Itaú BBA - Ahead of the Copom, DI Futures inch down

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Ahead of the Copom, DI Futures inch down

February 21, 2017

Risk-on day, with markets adjusting to the prolonged weekend in the US.

With information available until 6:30pm Brasilia time

Highlights

  • Risk-on day, with markets adjusting to the prolonged weekend in the US. Major equities got stronger across the board amid positive data in the Euro Zone. Also, Markets had a hawkish reading of the comments made by Fed’s Patrick Harker. The Fed funds futures implied probability of a March hike increased to 38% from 32% as of Friday. In rates, the DI Futures curve tightened - 6bps on average. The Jan-19 inched down 6bps to 9.99%. The Mexican swaps tightened expressively. In TIIE, the 1-year fell 10bps to 7.15%.
  • Commodities were mixed (CRB Futures Index: -0.04%) and oil prices strengthened (Brent: +0.89% to USD 56.68/bbl). While Soybean prices went down 0.58%, Copper (1.16%) and Iron Ore (2.56%) posted expressive gains. In LatAm FX, the BRL depreciated 0.28% to 3.0964/USD and the CLP traded at 643.46/USD. The COP was the regional laggard (-0.42% to 2,901.46/USD). The MNX over performed its peers, appreciating to 20.02/USD (+1.75%) – level last seen in November 2016.

Macro Backdrop

BRAZIL
  • What is the fiscal position of municipalities? Our Macro team published a study highlighting that municipalities do in fact have a fiscal problem, but to a lesser extent than the central government and states. In aggregate terms, municipalities do not face a debt problem or large and growing primary budget deficits. Full Report
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 22. 
COLOMBIA
  • New board member nominated. President Juan Manuel Santos named Gerardo Hernandez - previously financial superintendent of Colombia - to the central bank policy board, replacing Carlos Gustavo Cano.

Market Developments 

  • GLOBAL MARKETS: Risk-on day, with markets adjusting to the prolonged weekend in the US. Volatility measures increased and major equities stronger across the board amid positive data in the Euro Zone. Also, markets had a hawkish reading of the comments made by Fed’s Patrick Harker. Long EONIA (10-year: +2bps to 0.53%) and US Treasuries widened (5-year: +1bp to 1.91%), pushing DM rates up. The Fed funds futures implied probability of a March hike increased to 38% from 32% as of Friday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed (CRB Futures Index: -0.04%) and oil prices strengthened. While Soybean prices went down 0.58%, Copper and Iron Ore posted expressive gains of 1.16% and 2.56%, respectively. Brent went up, to USD 56.68/bbl (+0.89%), as Opec expects strong compliance on supply cut. In LatAm FX, most all currencies under our coverage depreciated due to a stronger overseas environment. The BRL depreciated 0.28% to 3.0964/USD and the CLP traded at 643.46/USD. The COP was the regional laggard (-0.42% to 2,901.46/USD). Due to the creation of a USD 20 billion FX swap facility, the MNX appreciated to 20.02/USD (+1.75%) – level last seen in November 2016. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: All LatAm spreads for the 5-year tenor decreased. In Chile, spreads went to 79 (-3bps). The Mexican fell 3bps to at 155bps. CDS in Brazil and Colombia fell the most (-4bps), to 227bps and 142bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Ahead of the Copom, the DI Futures curve tightened - 6bps on average. The Mar-17 fell 9bps to 12.48% and the Jan-19 inched down 6bps to 9.99%. The curve implies 339bps to 382bps in rate cuts for 2017. Accordingly, real rates fell: Jan-20 went down 4bps to 10.10%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve tightened expressively. In TIIE swaps, the 1-year fell 10bps to 7.15% and the 10-year decreased 7bps to 7.89%. The curve now implies roughly 100bps in rate hikes by YE17. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Camara rates traded marginally higher. While the 1-year went up to 3.03% (+2bp), the 5-year increased 1bps to 3.69%. Chile Rates Tracker The IBR curve slightly bear flattened. The 9-month fell 10bps to 6.66% and the 4-year decreased 4bps to 5.84%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Central Bank’s Monetary Policy Committee (Copom) meeting (Wed). We expect another 75 bps interest rate cut, lowering the Selic rate to 12.25%. Then, IPCA-15 consumer inflation preview for February will be released (Wed.), for which we forecast a 0.52% m/m rise. Also, FGV’s industrial business confidence preview for February will be released (Mon). We expect a 3.0% rise seasonally adjusted. The final industrial business confidence reading by FGV will be released on Friday. Furthermore, the nationwide unemployment rate for January will come through (Fri.). We forecast the unemployment rate to reach 12.5%, which in seasonally-adjusted terms means unemployment will climb to 12.8% from 12.6%. Moreover, CAGED formal job creation for the same month may come through. We expect net closings of 36k jobs, which is -4k in seasonally adjusted terms. Also worthy of note, the Central Bank’s credit report will come through (Thu.). Then, the consolidated primary budget balance for December will come through (Fri.). Finally, January’s tax collection may be released. We forecast BRL 137.8 billion. 
  • In Mexico, INEGI (the statistics institute) will publish 4Q’s and 2016’s GDP growth (Wed). We expect it to come in at 2.2% y/y and 2.3% y/y, respectively. INEGI will also publish December’s monthly GDP proxy (IGAE) (Wed.), for which we forecast at 1.8% y/y. Also, CPI inflation figures for the first half of February will be published (Thu.). We expect bi-weekly inflation to post 0.32%. Then, Banxico will publish (Thu.) the minutes of February’s monetary policy meeting. INEGI will announce December’s retail sales (Fri.). We estimate that retail sales growth at 6.8% y/y. Finally, the Central Bank will publish Q4’s current account balance (Fri.). We expect the current account deficit at USD 4.4 billion in 4Q16. 
  • In Colombia the central bank will hold its second monetary policy meeting of 2017. We expect the central bank to stay on hold at this meeting. Moreover, the national statistics authority will publish (Wed.) the supply-side breakdown of GDP growth for 4Q16. We estimate activity gained 0.6% from the previous quarter, resulting in annual growth of 1.2%. Also, the December activity coincident indicator (ISE) will be published (Wed.). Then, Fedesarrollo will publish (Wed.) the January retail and industrial confidence levels.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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