The market is entering a time of definition. We are 38 days away from the elections, the future dollar market, bonds and stocks will give their verdict soon.
Inflation for the month of August was 12.4% monthly, and annualized 124.4%, almost the same numbers with different interpretations. The question is whether the two digits in August could be repeated in the month of September.
The price increase in August was influenced by the 22% increase in the wholesale exchange rate; that will not happen in the month of September, since the exchange rate is frozen. Meat, which increased greatly in August, is declining in the Cañuelas agricultural and livestock market. The counter could not validate the new prices and is now being adjusted downwards while waiting for the consumer to return to the butcher shops. Home equipment and maintenance should not spiral upwards, since the exchange rate was frozen. Something similar happens with health. As for restaurant consumption, demand fell significantly, and if prices do not drop, the rooms will continue to have empty tables.
This implies that The recession will put a ceiling on price increasesin an economy where 50% of jobs are informal or self-employed, There is no room to continue validating greater increases in the coming months.
The market expectation survey (REM), which expresses the forecasts of the 36 consulting firms, shows that inflation in September would continue in double digits. They have predicted inflation of 11.6% for August and 11.5% for September. from our point of view We believe it is difficult for the two digits to be repeated. Although we will not escape a high inflation scenario.
For the next 12 months, the REM forecasts inflation of 190% and a wholesale dollar at $979.23. The 10 best forecasters in Argentina believe that inflation for the next 12 months would be 203.2% and the wholesale dollar would be at $1,000.72.
From these forecasts it is clear that Argentina will travel at a speed of high inflation for quite some time. On the other hand, the wholesale dollar would rise 180% in 12 months and would be increasing below expected inflation, according to the average of the analysts who report their projections to the Central Bank.
The critical moments that are looming in the economy would occur after the presidential elections. If there is a winner in the first round, we believe that monetary and exchange rate policy would unfreeze, and would lead to a rearrangement of prices.
If there is no definition in the first round, we believe that the exchange rate will remain frozen until the presidential elections are decided on November 19.
In any case, this freezing of the exchange rate cannot be sustained over time, therefore, we will have a spring effect once it is defined who will govern Argentina in the next 4 years.
The critical months would be November, December and January, we would have defined who would govern our country, and the governability conditions that they have to face. Until the month of April there is no significant income of dollars from exports, and it will have to manage the few dollars that are in the coffers of the Central Bank. It will have to adjust the public budget, realign the relative prices of the economy by removing subsidies and adjusting the exchange rate policy.
The budget could not be in deficit, since there are no sources of financing available. A new agreement with the IMF would be on the table, and it would be necessary to define what happens with the debt of importers, since if many companies do not receive the dollars to make payments abroad, they would default on payments with their suppliers. The rearrangement of relative prices will be inevitable, inflation and devaluation rate could be very high, the consequence would be a high recession.
What does the market tell us?
Firstly, there is no electoral definition on October 22, the future dollar of the October position is worth $399.50 and the maturity amounts to US$876 million. It is a low value when compared to the value of $350 of the dollar today. If the market were to price in a winner in October, this position would be worth more than $450, and volume would exceed $1.5 billion.
Secondly, the November future dollar is worth $479, this implies that the market is discounting a winner, for December it is trading at $615, and January $698. The biggest increase in percentage terms occurs between December and November with a gap of 28.4%. Whoever wins, there is an exchange rate adjustment. The market says so.
Thirdly, the stock and bond markets are on a downward path, this is very good, because we are 38 days away from the elections on October 22, and it seems to us that the market is crouching down to carry out an important bullish rally, facing the electoral definition.
Fourthly, the key dates will be October 1 and 8 when the presidential debates take place. Here you will begin to notice if someone can win in the first round, or who is shaping up for the second round.
Politics and markets go hand in hand, the intensity of the rise in the markets will determine how close we are to an electoral definition in October. Every day the market votes, for now and only for now, the question mark remains, but place your bets, a lot of money can be made in the remaining 38 days, the engines are running, but the decks are still cold to Let the markets pick up speed.
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