On Volatility and Predictability
Retail sales in May looked relatively strong, but monthly data should be taken with a grain of salt, as it has become increasingly volatile. Retail sales still may be favored by a recovery in the stock of durable goods, especially in cars. Manufacturing in May had a better performance than in previous months as well, but we are not necessarily entering a sustained recovery. The relatively good performance of both retail sales and industrial production led the market to expect a strong Monthly Index of Economic Activity. Nevertheless, economic activity didn’t signal entry into the widely-expected recovery.
The export sector was encouraging, though, turning in a double-digit rise over 12 months, reflecting the rising price of copper. Imports of consumption and capital goods were much higher than last year -- but still low in historical terms.
Employment data for the March-May rolling quarter were fairly auspicious, even though unemployment rose to 7%, the highest level for this period in six years. The increase can be mostly attributed to an “encouragement effect” in the labor force. Payroll jobs continued on a path to recovery, while the self-employed sector continued to decelerate. Wages continued to improve in May, both in nominal and real terms.
CPI inflation came in well below expectations in June. As a result, inflation expectations fell significantly. We consider this an overreaction. The surprise was concentrated in a few products whose volatility has increased significantly. Yet the price of perishables fell more than in any other June since 2009.
June CPI was so unexpectedly low that markets started to believe that there was a good chance that the Central Bank would cut rates in coming months. We disagree: we believe there are no grounds for expecting a rate cut, and that 2.5% is a solid floor. More deflationary surprises could change things, both for expectations and for the actual course of the TPM. Stay tuned.
The Bachelet administration embarked on a major legal initiative to reform one of Chile´s emblematic state-owned companies, ENAMI, the National Mining Company, responsible for the promotion and development of small and medium-sized mining activity. At first glance, the government seems to want to empower the company. But regaining control over it is also part of the game.
On the political front, the recent primaries offered few surprises. Sebastián Piñera remains the favorite to win in November’s presidential elections. Yet the results do provide some information on the state of Chile’s parties, and main coalitions.
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