VanEck
September 07, 2018
Identifying trends that create impactful investment opportunities since 1955

No Pressure to Tighten in Brazil

Brazil’s inflation outlook is still benign, which means less pressure on the central bank to hike in September. South Africa’s current account looks better, but future adjustment remains uncertain.

Today’s inflation prints in Brazil indicate that the central bank still has some breathing space on the policy front. Headline inflation moderated more than expected in August (to 4.19% year-on-year), helped by lower food and services prices and also due to the waning impact of the truck drivers’ strike. Monthly core inflation also eased. The diffusion index rose only marginally, staying close to 50%, and inflation expectations look anchored. There is a significant probability that the central bank will stay on hold on September 19, 2018, even though the market continues to price in a rate hike.

The South African rand got some relief this morning as the Q2 current account deficit narrowed in line with expectations, both in response to weaker domestic activity and due to improvements in exports (higher volume). It is not yet clear whether the adjustment will continue in the coming quarters (especially as regards to terms of trade). The consensus currently sees a deficit of 3.5% of gross domestic product (GDP) in both 2018 and 2019, with some further deterioration in 2020. And this means that the country will be closely watched by the rating agencies in the foreseeable future.

Macro prints in the U.S. today signal that the U.S. dollar remains a formidable opponent for many currencies in both emerging and developed markets. The services Institute for Supply Management (ISM) index jumped to 58.5 in July, beating the consensus by a wide margin. The final capital goods orders for July were revised a touch higher, while new factory orders rose by a respectable 9% on a year-on-year basis (compare this with Germany’s 0.9% year-on-year drop). All eyes are now on tomorrow’s labor market stats, especially the average hourly wages (for signs of underlying inflation pressures).

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