Volatility is the new normal
Economic activity is decelerating, while confidence is receiving simultaneous knocks on several fronts. The proposal for a new Constitution is a source of economic uncertainty: the proposed text is vague, and while introducing many principles and rights fails to solve some evident conflicts of interest that characterize politics. The main issues relate to social rights, expropriation, indigenous rights and autonomy, legislation in fiscal spending, regional and local government debt, and taxes and water rights.
If the economy is not slowing faster, it is only because households still hold some of the government transfers they received and the pension funds they withdrew during the worst part of the pandemic. The bad news is that households have strongly reduced their monetary balances, consumer confidence is collapsing, interest rates are up and real wages are falling. Beyond consumption, the outlook is even less auspicious. And the trade balance points to growing imbalances.
Data for the labor market in the March-May rolling quarter was weak. Job creation slowed, with a substantial drop in the private payroll. Not only is the slowdown in job creation a concern, but so is its composition, between payroll and self-employed workers. The unemployment rate remained relatively stable, but overstates the improvement in the labor market.
The CPI in June showed a 0.93% monthly variation, below market expectations but the largest for a June since 2008. The 12-month variation increased again by 1 ppt to 12.5%. The pass-through from international prices and the exchange rate is still evident, although with some moderation in some cases. Although there are still no clear signs that inflationary pressures are easing, some indicators could be interpreted as the first signs of inflation moderation.
The first half of July was characterized by the persistent weakness of the peso, which strongly underperformed. The Minister of Finance, in an unprecedented move, asked the Central Bank to comment on the devaluation. Two days later the Bank in a communiqué said there was no need for intervention, as markets were working properly. Moreover, in its July monetary policy meeting it surprised markets on the downside, and repeated that there was no need for intervention.
Only two days later the Central Bank announced a “program for exchange rate intervention and preemptive provision of liquidity in dollars.” We believe that the quality of the Central Bank's communications has deteriorated. Therefore, it will continue to be hard to anticipate the Central Bank's future decisions, and markets will remain particularly sensitive to both domestic and external news.
With just over six weeks to go until Chile’s constitutional referendum, polls continue to show that a plurality favor rejecting the proposal drafted by the country’s Constitutional Convention. This would be a major blow to President Gabriel Boric’s political fortunes, as he’s staked his reform agenda on the shoulders of the new Constitution.
But the realization that a rejection is in the cards pushed the president last week to announce that, should the “Reject” option triumph, he would immediately send to Congress a constitutional amendment to elect a new Constituent Assembly. The proposal left no one satisfied, and does little to reduce the political uncertainty hammering the markets.
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