INFLATION:
May:
IPC-A: 0.71%m/m Last Week: 0.70%m/m 4Cast: 0.75%m/m
IGP-M: 0.57%m/m Last Week: 0.52%m/m 4Cast: 0.75%m/m
Jun:
IPC-A: 0.31%m/m Last Week: 0.31%m/m 4Cast: 0.35%m/m
IGP-M: 0.40%m/m Last Week: 0.40%m/m 4Cast: 0.40%m/m
The weekly survey of economists' expectations shows that the market is seeing the light at the end of the tunnel even it is just a flickering tenuous one. Although there is a small upward adjustment in 2016 inflation, the forecast for 2017 inflation is unchanged, while there is no more worsening in GDP forecasts. Moreover we have not seen a worsening of the debt/GDP ratio despite the widening fiscal gap.
2016 inflation forecast was up to 7.06% from 7.04%, while estimates for 2017 were unchanged at 5.50%. As far as output forecasts go, 2016 GDP estimate was up from -3.83% to -3.81% whereas 2017 GDP forecast was unchanged at 0.5% on expectations the new govt. will improve investor confidence.
With respect to monetary policy, the market has included some of the new data on fiscal accounts and accepts that the BCB may not have much room to ease and has reversed some of its expectations for lower rates this year, with a forecast of 12.88% for 2016 EOY, up from 12.75% last year but has increased the easing budget from 11.38%.
As far as the local FX market, economists remain optimist about BRL's outlook, especially after its large rally in Q1 and believe that the currency will end 2016 at 3.65, and at 3.85 in 2017.
Debt/GDP projections are unchanged, despite worsening of fiscal forecasts, with 2016 debt/GDP at 42.0% and for 2017's at 46.95%. ON the other hand we continue to see an improvement in the current account forecasts which is now at -US$16.62bn for 2016 and at -US$14.93bn for 2017.
In summary, trends remain positive with only a blip in inflation expectations. We are seeing more confidence in the 2017 recovery, which may add to the bets on more rate cuts although the extent of the fiscal problem may temper forecasts.
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