[Prices] Price controls are doing the dirty work – for now – and inflation is going down. This week’s inflation runs at 0.3% WoW and monthly inflation already stands below 2.0% and is going down with 41% of our monitored prices actually decreasing (!!) in the last 4 weeks, while 27% of them increased less than 1%.
The period between February and May of 2013, when Ex-Secretary of Internal Commerce Guillermo Moreno applied a general freeze in supermarkets that was temporarily successful, seems the best antecedent of what we are seeing. Inflation dropped dramatically in those months, piling up a backlog that all came together in Junio
The inflation slowdown is not contradictory to renewed pressure on the forex market and the monetary base shock. The BCS FX increased 32% over the course of April, but short term inflation responds mostly to the official FX rate as we stated in our special report “is BCS already priced on inflation?“). Inflation dynamics will depend on the government’s ability to keep a good grip on the official FX.
We expect inflation to further decelerate in April and May, with a monthly rate that could end close to 1.9% MoM with a very low statistical carryover. We are also expecting some deflationary surprises in many sectors, mostly in services.
[Activity] Official activity indicators are still not reflecting the Covid shock, lagging behind almost two months (i.e.INDEC reported +5.3% YoY real supermarket sales in February and Shopping sales +10.9% YoY). Updated proxies, on the other hand, are reflecting that the economy is rolling down-hill: Activity-related taxes decreased -13% YoY in real terms in March, imports volume -17% YoY CAME’s retail sales (-49% YoY), new car sales (ACARA, -55% YoY), construction (Construya, -39% YoY; cement sales, -47% YoY) and manufacturing production (FIEL, -6.4% YoY).
These figures are just the tip of the iceberg, as the lockdown was enforced on March 20th. High-frequency information points to an even worse April. Mobility data reports that people’s movement is 17-24% of baseline pre-Covid situation.
[Markets] After last week’s Friday bond rally, Markets did not react positively to the government’s offer, Though NPV’s were above expectations, they still represent a steep haircut for bondholders to accept. Especially compared to other preemptive debt restructurings (as explained in Seido Special Report: Let the game begin).
To add pressure on bondholders, the government also did not service Global bonds (USD 500mn due on April 22nd) and now the country has now a 30-day grace period to avoid default.
Bond prices dropped and country risk increased to 4,056 bps (+569 bps WoW).
The forex market is under pressure as well and the BCS Premium increased to 71%, more than doubling since end-March, as the BCS FX rate climbed up to ARS 113 (+30% MoM) and the official FX rate moved to ARS 66.3 (+3.5% MoM). Monetary expansion, expectations of even tighter capital controls, and high overall uncertainty explain the depreciation of alternative FX rates.
[Prices]
Price controls are doing the dirty work – for now – and inflation is going down. Our high-frequency CPI shows that this week’s inflation runs at 0.3% WoW (vs 0.4% WoW of the previous week). As of April 23rd, monthly inflation stands at 1.9% MoM and is going down. Furthermore, observing the distribution of price increases we find that 41% of our monitored prices actually decreased (!) in the last 4 weeks, while 27% of them increased less than 1%, 9% increased 1-2%, 11% increased 2-4%, and 12% increased 6% or more. 4-week monthly inflation and Official FX Rate
General vs. Core Inflation
The inflation slowdown is not contradictory to renewed pressure on the forex market. The BCS FX increased 32% over the course of April, but inflation responds to movements of the official FX rate (as explained here), which depreciated less than 3%. Furthermore, regulated price incidence is minimal while tight controls and temporarily closed firms (because of lockdown) also keep inflation down. We expect inflation to further decelerate in April, with a monthly rate that could end close to 1.9% MoM with a very low statistical carryover.
Inflation dynamics will depend on the government’s ability to keep a good grip on the official FX. In this regard, a rising BCS Premium could add some pressure, especially if the premium increases above levels seen in the previous episode of capital controls. Historical evidence shows that FX premiums over 100% correlate with inflation outburst episodes.
[Activity]
Official activity indicators are not reflecting the Covid shock … yet. INDEC reported that real supermarket sales increased by 5.3% YoY (vs -1.6% YoY in January), while Shopping sales increased 10.9% YoY (vs -1.9% YoY). Lagging behind almost two months, most official figures (like manufacturing production) are not showing the initial impact of the pandemic outbreak and the mandatory lockdown. Selected Activity indicators
Updated proxies of economic activity reflect that the economy is rolling down-hill. At an aggregate level, activity-related taxes decreased -13% YoY in real terms in March (vs -10.6% YoY of the previous month), while import volume decreased -17% YoY (vs -16.5% YoY). At a sectoral level, latest indicators report significant drops of retail sales (CAME, -49% YoY), new car sales (ACARA, -55% YoY), construction (Construya, -39% YoY; cement sales, -47% YoY) and manufacturing production (FIEL, -6.4% YoY). These figures are just the tip of the iceberg, as the lockdown was enforced on March 20th.
Apple Mobility Data – Index, 7- day MA
High frequency information points to an even worse April. Mobility data[1]
reports that people movement is 17-24% of baseline pre-Covid situation (depending on transportation). Mobility has increased over the past few weeks (it was 10-12% of baseline about a month ago), possibly reflecting the lifting of some restrictions and also some “lockdown fatigue”. With the logical caveats about the representativity of aggregate mobility data, this shows that a large fraction of the economy remains halted.
[1] We use Apple Mobility data (see here) instead of Google Covid reports as information is updated more frequently. Google reports are more detailed, with information for each Province instead of the whole country.
[Markets]
Markets did not react positively to the government’s offer. Though NPV’s were above expectations, they still represent a steep haircut for bondholders to accept. Especially compared to other preemptive debt restructurings (as explained in Seido Special Report: Let the game begin). It was no surprise, then, that bond prices dropped and country risk increased to 4,056 bps (+569 bps WoW).
Country risk Premium
To put pressure on bondholders, the government decided not to service Global bonds (USD 500mn due on April 22nd). Therefore, the country has a 30-day grace period before entering default. The government announced that the debt exchange offer would be available for 20 days, but that deadline can be extended. Therefore, a deal could be reached (or not) until May 22nd. Though there is room for negotiations, both parties are trying to increase the credibility of their threats. In this “chicken game” of debt negotiations, the player that convinces the other that they will not flinch wins. Still, the government stands to lose more than bondholders in case of a debt default, eroding the credibility of its threats.
The forex market was under pressure as well. The BCS Premium increased to 71%, more than doubling since end-March, as the BCS FX rate climbed up to ARS 113 (+30% MoM) and the official FX rate moved to ARS 66.3 (+3.5% MoM). Monetary expansion, expectations of even tighter capital controls, and high overall uncertainty explain the depreciation of alternative FX rates.
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