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Andean curves steepen, Brazilian nominals rally

June 30, 2017

Short Chilean rates fell on the higher-than-expected unemployment figure, while the long end tracked DM yields higher.

With information available until 6:30pm Brasilia time

Highlights

  • The Chilean curve steepened, as the front end edged down on the higher-than-expected unemployment figure (see Macro Backdrop) and the long end tracked DM yields higher. In Camara swaps, the 2s20s spread widened 4bps. The Colombian curve bull-steepened slightly, as labor market conditions deteriorated further in May despite the lower headline (see Market Backdrop). In IBR swaps the 1s10s spread rose 2bps. In contrast, the Brazilian curve bull-flatted on the improved risk mood abroad; in DI futures, the Jan-19x21 spread narrowed 4bps.
  • Commodities ended the week firm on the green, led by energy and grains. In this context, commodity-linked currencies strengthened 0.36%, outperforming the EMFX index (+0.11%). LatAm FX registered mixed performances though. The MXN was again the regional laggard (-0.43% to 18.12/USD), followed by the BRL (-0.16% to 3.3082/USD). Andean pairs performed better, as the COP stood stable at 3,045.67/USD and the CLP appreciated 0.19% to 663.90/USD.

Macro Backdrop

BRAZIL
  • The nation-wide unemployment rate (PNAD Contínua) reached 13.3% in May, below our expectations and the market median (both at 13.6%). The result represents a 2.1 p.p. increase compared to the same period last year (11.2%). Using our seasonal adjustment, unemployment receded from 13.1% to 13.0%. The labor force advanced 0.1% at the margin and 1.1% yoy. The participation rate (ratio of the labor force to the working-age population) remained stable at 61.5% according to our estimates, close to the historical average (61.3%).
  • The downward pressure on real wages stemming from high unemployment has been partially offset by the upward pressure from falling inflation. The average real wage fell 0.1% mom/sa, while yoy growth receded slightly to 1.8% from 2.3%. The real wage bill posted a 0.5% increase yoy, with a rise in real wages (1.8%) offsetting the 1.3% drop in the labor force. Conversely, the real wage bill at the margin gained 0.1% in the month, with the increase in the labor force offsetting the decline in the average real wage. Full Report
  • The consolidated public sector posted a primary deficit of BRL 30.7 billion in May, higher than our forecast and market consensus (both at 21 billion). The consolidated primary deficit accumulated over 12 months increased to 2.5% of GDP from 2.3% in April. The central government’s result had the largest surprise (deficit of 29.4 billion, while we and market consensus estimated 20 billion). Regional governments again posted a positive reading, in line with annual seasonality and above our expectation (BRL 0.9 billion, while we forecasted a balanced result). State-owned companies had a surplus of BRL 0.5 billion. In the meantime, the nominal deficit remained high, at 9.2% of GDP over 12 months, excluding the Central Bank’s gains on FX swaps.
  • The general government’s gross debt edged up to 72.5% of GDP in May from 71.3% in April, while public sector net debt went to 48.1% from 47.4% of GDP in the same period. If approved, the pension reform will be essential for public debt dynamics — by reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap — and could generate the necessary conditions for the structural decline in interest rates and the rebound in economic activity. Full Report
  • Gasoline prices at the refinery were adjusted to the downside by 2.4%. We estimate an impact over the IPCA inflation of roughly -9bps between July and August. From now on, fuel prices will be adjusted more frequently – even on a daily basis.
CHILE
  • Industrial production indicators were mixed as manufacturing came in stronger than expected, while the mining recovery faltered. The industrial production index grew a mild 0.1% year over year in May (0% on seasonally adjusted basis), but an improvement from the 4.0% drop in April (-2.0% on a seasonally adjusted basis). Activity in May was pulled up by the 1.9% year over year rise in manufacturing (previous: -7.1%), exceeding the market’s forecast (+0.3%) and ours (-0.3%). Food processing was the main force behind the manufacturing growth (3.0 pp contribution), but weakness remains widespread as more than half of the index divisions are contracting. Mining fell 2.6% (previous: -1.3%) and reflects a slower than expected recovery from the extensive copper mining strike earlier in the year.
  • We expect activity to show some pick up ahead. We see mining activity recovering during the remainder of the year, driving the industry. The loose monetary policy and low inflation will also aid activity. We expect growth of 1.6% this year, stable from 2016. Full Report
  • The loosening of labor market continued in May. The unemployment rate for the quarter ending in May increased 0.2% to 7.0% over the 12-month period, a touch above ours and the market’s expectation (6.9%). Total job growth came in at 1.7% (1Q17: 1.4%), while the labor force also picked up to 2.0% year over year (1Q17: 1.8%). Salaried employment in the private sector remains weak, with growth of only 0.3% year over year (some improvement from -0.6% in 1Q17), while public salaried employment picked up to 6.0% (0.2% in 1Q17). With fiscal expenditure expected to moderate ahead, support from the public sector will likely diminish. Accounting for hours worked, effective labor actually shrunk 1.0% year over year in the quarter ending in May (1Q17: +0.8%). We expect the unemployment rate to average 7.0% this year (from 6.5% in 2016), dragging consumption growth down. Full Report
  • On Sunday (July 2) primary elections will be held to determine two (of many) presidential candidates for November’s presidential election. Only two coalitions (Chile Vamos and Frente Amplio) will hold primaries, with binding results. The latest polls point to former president Sebastian Piñera as the nominee for the Chile Vamos coalition, while Beatriz Sanchez seems to be the most likely candidate for the newly-created Frente Amplio coalition. The government coalition, Nueva Mayoria, will present two candidates in the election in November. We note that participation in Sunday’s primaries will not be indicative of the general election in November, given that only two coalitions are participating in the primary election. However, the election is likely to be a reflection of the strength of the participating coalitions and recommend that investors keep a close eye on the results. Full Report

COLOMBIA

  • The labor market dynamics continue to diverge between rural and urban areas. The national unemployment rate came in at 9.4% in May, 0.6 p.p. higher than the previous year. Meanwhile, the urban unemployment rate was higher at 10.2%, 1.2 p.p. above that in May 2016, but lower than the 10.4% Bloomberg market consensus and our 10.7% forecast. The difference between national and urban unemployment rate can be explained by a recovery in agriculture-related sectors, due to the normalization of weather conditions.
  • In the breakdown, job quality continued to deteriorate in May, with self-employment the main contributor to employment growth. Employment expanded 1.9% at the national level in the quarter ended in May from 0.9% in 1Q17. Self-employment increased 2.6% (1.1 p.p. contribution to the total gain), up from 2.2% in 1Q17. Salaried employment gained 1.6%, lower than the 2.6% recorded in 1Q17. At the same time, government employment declined 3.4%, continuing the negative trend recorded since February. The agriculture sector was the main contributor to payrolls (7.5% year over year, or 1.2 p.p. contribution). We expect the national unemployment rate to average 9.0% this year, from 9.2% last year. Nevertheless, the deterioration of job quality will mean support for private consumption from the labor market remains limited. Full Report
Market Developments
  • GLOBAL MARKETS: Risk appetite improved at the margin, as volatility subsided and high-yield US corporate credit spreads inched down. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities ended the week firm on the green (CRB futures: +1.68%), led by energy and grains. Oil rose strongly (WTI: 3.12% to 46.33/bbl) as Baker Hughes data showed a decrease in the number of US oil rigs. Shale explorers had added rigs for 23 uninterrupted weeks. What’s more, soybean rallied 3.24%, after stockpiles and planted acreage intentions reported by the USDA fell short of market expectations. In this context, commodity-linked currencies strengthened 0.36%, outperforming the EMFX index (+0.11%). In LatAm, the MXN was again the regional laggard (-0.43% to 18.12/USD), followed by the BRL (-0.16% to 3.3082/USD). Andean pairs performed better, as the COP stood stable at 3,045.67/USD and the CLP appreciated 0.19% to 663.90/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads were flattish, supported by the gains in key commodities for LatAm countries. In the 5-year sector, the Brazilian risk premium stood at 242bps, Mexico at 113bps, Chile at 66bps and Colombian CDS was stable at 136bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The curve bull-flatted on the improved risk mood abroad. In DI futures, the Jan-19 dropped 7bps to 8.92% and the Jan-21 fell 11bps to 10.07%. Long breakevens narrowed 10bps in average; the 5y5y forward tightened 12bps to 4.78%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Nominals widened in tandem with US Treasuries. TIIE swaps widened 3-4bps past the 5-year. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve steepened, as the front end edged down on the higher-than-expected unemployment figure (see Macro Backdrop) and the long end tracked DM yields higher. In Camara swaps, the 2s20s spread widened 4bps. Chile Rates Tracker The Colombian curve bull-steepened slightly, as labor market conditions deteriorated further in May despite the lower headline (see Market Backdrop). In IBR swaps the 1s10s spread gained 2bps. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will remain focused on political issues next week. One of the main events is the choice of the rapporteur responsible for President Temer’s accusation in the Lower House Constitution and Justice Committee. Labor reform was expected to be voted in the Senate by next week, but latest news indicate that it will be postponed. On activity, the key release will be May’s industrial production (Tue.), for which we expect a 0.7% seasonally-adjusted monthly increase. June’s coincident indicators will also hit the wires: Fenabrave’s vehicle sales (Mon.) and Anfavea’s auto production (Thu.). We forecast June’s IPCA (Fri.) to register a 0.15% monthly decrease. On external accounts, we expect June’s trade balance (Mon.) to post another strong surplus (USD 6.8 billion).

  • Banxico will publish the minutes of June’s monetary policy meeting on (Thu.). Banxico surprised the market by signaling the end of the tightening cycle in its latest monetary policy meeting. However, the statement didn’t close the door completely to additional rate hikes, so the minutes could hint what would be potential triggers for further tightening. INEGI will announce June’s CPI inflation (Fri.), for which we expect a 0.20% month-over-month print. The statistics institute (INEGI) will publish April’s gross fixed investment (Wed.). We forecast a 6% year-over-year contraction, given the deterioration in coincident indicators and a negative calendar effect. Also noteworthy, June’s Economist Survey will be released (Mon.).

  • A busy week in Chile brings key activity and inflation releases. BCCh will publish the minutes from the June monetary policy meeting (Mon.). The minutes will likely confirm that the board is content to wait and observe how the economy unfolds, given the monetary stimulus already implemented. The national statistics agency (INE) will publish the private consumption activity indicators for May (Mon.). We expect the commercial activity index to have increased 3.5% from last year (-0.5% previously). The central bank will publish the Imacec GDP proxy (Wed.) for the month of May. We expect mining activity to support a 0.5% expansion from April, resulting in an annual increase of 1.0%. On Thursday, the National Institute of Statistics (INE) will publish nominal wage growth for May. In April, nominal wage growth was stable at 4.3% year-over-year (4.9% in December 2016). Wage inflation is likely to stay low and possibly moderate further amid a loose labor market and low headline inflation. The INE will publish inflation for the month of June (Fri.). We expect prices to fall 0.1% from May. As a result, annual inflation would dip to 2.0% reaching the lower bound of the 2%-4% tolerance range.Finally, the central bank will release the trade balance figures for June (Fri.). We forecast a USD 100 million surplus.

  • In Colombia, external data and inflation are on the spotlight. The DANE will publish export data for May (Wed.). We expect exports to come in at USD 3.4 billion, representing annual growth of 23.3%, led by mining (coal, ferronickel and oil). The national institute of statistics will release inflation for June (Wed.). We expect consumer prices to gain 0.19% from May, taking annual inflation down to 4.07%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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