Argentina Trade Balance Hits Roadblock

The macro-adjustment process in Latin America experienced some hiccups today in the form of a wider trade gap in Argentina and higher bi-weekly inflation in Mexico.

Sometimes things in life do not go quite as planned, and Argentina’s latest trade balance provides a good example. The gap was much worse than expected in July, widening to USD789M vs. the expected correction to USD125M. A lack of adjustment was due to both weaker exports and stronger imports. The exports’ downside was not too surprising due to the drought’s impact on agricultural production. However, the adjustment lag on the imports side appears to be longer than initially thought, despite massive currency depreciation. Still, domestic activity is slowing (check yesterday’s leading indicator for July), supporting the upbeat consensus view on Argentina’s external accounts. The current account deficit is expected to narrow from 5.17% of gross domestic product (GDP) in Q1 to 4.55% in 2018 and 3.7% in 2019.

On the inflation front, Argentina’s neighbor, Brazil, fared better today. Mid-month inflation moderated in line with expectations to 4.3% year-on-year, reflecting the diminishing impact of the truck drivers’ strike and possibly giving the central bank some breathing space (albeit rising diffusion and higher core services prices will keep it on its toes). Mexico, however, was less lucky. Both core and headline bi-weekly inflation surprised to the upside, raising a question mark over whether the central bank will be able to stick to its less hawkish policy bias.

U.S. Federal Reserve (the Fed) Chairman Jerome Powell’s speech at the Jackson Hole conference is tomorrow, and the latest data points in Europe and the U.S. show a less straightforward macro backdrop. August’s Purchasing Managers Indices (PMI) for the U.S. surprised to the downside, sending a less supportive signal for growth. Meanwhile, the Eurozone’s composite PMI continued to move sideways, and Germany’s services PMI was much stronger than expected. The U.S. dollar was a bit disappointed by this configuration, sliding vs. the euro after the release. The reaction of the Fed’s Chairman tomorrow has become trickier to predict.