[Prices] INDEC’s Inflation accelerated to 2.2% in June, above our expectations (1.9% est.), Acceleration was mostly driven by dollarized goods: clothing, and household and recreation equipment. We believe that this hike in inflation was mainly driven by BCRA’s tightening of the FX controls in late May, that restricted access to the official markets to many importers. We expect July – range 1.0%/1.5%- to be the month with the lowest inflation in the year so far, as we have found signs of deflation in non-dolarized goods (see SEIDO High-Frequency CPI)

[Activity] Early June indicators confirm a sequential recovery of the activity, in line with our expectations. We estimate that at least half of March and April’s contraction has been reverted. Industrial electricity demand dropped -17.8% YoY (up from -25% YoY in May), a movement also seen in car and steel production (-35% vs -84% YoY and -32% vs -56%, respectively). Some improvement was also registered in consumption (retail sales and new car sales) and construction (cement sales).

[Markets] The Central Bank tightened financial repression forcing the hard-currency mutual funds to price their holdings at the official FX rateThe regulation, however, had did not have the expected effect on the BCS, which is already 9.1% up month to date and +1.4% since Wednesday.


Inflation accelerated in June, in line with our expectations. Official data reports an increase of 2.2% MoM in consumer prices, accelerating from the 1.5% MoM registered in May. Last month’s printing was close to our own estimates (1.9% MoM, see SEIDO’s monthly CPI) and market expectations (2.0% MoM according to the latest REM). The interannual inflation rate decelerated again, moving from 43.4% YoY in May to 42.8% YoY in June.

Monthly Inflation rate (incidence by item)

Despite last month’s acceleration, July’s early data shows very low inflation. Our high-frequency monitoring reports that inflation is running at 0.3% WoW, or 1.3% MoM (see SEIDO High Frequency CPI). With very low statistical carry-over from the previous month, July’s inflation rate could end in the range of 1-1.5% MoM. Inflation dynamics are being affected by frozen regulated prices, price controls, and a depressed economy. However, the key variable will be the movement of the official FX rate. If the BCRA loses control over the forex market (something that could occur due to mounting imbalances), an exchange rate crisis would translate into an inflation spike.

Inflation accelerated across categories in June. Prices of Seasonal items increased 4.8% MoM (vs 4.7% MoM in April), while Core inflation was of 2.3% MoM (vs 1.6% MoM). Meanwhile, Regulated prices were positive again, with an increase of 0.7% MoM (vs -0.1% MoM). Most important increases were those of Clothing (6.6% MoM, due to seasonal changes), Recreation (4.2% MoM), and Household Equipment (4.1% MoM). These last two were affected by increases in prices of appliances, cellphones, and durable equipment. Food & Beverages accelerated slightly (1.2% vs 0.7% MoM), but lower demand and some reversion of previous increases have kept price increases relatively low.


Unofficial data shows marginal improvement on the activity in June. Though official figures will be released next week, relevant proxies suggest the economy bottomed out in April and recovered slightly in May (see Table below). Early June indicators point in a similar direction. Industrial electricity demand dropped -17.8% YoY (up from -25% YoY in May), a movement also seen in car and steel production (-35% vs -84% YoY and -32% vs -56%, respectively). Some improvement was even registered in consumption (retail sales and new car sales) and construction (cement sales). Nevertheless, activity still has a long way to go in order to recover the ground lost to the Covid-19 shock and the subsequent lockdown.

Selected Economic Indicators

A large part of industrial capacity remains without use. INDEC reported industry used 46.4% of its capacity in May, way below the 62% recorded at the same month of 2019. However, seasonally adjusted data shows a marginal improvement (see graph below), in line with other indicators dynamics. Of course, there is heterogeneity in the use of capacity (UCI) data, as essential sectors were relatively unharmed by the lockdown (such as Food & Drinks, which saw its UCI drop -3.5pp YoY), while the rest has suffered severely (like Auto production, with UCI down -30.4pp YoY).

Use of Industrial Capacity (seasonally adjusted)


The government tightened regulations on the financial market even more. What was a market rumor was confirmed yesterday: the CNV (local SEC) published resolution 848, whereby mutual funds will have to price their holdings at the official FX rate. This affects funds that invested in hard currency assets (including cash) and allowed savers to subscribe with ARS, which priced holdings at the Blue Chip Swap FX rate.

The latest regulation did not affect the BCS. The BCS FX rate increased 1.4% since Wednesday (when the measure was released to the public) and the FX premium ended at 60%, slightly above previous days levels but similar to late-June levels.

FX Premiums

Lack of significant impact could be for a number of reasons: (a) the measure was already expected (previous CNV regulation limited to 25% the share of the total that these mutual funds could invest in cash) and managers had time to reorganize; (b) the government gave additional time for readjustments (the measure will be enforced on July 29th for cash investments and October 15th for other assets).