End of the Cycle

jje

WORK DONE ?

The Giro de Italia is currently taking place with the world’s top cyclists pedalling all over the Italian peninsula, struggling up mountains and fighting inclement weather as they hit the alps, for them the end of the cycle will be great news but here in Colombia, if we are indeed done with interest rate cuts, what is the significance ? Going into 2018 the authorities inflation target was 3%, this was seen by most observers as a touch optimistic however we have already reached 3.13% so why the concerns ? Firstly the April reading was higher (0.46%) than analysts were expecting (0.29%) and whilst there was a 1bp decline MoM in that 12 month reading the market has become accustomed to gaps downwards over recent months, spoilt if you like. Has it closed the door for further cuts ? My old chums at Bancolombia have been calling for a 4.25% terminal rate since mid 2017 however the initial outliers at 4% are slowly but surely gaining a little more traction however is it necessary or even possible ? The Central Bank under the stewardship of Dario Uribe and now JJ Echavarria have been strong on inflation and as we have seen when inflation peaked at 8.97% they were prepared to make the tough decisions and not pay attention to the politicians, they should be commended for their independence and stewardship of the economy. The question now is whether they still consider that economic stimulus should take priority over inflation, according to the committee minutes we have seen the same discussion for the past two years with the economy having won out, will that continue ? Within the inflation basket one area where several analysts see a problem is on regulated goods with public services having jumped in April and is an area which appears particularly stubborn, food also jumped 0.66% and it remains to be seen if this is seasonal due to the current rainy season or something more profound. Does the economy need further help ? Recently the IMF stated that they foresee 2018 growth of 3.1% and inflation of 3.4%, those came with the usual caveat recommendations of tax and pension reform however those in power would sign for that 3.1% number right now as it is 0.4% above their own predictions and even further above where the consensus lies. The 3.4% would also be acceptable if that is the cost of faster economic expansion, analysts consensus is at 3.27% anyway and with an expected spike in 2H18 surely those at the FinMin know the 3% number isn’t going to happen. So could the IMF be correct on growth ? To me it looks punchy however I also think at his point 2.5% will be too conservative and would lean more towards the 2.7% with some slight upside bias - they say numbers don’t lie but I think they are slightly misleading.The first half will look a lot like the second half of 2017 with Q1 GDP next week expected to deliver a solid 2.2% reading and Q2 likely to look similar however we are in an election funk at this point & 4G needs a few more months from there things should look different. At this point I add in my gorrilla caveat in the guise of Gustavo Petro - who is the very reason people are keeping their hands in their pockets, the devil in me knows and wants the system to be shaken up as the level of inequality in Colombia is totally unacceptable however I would prefer a tropical storm to blow through the country - not a Force 5 Hurricane which is what Petro would be. On the positive side and key in this is Consumer Confidence where we are continuing to truck upwards, hitting -3.2% last time around, we were are -30.2% at the beginning of 2018. Where this appears to be reflected is in housing. If we look at the April banking data whilst overall loan growth of 6.1%. (2.9% real) is benign with the commercial side really struggling to get a toe-hold both consumer (8.9%) and mortgages (11.5%) are moving relatively well, anecdotally I am using my downtime to make some property moves in two different cities and it is moving, prices are firm and consumers appear to be heeding the comments made in the press recently by the heads of a couple of banks that mortgage rates may have bottomed. Imports are solid as are exports and the latter may benefit from the Iranian situation which has helped drive oil upwards and in an unexpected development the Colombian Peso has fallen from its highs so the Peso oil barrel has risen in value - all extra revenues are welcome at this moment as the authorities try to drive the CAD downwards, away from Iran it is the neighbours and their suffering oil production which are also indirectly helping Colombian finances. Of course not all is peachy in the economy and we have already touched on 4G - it will come and whilst the 'patience' message grows weary, it is nonetheless true. I was watching a Presidential debate this week and one candidate was trying to suggest that the Santos administration had mismanaged the process and that projects represented negative return for those funding - he was corrected and rightly so, not a message a future President wants to send to a watching world when it is wildly inaccurate. Other areas such as Retail Sales and Industrial Production are continuing to bounce, we get our latest look later today (Friday) and whilst a dip is expected in Industrial Production (it has been two steps forwards one step back for a year) another expansion is anticipated for Retail Sales which is no suprise - this is a consumption driven economy, the trick is to make sure more of the goods they are consuming are made in Colombia. So what should the Central Bank do - well they have time until June and so there will be plenty more data to look at but surely they won't be counting their chickens on inflation, doubtless events in Buenos Aires won't have excaped their attention, the new golden child suddenly finds itself with 40% rates - clearly there is not a direct compable but for a committee which such a history of discipline there is perhaps a subliminal message.