Mind the calm, not the gap
In June the IMACEC was up 3.1% y/y, but that figure overstates momentum: much of the improvement reflects base effects and one-offs. Underlying consumption trends remain closer to stagnation than expansion. Business sentiment is still stuck in pessimistic territory, consistent with the slow pace of activity. Imports of mining-related investment spiked in July, while exports slipped, dragged down by mining maintenance and softer industrial shipments. Chile posted its first monthly trade deficit since September 2022.
Labor market signals remain unfavorable. The absence of net job creation has become a concern, and the latest figures confirm that pattern. Labor market slack suggests consumption will face headwinds. So far, wage growth has compensated for weak job creation. But with no further significant minimum wage hikes on the horizon, both real wages and the wage bill will likely slow.
July’s CPI print delivered a widespread surprise upside. Core measures overshot, pointing to stickier dynamics. Services price increases remain sticky: total services inflation has held above 7% y/y for eight straight months. Inflation is closer to the Central Bank’s target than headline prints suggest. The question now is whether the pace of convergence is slowing.
In the absence of disruptive events, the Central Bank delivered a widely-expected 25bp cut. The corridor in the June IPOM still implies one more 25bp cut at the next Board meeting. But the Board will only move if conditions remain calm. Moreover, the dovish leaning in the communiqué was tempered by caution over what the Fed might or might not do. The direction for the TPM is set, but the pace remains hostage to noise.
The Central Bank announced a new reserve accumulation program. The program is bigger and more sustained than previous ones, but daily purchases are smaller. The design is novel, and in some ways resembles an ETF on the “dólar observado.” So far, market impact has been minimal.
While Chile’s presidential race has drawn most of the attention in the runup to the November 16th national elections, the congressional contests may prove just as important. The right had been expected to split into two slates, but the left also fractured, albeit less severely. Smaller leftist parties aim to survive by leveraging local strength, while the right faces deeper ideological divides, between traditional and nationalist factions. These dynamics suggest that another evenly-divided Congress is likely, where weak party discipline and limited executive power hinder majorities. Perhaps this is why, in a moment of frankness, frontrunner José Antonio Kast suggested that he might try to bypass Congress as much as possible by using executive orders. “Congress,” he said, “is not as important as one might think.” In fact, it’s precisely because Congress is so important that Kast is tempted to seek ways to govern without it.
Now read on...
Register to sample a report