[Prices] INDEC’s May inflation was 1.5%, in line with our expectations (1.6%). Despite the inflation acceleration of late May – see Special Report “Unfrozen Prices” -, June early data is surprising positively, with very low printing in the last two weeks. We are expecting prices to be affected by the recent changes in the access to the official FX markets, but we have yet not seen it in our high-frequency tracking. We now foresee inflation on the range 2.0-2.5% MoM in June (instead of the previous 2.5-3.0%).
[Activity]Early aggregate indicators show that May was slightly better than April. Activity-related revenues dropped -23% YoY in real terms, vs -32% YoY of the previous month. Construction has bounced but remains lower than pre-lockdown levels. According to CAME, real sales dropped -50.8% YoY last month. All 13 subsectors of the CAME index presented double-digit declines, though 11 of them performed relatively better than in April when sales fell -57.6% YoY. The difference in performance between sectors has widened, with essential sectors’ sales decreasing -23.5% YoY and sales of non-essentials dropping -69.6% YoY.
Though the lockdown has been extended to June 28th, more and more businesses are allowed to open, but lack of demand keeps the economy depressed. As time goes by it will be more evident that: (a) some firms have shut down permanently, and (b) aggregate demand has contracted substantially due to lower household income and higher uncertainty. In short, the supply-side shock might phase off, but the demand-side shock will linger on.
[FX] Eerie silence on the FOREX markets since the new regulations were put in place and Central bank intervention in the forex market turned positive. After almost 2 months of continued sales, the BCRA was able to increase its stock of international reserves. In the last 10 days, the monetary authority bought approximately USD 770m and increased net reserves to USD 9.7bn from USD 8.4bn. The CB, again on the buying side, reinforced its crawling peg, and for the first time since end-April, depreciation rate was below 0.13% daily (0.09% on Thursday). The BCS premium stood relatively stable, closing at 67.2% (-0.3 pp and -2.5pp since end-May), and the informal premium was 77.5% (-1pp and -4.9pp).
After two failed attempts, the market expects Guzmán to present a new (and improved) debt offer. Rumor has it that the proposal will be released shortly and might include a value recovery instrument related to exports
[Prices]
INDEC’s May inflation was 1.5%, in line with our expectations (1.6%). Consumer prices increased 1.5% MoM (same printing than in April), in line with our estimates (1.6% MoM, see SEIDO’s monthly CPI) and somewhat below market expectations (1.7% MoM according to the latest REM). It should be noted that INDEC increased its flow of information collection, being able to survey 86.9% of regular information (vs. 70.4% in April).
Despite the inflation acceleration of late May, June early data is surprising positively. We now expect inflation on the range 2-2.5% MoM on June (instead of the previous expectation of 2.5-3% MoM).
Inflation in May remained relatively stable across categories, except for Regulated prices. Seasonal items stood at 4.7% (vs 4.6% in April), while Core inflation was of 1.6% MoM (vs 1.7% MoM). Meanwhile, Regulated prices decreased -0.1% MoM last month, down from 0.7% MoM in April. This was mainly explained by a drop in Education (-0.4% MoM), partially offset by slight accelerations in the Communications (0.3% MoM), Health (1.1% MoM), and Transportation (1.1% MoM) items. Food and Beverages slowed down notoriously (0.7% MoM vs 3.2% MoM in April), movement associated with lower demand, some reversion of previous increases and the normalization of the supply chain.
[Activity]
Activity continues contracting, although May seems relatively better than April. Early aggregate indicators show marginal improvement (see table). For instance, activity-related revenues dropped -23.3% YoY in real terms, against -31.6% YoY of previous month. Though the lockdown has been extended to June 28th, more and more businesses are allowed to open, but lack of demand keeps the economy depressed. As times goes by it will be more evident that: (a) some firms have shut down permanently; and (b) aggregate demand has contracted substantially due to lower household income and higher uncertainty. In short, the supply-side shock might phase off, but the demand-side shock will linger on.
Selected economic indicators
Construction has bounced but remains lower than pre-lockdown levels. The Construya index (private estimate of sector activity) has recovered from the worst month recorded in the series, as prohibitions were lifted in most provinces. However, construction is at its lowest level since 2006 and in March, before a full lockdown, it had already lost 24% of its workforce (about 100,000 workers). The coronavirus has deepened the downturn of this sector and the possibilities of a short-term quick recovery are low, considering the overall economic scenario.
Construction activity (Construya index) – Seasonally adjusted
Retail sales halved in May. According to CAME, real sales dropped -50.8% YoY last month. All 13 subsectors of the CAME index presented double-digit declines, though 11 of them performed relatively better than in April when sales fell -57.6% YoY. The difference in performance between sectors has widened, with essential sectors’ sales decreasing -23.5% YoY and sales of non-essentials dropping -69.6% YoY.
Retail Sales (CAME) – YoY change
Note: Essential corresponds to the weighted average of Pharmacies, Food & Beverages and Hardware stores.
More red flags for manufacturing production. In April, industry worked at 42% of its capacity, almost 20pp lower than the same month of last year. After adjusting for seasonality, the use of industrial capacity has dropped to the lowest level since INDEC reports the indicator (see graph below, with an adjustment of old and new series). As with most indicators during the pandemic, essential sectors such as food and drinks suffered the least compared with non-essentials. The automotive sector was completely shut down (0% usage), while Textiles (4.2%) and Metal mechanics (20.2%) were severely affected.
Use of Industrial Capacity – Seasonally adjusted
[Markets]
After two failed attempts, the market expects Guzmán to present a new (and improved) debt offer. rumor has it that the proposal will be released shortly and might include a value recovery instrument related to exports (instead of a GDP warrant). Meanwhile, bond prices have suffered, and thesovereign spread increased to 2,614bps (+133 bps WoW). Regional spreads (excluding Ecuador) improved marginally, despite some headwinds coming from the global financial scenario (EMBI-Latam closed at 499bps, decreasing -15bps WoW).
EMBI Spreads
The forex market has not experienced much change. The Central Bank maintains a crawling peg and, for the first time since end-April, the official FX depreciation rate was lower than 0.13% daily (0.09% on Thursday). On the other hand, the BCS premium stood relatively stable, closing at 67.2% (-0.3 pp and -2.5pp since end-May), and the informal premium was of 77.5% (-1pp and -4.9pp). Despite BCRA regulation that pushed importers out of the official forex market, alternative exchange rates have not reacted yet.
Exchange Rate Premiums
Central bank intervention in the forex market turned positive. After almost 2 months of continued sales, the BCRA was able to increase its stock of international reserves. In the last 10 days, the monetary authority bought approximately USD 770m and increased net reserves to USD 9.7bn from USD 8.4bn. With relatively low USD sales from the agricultural sector, this change was due to tighter capital controls. Access to the official market has been reduced even further, restricting operations for both individuals and firms. The latest regulations have even pushed importers out of the market, forcing them to use external assets to pay imports or maturing debt. These measures help over the short term, but benefits will only prove temporary if economic imbalances are not properly addressed.
BCRA intervention and Net Reserves
