Sovereign Macro-Weekly Latin America Outlook November 1, 2021

Sovereign Macro-Weekly Latin America Outlook November 1, 2021

Summary: the global economy is showing clear signs of slowing during the third quarter -perhaps more than expected- at a time when many central banks are in the process of normalizing their policies sooner and faster than expected pressured by hard evidence of worsening inflation dynamics. Inflation remains high, and in some cases increasing. Supply chain disruptions and wage pressures are the next challenges to figure out for central banks. Supply chain disruptions, which according to experts, were expected to ease in 2H of 2020 and later to q1 2022, are now likely to persist well into 2022 and add to the downward rigidity of goods inflation. Wages are starting to perk up and services inflation is coming to life, almost everywhere, as the global economy reopens more fully. The debate of whether inflation is permanent or temporary is unhelpful; inflation is indeed more complex than in previous episodes because it is not just an oil shock or a food shock, Covid is forcing a complete reconfiguration of global manufacturing in a context in which governments have expanded irreversibly. Instead, markets should be discussing how long high inflation is likely to persist and whether converging to the target will require higher central bank terminal rates than those prevailing before the pandemic, among other things because of higher fiscal risk premia. But coming back to this week’s events, they promise a lot of action. The FED will start tapering this week, joining other central banks like Australia, England, Canada that are on the verge to reduce accommodation. The ECB will do it in some form. The FED is unlikely to surprise anyone emphasizing ample flexibility of implementation. The more relevant part for the FED decision is the discussion about the start of the hiking cycle -which incidentally already started in September- and how they reassess their views about “maximum employment”, is 3.5% the relevant benchmark? My count is that 4 of the 10 voting members already see a hike in 2022 (6 of the whole 18 members). The market pricing of hikes right after the end of tapering is appropriate in my view. We will have a fresh read of the job market in a context in which wage pressures are mounting; ECI for Q3 came at 1.3% q/q and 3.7% y/y and AHE stands at 4.6%. The expectation for AHE for October is at 4.9% y/y and for unit labor costs for Q3 at 5.6%.  The US Congress hopefully will vote the Biden reconciliation bill at a misleading 1.8tn USD; misleading because it relies on gimmicks that estimate the cost over a period of less than 10 years when everyone knows that social spending, once enacted, will never decline. There are also several regional elections -Virginia’s governor importantly- that will take stock of the balance of political forces in the US and the future of Biden’s progressive agenda. In the region, we will get the minutes of central bank decisions in Brazil and Colombia. The BCB should clarify its flight plan including the new pace and some guidance of what “even more restrictive” policy means. Banrep will have to do the same and explain why it is not considering going into restrictive territory; it will provide fresh projections in its latest monetary policy report; Dane will release inflation for October. Banxico will publish its latest survey of expectations and I will be curious to see what policy expectations are for the next meeting after two seriously bad inflation prints. Chile will release the latest survey of expectations among market makers.

Jaime Valdivia

Chief Economist

Sovereign Macro

jaime.valdivia@sovereignmacro.com