MacroScope

Brazil set to release long-overdue jobless rate just as election race heats up

Workers at a General Motors vehicle factory listen during a meeting to discuss their reactions to an announcement of plans to put some 1,000 workers on paid leave, in Sao Jose dos CamposBrazil’s unemployment rate has been a mystery for months: a strike in the country’s statistics agency, ironically enough, disrupted its main job market survey. The numbers will finally come out in a few hours, less than two weeks before a tight presidential election, and will help voters understand just how bad the recently-confirmed recession has been.

IBGE’s August unemployment report is important not only because it can tilt Brazil’s election balance in favor of current President Dilma Rousseff or her opponent Marina Silva, but also because it will determine the starting point of the labor market for a much-anticipated adjustment in Brazil’s economic policy. Some kind of shift is expected after the October election regardless of who wins, to keep debt under control and avoid losing the investment grade in coming years.

Looking at market estimates, one can expect anything, apparently. The range of forecasts in a Reuters poll was about three times as wide as in previous months, going from 4.5 percent, near a record low, to 5.8 percent, which would be the highest for August in three years. Either the recession has spared the job market so far, in good news for re-election candidate Rousseff, or it is now a reality for thousands of workers across Latin America’s largest economy.

The median forecast is 4.9 percent, exactly the same rate reported in April. But some signs suggest a small increase is the most likely scenario, which would reinforce the outlook of a gradual but steady deterioration of one of the world’s strongest labor markets just a few years ago.

Although the job market numbers have been held off since April, data on four of the six urban areas surveyed has been released by statistics agency IBGE, including Sao Paulo and Rio de Janeiro, the country’s largest cities.

El Niño may not give Brazil much to worry about on food prices

File photo of loaded soybean truck for BRAZIL SOY.

Now that Brazilian food prices are finally settling down, it looks like El Niño will strike back in a couple of months to throw the world’s weather into disarray.

Bad news for Brazil’s Finance Minister, Guido Mantega?

Not necessarily.

It could just as easily be a blessing, economists say. The changes in climate patterns caused by warmer Pacific waters could actually be a boon for Brazilian soy and corn producers while not necessarily disrupting other crops.

It is not clear yet if the El Niño phenomenon will happen this year – the odds are high at about 70 percent, according to the U.S. and Australian weather agencies.

Firing up Brazil’s economy

A hot, dry spell in southeastern Brazil has pushed up energy prices, stretched government finances and raised the threat of water rationing in its largest city, Sao Paulo, just months before it hosts one of the world’s largest sport events, the soccer World Cup.

It looks like the last thing Brazil needed as it scrambles to woo investors and avoid a credit downgrade.

But if the scattered rains that started to pour down over the past few days bring in continued relief through March, the heat could actually prove to be a much-needed boost for Brazil’s economy, research firm LCA found.

Brazil’s need for dollars to shrink in 2014 – but the long-term view remains bleak

Brazil’s current account deficit will probably narrow this year. That may sound as a reassuring (or rather optimistic) forecast after the recent sharp sell-off in emerging markets, which prompted Turkey to raise interest rates dramatically to 12 percent from 7.75 percent in a single shot on Tuesday. But that was the outlook of three major banks – HSBC, Credit Suisse and Barclays - in separate research published earlier this week.

The gap, a measure of the extra foreign resources Brazil needs to pay for the goods and services it buys overseas, will probably shrink to 3.0-3.4 percent of GDP in 2014, from 3.7 percent last year, they said.

“Brazil’s external vulnerabilities are overstated,” claims Barclays’ Sebastian Brown, adding: “the central bank’s FX intervention program should limit bouts of excessive BRL weakness.”

Too early to call revival in Latin America manufacturing

It may be too early to herald a revival of Latin America’s manufacturing following a recent currency decline, according to a report by London-based research firm Capital Economics.

Increased competitiveness of local factories has been seen as a good side effect of the currency shock triggered by prospects of reduced economic stimulus in the United States. However, the data compiled by Capital Economics suggests there is still a long way to go before investors see any fireworks.

David Rees, emerging markets economist at Capital Economics, wrote in his report:

For workers, the long run has arrived in Latin America

The outlook for emerging market economies over the next decade looks more challenging as long-term interest rates start to bottom out in the United States. Here is another complicating factor: ageing populations.

That problem is not as serious as in Japan or Europe, of course. Still, investors probably need to cut down their expectations for economic growth in Latin America over the next years, according to a report by BNP Paribas.

The graphic below shows the declining demographic contribution for economic growth in Latin American countries. The trend is particularly bad in Chile, Venezuela and Brazil:

Best days over for emerging market local currency bonds?

Local currency bonds in emerging markets, like most financial assets, have enjoyed a solid rally on the back of ample global central bank liquidity. But the good times may be coming to an end, according to a report from Capital Economics. That’s because there’s only so much boost the securities can get out of the monetary easing efforts of the Federal Reserve and other major central banks, the firm says.

Emerging market (EM) local currency government bond yields have fallen sharply in the past few years. Our GDP-weighted overall 10-year yield of a sample of 18 EM sovereign borrowers has dropped by 125 basis points since the start of 2011, to around 4.4% at the end of April.

Our calculations suggest that almost the entire decline in the yield has been due to a drop in the risk-free rate rather than in the credit spread. And since the risk-free rate reflects long-term expectations for monetary policy, this suggests that the fate of EM local currency bonds will depend to a large extent on how short-term rates evolve.

from Global Investing:

Show us the (Japanese) money

Where is the Japanese money? Mostly it has been heading back to home shores as we wrote here yesterday.

The assumption was that the Bank of Japan's huge money-printing campaign would push Japanese retail and institutional investors out in search of yield.  Emerging markets were expected to capture at least part of a potentially huge outflow from Japan and also benefit from rising allocations from other international funds as a result.  But almost a month after the BOJ announced its plans, the cash has not yet arrived.

EM investors, who seem to have been banking the most on the arrival of Japanese cash, may be forgiven for feeling a tad nervous. Data from EPFR Global shows no notable pick-up in flows to EM bond funds while cash continues to flee EM equities ($2 billion left last week).

When interest rates rise, credit growth should… accelerate?

Latin America has defied one of the most elementary rules of macroeconomics in the past decade, Citigroup economists Joaquin Cottani and Camilo Gonzalez found in a report.

Lower interest rates reduce the cost of money and therefore should encourage businesses and consumers to borrow, as we’ve repeatedly heard from analysts and government officials for decades. Puzzlingly enough, credit growth accelerated after central banks in countries like Brazil and Peru raised rates, and slowed when borrowing costs fell. Why is that?

The keyword here is confidence. In this commodity-exporter region, with a long history of deep, painful crises caused by currency devaluations and global downturns, perhaps it’s worth paying more attention to what happens abroad than to the cost of money – and how the global background might affect the local business cycle.

Latin America: the risks of being too attractive

Ironically, an increase of capital inflows to Latin America in the last few years due to unappealing ultralow yields in industrialized countries and the region’s relative economic success is posing a threat for development, according to a recent paper that provides wider background to BRIC criticism of the latest U.S. Federal Reserve´s quantitative easing.

The article, written by Argentine economists Roberto Frenkel and Martin Rapetti for the World Economic Review – an international journal of heterodox economics –  warns about the possibility of a Latin American variant of the so-called “Dutch Disease”. This is a situation where a country suddenly finds a new source of wealth that makes its currency more expensive, hurting local exports and causing traumatic de-industrialization.

“Our concern is that massive capital inflows to Latin America may have pernicious effects via an excessive appreciation of the real exchange rates, which could lead to a contraction in output and employment in tradable activities with negative effects on long-run growth”, says the paper.