as trade conflicts and Brexit.

The bank’s Monetary Policy Committee (“Copom”) reiterated the need for economic stimulus and decided to keep the Selic rate at 6.5%.

The Copom also stressed that the evolution of reforms and necessary adjustments in the Brazilian economy is essential to maintain low inflation in the medium- and long-term, for the reduction of its structural interest rate, and for sustainable economic recovery. The central bank emphasized that the perception of continued reform “affects current expectations,” as well as macroeconomic expectations.

Inflation expectations for 2019, 2020 and 2021 are around 3.9%, 4.0% and 3.75%, respectively, while GDP grew 1.3% year-on-year in Q3’18 following a downward revision to growth in the prior period of 0.9%.

According to the IMF’s World Economic Outlook, growth in Brazil is set to accelerate from 1.3% in 2018 to 2.5% in 2019, then taper to 2.2% in 2020, amid continued recovery from its recession.

Friday, March 1

  • Consumer Confidence - Jan
  • Markit Manufacturing PMI – Feb
  • Trade Balance - Feb

Ahead of the weekend, investors will receive an update on consumer confidence following a steady climb in the index, with December marking the sixth straight month of inclines. Consumer confidence registered 114.3 in December, up from 113.6 in the prior month.

Also Friday, IHS Markit will unveil its Manufacturing Purchasing Managers’ Index (PMI) for February, after the previous month continued a string of solid increases in production and sales across the country, which Markit observed “have been evident since the end of the presidential elections.”

Pollyanna De Lima, IHS Markit principal economist, said that demand strength continued to be “supportive of the manufacturing industry at the start of the year, boosting sales, purchasing activity and output.”

She noted that buoyed by “this sustained upturn in domestic demand, factories lifted production at one of the strongest rates seen since early 2018.”

De Lima added that cost inflation “eased further, as improvements in the BRL/USD offered respite to manufacturers.” However, companies “hiked their fees to a greater extent, supported by robust demand conditions and in attempts to improve margins, which have been squeezed by sharp cost increases over the past year or so."

Brazil will also unleash updated trade figures Friday.

Investors will generally be watching the incoming data closely for any signs of further improvements in the economy, as well as strength in the country's currency.

Note: This material was originally published on IBKR Traders' Insight on February 19, 2019.

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