Jul-14. Jul-13. Oct-12. Oct-14. Oct-13. Jan-13. Jan-14. Jan-15. Apr-14. Apr-13. Apr-15

(1)

Weekly Report

July 13 to 17

A equipe do Departamento Econômico do BES Investimento do Brasil S/A - Banco de Investimento elaborou esta mensagem com propósito meramente informativo, baseada em informações disponíveis

With negotiations involving Greece and its European partners still dominating markets, the international front will

see quite a few relevant events during this week, such as monetary policy decisions in Canada, the Euro Zone and

Japan, as well as Chinese GDP data and plenty of speeches from FOMC members. However, the highlight should be

Ms Yellen’s semi-annual testimony to the US Congress, which we expect to bring crucial clues about the timing,

shape and magnitude of the tightening cycle that that country is likely to face. In Brazil, the data stream is thinner

than abroad and it will focus on economic activity with the release of retail sales and the Brazilian Central Bank’s

activity index for May15, which – unfortunately – are likely to reinforce the prospects for a negative result of the

Brazilian economy in 2Q15.

Brazil

Despite the official view that states that the current situation isn’t as bad as headlines of newspapers portray,

economic indicators insist on challenging such an ‘upbeat’ tone. The unemployment rate is on the rise,

industrial production has virtually collapsed, there are no room for fiscal incentives and credit conditions are

much dearer than before. How can household consumption thrive on the back of such an adverse mix? It can’t

in our view and the release of retail sales figures for May15 should confirm this as we expect the broader

gauge to have declined 1.3% MoM sa (the sixth consecutive drop). It’s true that an important part of this

performance has to do with the abysmal performance of the automotive sector. However, the picture doesn’t get

substantially better even factoring out the contribution from that sector.

Jankiel Santos

Chief economist

+ 55 11 3074 7344

jsantos@espiritosantoib.com.br

Flávio Serrano

Senior economist

+ 55 11 3074 7343

fserrano@espiritosantoib.com.br

Ombudsman 0800 7700 668

Taking into account the narrower gauge of retail sales – which excludes the performances of building material stores and vehicles and auto-parts’ dealers – our

simulation points towards an expansion of 0.3% MoM sa in May15, which can be considered a quite weak outcome after having registered three drops in a row.

Apparently, the relief observed in foodstuff inflation has managed to give some impulse to supermarkets’ sales in that period, but the deterioration in labour

market conditions and the substantial increases in administered prices – which cannot be avoided by consumers – are likely to weigh on the segment in the

coming months. That is, the prospects for household consumption are far from encouraging.

Chart 1: Retail sales gauges (2011=100, sa)

45.0

50.0

55.0

60.0

65.0

70.0

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80.0

85.0

90.0

95.0

100.0

105.0

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-1

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l-1

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-1

0 Ja

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-1

1 A

p

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l-1

1 O

ct

-1

1 Ja

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-1

2 A

p

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2 Ju

l-1

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2 Ja

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3 A

p

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3 Ju

l-1

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3 Ja

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4 A

p

r-1

4 Ju

l-1

4 O

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-1

4 Ja

n

-1

5 A

p

r-1

5 Narrow sales

Broad sales

Source: IBGE, BESI Brasil.

- Forecast

With consumption losing steam, investments facing hard times on the back of probes allegedly involving some of the biggest contractors of the country and the

public sector pursuing a thriftier stance in order to avoid a downgrade in its credit ratings, it’s up to net exports to provide some thrust to economic expansion and

they have been doing so. However, given that the Brazilian economy is far from open, this hasn’t been enough to offset all the other headwinds the economy has

been facing. As a result, GDP has been falling and signs for 2Q15 point to continuation of this trend.

That’s the backdrop we expect the economic activity index built by the Brazilian Central Bank – dubbed IBC-BR – to show in the coming days. According to our

simulation, the IBC-BR for May15 should have declined 0.3% MoM sa, which would be its third consecutive drop in seasonally adjusted terms. What’s more, the

reading – if confirmed – will mean a negative carry-over estimate for 2Q15 – a 1.8% QoQ sa fall in our calculations – which underpins our view that the Brazilian

economy hasn’t reached the bottom yet and, hence, is still far from a turning point.

(2)

Chart 2: CB’s economic activity index (2002=100, sa)

95.0

105.0

115.0

125.0

135.0

145.0

155.0 Ja

n

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3 Ju

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3 N

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3 A

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4 S

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p

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4 F

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b

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5 Ju

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5 D

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a

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6 O

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7 A

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7 Ja

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9 F

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b

-1

0 Ju

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a

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1 O

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-1

1 M

a

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2 A

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-1

2 Ja

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3 Ju

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3 N

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-1

3 A

p

r-1

4 S

e

p

-1

4 F

e

b

-1

5 IBC-BR

Qtly avg

Source: Banco Central do Brasil, BESI Brasil.

- Forecast

This lacklustre environment is expected to see some deflationary impact ahead and inflation expectations for the coming years have already started declining

according to the Brazilian Central Bank’s Focus report. That’s the reason why market participants – including ourselves – believe that the on-going monetary

tightening cycle is about to be adjourned soon, with the Selic target rate likely to reach 14.50% pa in early Sep15. Unfortunately, though, the high level of interest

rate should prevail for quite a while in order to insulate the Brazilian economy from the fallout that the high inflation level of this year is likely to have caused.

Consequently, one should not expect the resumption of activity growth anytime soon.

Weekly indicators

Date

Time

(Brazil)

Indicator

Reference

BES

forecast

Market

consensus

Prior

08-20/Jul

- -

Russia Hosts BRICs Summit

- -

09-15/Jul

- -

Chinese Money Supply M2 YoY

Jun

- -

11.0%

10.8%

12-13/Jul

- -

Chinese Trade Balance

Jun

- -

$56.70B

$59.49B

12-13/Jul

- -

Chinese Exports YoY

Jun

- -

1.0%

-2.5%

12-13/Jul

- -

Chinese Imports YoY

Jun

- -

-15.5%

-17.6%

13-20/Jul

- -

Brazilian Formal Job Creation Total - CAGED

Jun

- -

-115,599

15-22/Jul

- -

Brazilian Tax Collections

Jun

R$ 96.5B

- -

R$ 91.5B

Monday

01:30

Japanese Industrial Production MoM

May F

- -

-2.2%

01:30

Japanese Capacity Utilization MoM

May

- -

-0.4%

06:00

Italy to Sell Bonds

- -

08:25

Brazilian CB's Focus - IPCA 2016

10-Jul

- -

5.45%

10:00

Euro-Area Finance Ministers meet in Brussels

- -

15:00

Brazilian Trade Balance - 2

nd

_week

_Jul

_{- -}

_$636M

15:00

US Monthly Budget Statement

Jun

- -

$41.0B

-$83.4B

Tuesday

03:00

German CPI EU Harmonized YoY

Jun F

- -

0.1%

04:00

Spanish CPI EU Harmonised YoY

Jun F

- -

0.0%

05:00

Italian CPI EU Harmonized YoY

Jun F

- -

0.2%

05:30

British CPI YoY

Jun

- -

0.0%

0.1%

05:30

British CPI Core YoY

Jun

- -

0.9%

06:00

Euro-zone Industrial Production SA MoM

May

- -

0.2%

0.1%

06:00

German ZEW Survey Expectations

Jul

- -

29.0

31.5

(3)

Weekly indicators

Date

Time

(Brazil)

Indicator

Reference

BES

forecast

Market

consensus

Prior

06:10

ECB Main Refinancing Operation Result

- -

09:00

Brazilian Retail Sales MoM

May

0.3%

-0.2%

-0.4%

09:00

Brazilian Retail Sales YoY

May

-2.9%

-3.0%

-3.5%

09:00

Brazilian Retail Sales Broad MoM

May

-1.3%

- -

-0.3%

09:00

Brazilian Retail Sales Broad YoY

May

-10.4%

- -

-8.5%

09:30

US Retail Sales Advance MoM

Jun

- -

0.3%

1.2%

09:30

US Retail Sales Ex Auto MoM

Jun

- -

0.6%

1.0%

09:30

US Import Price Index YoY

Jun

- -

-9.8%

-9.6%

11:00

US Business Inventories

May

- -

0.2%

0.4%

18:00

Chilean CB sets the base interest rate

14-Jul

- -

3.00%

21:15

Fed's George speaks in Kansas City

- -

23:00

Chinese Retail Sales YoY

Jun

- -

10.2%

10.1%

23:00

Chinese Industrial Production YoY

Jun

- -

6.0%

6.1%

23:00

Chinese GDP YoY

2Q

- -

6.8%

7.0%

23:00

Chinese GDP SA QoQ

2Q

- -

1.6%

1.3%

Wednesday

00:00

BoJ Policy Statement/Kuroda Press Conference

- -

03:45

French CPI EU Harmonized YoY

Jun

- -

0.4%

0.3%

06:30

Germany to Sell 2025 Bonds

- -

06:30

U.K. to Sell I/L 2026 Bonds

- -

08:30

Brazilian Economic Activity MoM

May

-0.3%

-0.6%

-0.8%

08:30

Brazilian Economic Activity YoY

May

-4.4%

-3.8%

-3.1%

09:30

US PPI Final Demand YoY

Jun

- -

-0.9%

-1.1%

09:30

US PPI Ex Food and Energy YoY

Jun

- -

0.6%

09:30

US Empire Manufacturing

Jul

- -

3.0 -2.0

10:15

US Industrial Production MoM

Jun

- -

0.2%

-0.2%

10:15

US Capacity Utilization

Jun

- -

78.1%

11:00

Canadian CB sets the base interest rate

15-Jul

- -

0.50%

0.75%

11:00

Yellen's Semi-Annual Testimony to House Financial

Panel

- -

13:25

Fed's Mester speaks in Columbus, Ohio

- -

15:00

Federal Reserve Releases Beige Book

- -

16:00

Fed's Williams speaks in Phoenix

- -

Thursday

05:30

Spain to Sell Bonds

- -

05:50

France to Sell Bonds

- -

06:00

Euro-zone Trade Balance SA

May

- -

€22.0B

€24.3B

06:00

Euro-zone CPI YoY

Jun F

- -

0.2%

06:00

Euro-zone CPI Core YoY

Jun F

- -

0.8%

06:50

France to Sell I/L Bonds

- -

08:00

Brazilian FGV Inflation IGP-10 MoM

Jul

0.67%

- -

0.57%

08:00

Brazilian FGV CPI IPC-S

15-Jul

0.66%

- -

0.82%

08:45

ECB Main Refinancing Rate

16-Jul

- -

0.05%

(4)

Weekly indicators

Date

Time

(Brazil)

Indicator

Reference

BES

forecast

Market

consensus

Prior

08:45

ECB Marginal Lending Facility

16-Jul

- -

0.30%

09:30

US Initial Jobless Claims

11-Jul

- -

283K

297K

11:00

Yellen's Semi-Annual Testimony to Senate Banking

Panel

- -

11:00

Philadelphia Fed Business Outlook

Jul

- -

12.0

15.2 17:00

US Total Net TIC Flows

May

- -

$106.6B

Friday

05:00

Brazilian FIPE CPI - 2

nd

_week

_Jul

_0.48%

_{- -}

_0.43%

09:30

US Housing Starts

Jun

- -

1123K

1036K

09:30

US Building Permits

Jun

- -

1150K

1250K

09:30

US CPI YoY

Jun

- -

0.2%

0.0%

09:30

US CPI Ex Food and Energy YoY

Jun

- -

1.8%

1.7%

09:30

US Real Avg Weekly Earnings YoY

Jun

- -

2.2%

11:00

Fed's Fischer speaks in Washington

- -

11:00

U. of Mich. Sentiment index

Jul P

- -

96.5

96.1 11:00

U. of Mich. 1 Yr Inflation

Jul P

- -

2.7%

11:00

U. of Mich. 5-10 Yr Inflation

Jul P

- -

2.6%

22:30

Chinese Property Prices

Jun

- -

Brazilian CNI Industrial Confidence

Jul

- -

38.9

(5)

2013

2014 E

2015 E

2016 E

2017 E

National Accounts

GDP (BRL billion)

5,157.6

5,521.3

5,864

6,294

6,688

GDP (USD billion)

2,387.9

2,345.4

1,906

1,964

2,024

GDP - Real Growth (%)

2.74

0.14 -1.5

0.0

1.0 Economic Activity

Industrial Production (%)

1.14 -3.23

-4.0

-0.5

2.0 Unemployment Rate (%) - average

5.39

4.85

6.3

7.0

6.8 Price Indices

IPCA - Consumer Price Index (%)

5.91

6.41

9.2

5.4

5.0 IGP-M - General Price Index (%)

5.51

3.69

7.4

5.1

4.9 IGP-DI - General Price Index (%)

5.52

3.78

7.6

5.1

4.9 Interest Rates

Selic Target - end of year (%)

10.00

11.75

14.50

12.00

10.50 Selic - average (%)

8.22

10.90

13.7

13.4

11.0 Real Interest Rate - Selic/IPCA (%)

2.18

4.23

4.1

7.6

5.7 TJLP - Long Term Interest Rates (%)

5.00

6.13

6.50

6.50 FX Rates

FX Rate - end of year (BRL/USD)

2.343

2.656

3.15

3.25

3.35 FX Rate - average (BRL/USD)

2.161

2.355

3.08

3.20

3.30 FX Rate - end of year (BRL/EUR)

3.219

3.213

3.37

3.35

3.35 FX Rate - average (BRL/EUR)

2.870

3.128

3.38

3.36

3.35 FX Rate - end of year (USD/EUR)

1.374

1.210

1.07

1.03

1.00 FX Rate - average (USD/EUR)

1.329

1.10

1.05

1.01 Balance of Payments

Exports (USD billion)

242.034

225.101

212.0

213.0

226.0 Imports (USD billion)

239.748

229.137

205.0

200.0

212.2 Trade Balance (USD billion)

2.286 -4.036

7.0

13.0

13.8 Current Account (USD billion)

-81.226

-103.981

-76.2

-68.8

-64.8

Current Account (% of GDP)

-3.40

-4.43

-4.0

-3.5

-3.2

International Reserves (USD billion)

375.794

374.031

370.0

370.0 Sovereign Risk - end of year (bps)

224

259

275

250

225 Public Sector

Primary Fiscal Balance (% of GDP)

1.77 -0.59

0.6

1.2

2.0 Nominal Fiscal Balance (% of GDP)

-3.05

-6.23

-6.3

-4.8

-3.8

Total Net Debt (% of GDP)

31.53

34.11

36.1

37.8

38.1

(6)

Contact information

BESI Brasil S.A. – Banco de Investimento

Address: Av. Brigadeiro Faria Lima, 3729 – 9

th

_{floor - Itaim Bibi}

ZIP 04538-905 São Paulo – SP, BRAZIL

Telephone:

+ 55 11 3074 7444 / 3193 7444

Fax:

+ 55 11 3074 7469 / 3193 7469

E-mail:

contato@besibrasil.com.br

Ombudsman:

0800 77 00668

BESI BRASIL – BANCO DE INVESTIMENTO

CEO

Rafael Valverde

presidencia@espiritosantoib.com.br

11 3074-7388

Deputy CEOs

Alan Fernandes

alanf@espiritosantoib.com.br

11 3074-7422

Frederico Alegria

falegria@espiritosantoib.com.br

11 3074-7407

Structured Operations

Alan Fernandes, Global Head

alanf@espiritosantoib.com.br

11 3074 7422

Capital Markets

Miguel Guiomar, Head

mguiomar@espiritosantoib.com.br

11 3074 7407

Corporate Finance

Daniela Pineli

dpineli@espiritosantoib.com.br

11 3074 7423

Fixed Income (Sales & Trading) & Treasury

Frederico Alegria, Global Head

falegria@espiritosantoib.com.br

11 3074 7407

Roberto Simões, Head

rsimoes@espiritosantoib.com.br

Client Relationship and Origination

Miguel Lins, Head

miguell@espiritosantoib.com.br

11 3074 7422

Silvan Suassuna

ssuassuna@espiritosantoib.com.br

Geraldo Rinaldi

grinaldi@espiritosantoib.com.br

Eduardo Bierrenbach

ebierrenbach@espiritosantoib.com.br

Luciana Costa

laparecida@espiritosantoib.com.br

Asset Management

Paulo Werneck, Head

pwerneck@espiritosantoib.com.br

11 3074-7407

BESI Securities do Brasil – CCVM

Alvaro Maia / Pedro Fonseca

amaia@espiritosantoib.com.br

/