Brazil: Q2 GDP and electoral developments on the spotlight - Rabobank

Analysts at Rabobank note that owing to high electoral uncertainties, and amid an unfriendly global backdrop for EMs, most Brazilian assets kept selling off and underperforming its already-beaten asset class (i.e. EMs) in the previous week.

Key Quotes

“The bear market in yields occurred in tandem with the sharp weakening of BRL, the underperformer among 35 of the major currencies. Brazil FX plunged 4.7% to 4.10/USD, the weakest nominal level since January 2016 (for the same period, we estimate that Latam FX lost 2.4%, commodity FX fell 1.0% and EM FX slid 0.1%).”

“The race for the presidency remains all but clear. During the past week, Ibope and Datafolha published electoral surveys showing little (qualitative) changes from previous results. The scenarios maintain a highly uncertain outlook for the approval of fundamental economic reforms in 2019.”

“Economic data out recently reaffirmed the fading effects of the truckers’ strike on inflation, with August IPCA-15 preview showing well behaved core prices, with little signs of FX pass through for now. Elsewhere, other reports pointed to sluggish payroll gains (for July) and falling economic confidence (for August).”

“This week’s calendar features the 18Q2 GDP report (Fri). Owing to the negative impact of the truckers’ strike, the worse financial conditions and the weaker economic confidence, we look for a slight sequential contraction of 0.1% q/q (0.5% annualized), consistent with a 1.1% y/y gain.”

“We continue to see downside risks for the pace of recovery in 18H2 and our full-2018 GDP growth projection (currently at 1.3%).”

“On the political front, the electoral propaganda on TV and radio starts on Friday. Clearly, electoral surveys and events will continue to move the local asset markets in coming weeks.”

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