Itaú BBA - Banrep delivers a 25-bp cut in another split decision

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Banrep delivers a 25-bp cut in another split decision

March 24, 2017

Cuts larger than 25-bp seem unlikely for now.

With information available until 6:30pm Brasilia time


  • Banrep cut the policy rate by 25bps to 7.0%, in line with consensus. We, however, felt that the evolvement of macroeconomic indicators over the past month would lead most board members to accelerate the easing cycle. Cuts larger than 25-bp seem unlikely for now (see Macro Backdrop).
  • In Mexico, long yields fell as retail sales came in weaker-than-expected (see Macro Backdrop). In TIIE swaps the 10-year fell 3bps to 7.48%. The MXN (0.91% to 18.76/USD) is the best LatAm currency year-to-date. 
  • In the session, the BRL outperformed the majors closing at 3.1080/USD (+1.05%). Likewise, the DI Futures curve bull flattened substantially (Jan-18x25: -9bps). 

Macro Backdrop

  • Wider-than-expected current account deficit due to profit and dividend remittances. The deficit totaled USD 935 million in February - worse than our estimate (USD 400 million surplus) and market consensus (zero balance). Still, the reading was narrower than in February 2016, when the deficit was USD 1.9 billion. Over 12 months, the current-account deficit receded to USD 22.8 billion or 1.2% of GDP. The seasonally-adjusted annualized three-month moving average advanced to a $26 billion deficit (January: -$25 billion). The biggest positive contribution again came from the trade balance, with a USD 4.4 billion surplus (February 2016: USD 2.9 billion). The trade surplus will continue to be the main driver behind the maintenance of a narrow current account deficit. A stronger exchange rate in 2017 (on average, compared to 2016) and some economic recovery will likely produce a slightly wider current account deficit than in 2016. We forecast a 1.6% of GDP deficit this year.
  • Direct investment in the country (DIC) surprised again by reaching USD 5.3 billion, beating our estimate (USD 4.5 billion) and market consensus (USD 5 billion). Equity capital transactions accounted for less than half (just 40.9%) of total DIC, in contrast with the trend seen in recent months. DIC over 12 months receded to USD 84 billion (previous: USD 85 billion). Preliminary data published by the Central Bank suggest DIC will remain high this month (USD 4.9 billion inflows as of March 22). Foreign investment in the local capital markets again posted outflows after a positive reading in January: USD 1.6 billion outflows from the fixed income market were partially offset by USD 648 million inflows to the stock market. Over 12 months, foreign investment in the local capital markets remains negative, by USD 11 billion. Overall, DIC remains resilient, reducing Brazil’s reliance on volatile capital flows. Portfolio flows (stocks and fixed income) are still negative over 12 months, but outflows became thinner at the margin. Full Report
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 27. 
  • Mexico’s retail sales began the year on a soft footing. Retail sales grew 4.9% y/y in January - undershooting our forecast (7%) and market expectations (5.5%) - pulling down the 3-month moving average growth rate to 8.4% y/y (previous: 9.8%). At the margin, retail sales are contracting. Seasonally-adjusted retail sales fell 1.1% from December, posting two consecutive declines. Thus, the quarter-over-quarter annualized growth decreased to 2.2% (December: 7.0%). Consumption will likely weaken this year relatively to 2016. Last year, the annual growth of retail sales was a robust 8.7%, underpinned by strong employment growth, low inflation, dynamic credit growth, and solid remittances. However, fundamentals have deteriorated recently. The spike of inflation since January has translated into negative growth for real wages during the first two months of 2017, consumer confidence fell to a historical low in January (rebounding to a still low level in February) and fiscal and monetary policies are getting tighter. 
  • Banrep cut the policy rate by 25bps to 7.0%, in line with consensus. We, however, felt that the evolvement of macroeconomic indicators over the past month would lead most board members to accelerate the easing cycle. The decision was reached through a three-way split with one co-director preferring to stay on hold, FinMin Cardenas opting for a 50-bp cut, while the remaining four co-directors fell in the majority. This was the fifth consecutive split vote, reflecting a divided board. The explicit reference to the rate cut being consistent with meeting the 3% target in 2018 shows it is focusing on a longer forecast horizon than previously. The board also commented that the speed of the disinflation underway has exceeded the technical staff’s expectations, although it noted the presence of indexation mechanisms and that rising price-stickiness could slow the convergence to 3%. In terms of activity, the board acknowledged the recent indicators pose downside risks to the 2% growth forecast for this year. Furthermore, the board continues to see the current level of real interest rate as historically high.
  • However, cuts larger than 25-bp seem unlikely for now. While Finance Minister Cárdenas is favorable of more aggressive rate cuts, Governor Echavarría noted in the press conference that current data does not warrant the use of deeper cuts (50-bp or 100-bp per meeting), as was the case in the past. In all, there is a clear concern over the evolution of activity, while inflationary pressures are diminishing and external imbalances correct. We see the policy rate ending the year at 5.5%. For now, it appears likely Banrep will continue through 25-bp cuts. Full Report
  • The coincident activity indicator (ISE) for the month of January reaffirmed that the economy continues to show weakness in the aftermath of the terms-of-trade shock. The seasonally adjusted series grew 1.2% y/y (December: +1.3%), resulting in growth in the quarter ending in January coming in at 1.6% (4Q16: 1.6%). Sequentially, activity contracted from the previous month for the second consecutive time, resulting in quarterly activity slowing to 1.2% q/q in the quarter (4Q16: 3.3% q/q, 3Q16: 3.7% q/q). The continued weak performance from the coincident activity indicator reinforces the downside bias to our 2.3% growth expectation for 2017 (2.0% in 2016). The still tight monetary policy, low oil investment and historically low private sentiments will limit the activity recovery. 

Market Developments 

  • GLOBAL MARKETS: US equity markets close lower as the House of Representatives vote on a new healthcare bill has been postponed. Tax reform should be discussed after the FY17 budget (expected to be approved by April 28). True, the health care revamp negotiation showed it is difficult to reach simple majority in congress, reducing the odds of a major unfunded tax cut but the market still expects some fiscal stimulus. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed and oil prices posted gains (Brent: +0.91% to USD 51.02/bbl). In LatAm FX, all currencies under our coverage appreciated. The CLP increased 0.41% to 660.48/USD and the COP strengthened 0.72% to 2,897.71/USD. In the session, the BRL outperformed the majors closing at 3.1080/USD (+1.05%). However, the MXN (0.91% to 18.76/USD) is the best LatAm currency year-to-date. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor decreased across the board. Chilean spreads decreased to 75bps (-3bps). Both Mexican and Colombian country risk fell 5bps to 135bps and 138bps, respectively. CDS in Brazil went down 4bps to 237bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened substantially. In DI Futures, the Jan-18 decreased 7bps to 9.90% and the Jan-21 went down 15bps to 9.87%. Accordingly, breakevens tightened as the 5-year fell 14bps to 4.54%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields fell as retail sales came in weaker-than-expected (see Macro Backdrop). In TIIE swaps, while short rates traded higher (1-year: +2bps to 7.15%) long ones fell (5-year: -1bp to 7.24%; 10-year: -3bps to 7.48%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded range bound. In Camara swaps, the 1-year fell 1bp to 2.83% and the 5-year inched up 1bp to 3.58%. Chile Rates Tracker In Colombia, rates traded higher, in average. In IBR swaps, the 1-year went up 1bp to 5.81% and the 5-year increased 3bps to 5.54%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for 1Q17 will come through (Thu.). We expect the message conveyed in this QIR to leave the doors open for stronger rate cuts (we expect a 100-bp cut in April’s meeting). Then, January’s retail sales numbers will be published (Thu.). We expect a 0.4% m/m increase in core retail, whereas the broad segment will likely shrink: we expect a 0.9% decline, pulled down by weaker vehicle sales. Moreover, the final March reading of FGV’s industrial business confidence will come out (Wed.), for which the preview indicates a 3.3% rise in confidence and 0.2 p.p. rise in capacity utilization. January’s Service Sector Survey (PMS) with data on the sector’s revenues will also come through (Wed.). Ahead on the week, the nationwide unemployment rate will hit the wires (Fri.). We expect the unemployment rate to reach 13.1% in the quarter ended in February. Finally, we count on a possible release of the BCB’s monthly activity index (IBC-Br) for January. We expect a 0.1% m/m decline. The BCB’s credit report release is also relevant (Wed.). Onto fiscal accounts, February’s tax collection may be released throughout the week. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. Then, the consolidated primary budget balance for February will come through (Fri.). We expect a BRL 19.6 billion deficit, with the central government result (Thu.) posting a BRL 20.2  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.5 billion surplus (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Finally, the National Monetary Council is scheduled to meet to decide on the TJLP long term interest rate (Thu.). We expect no change to the TJLP in the near future, currently at 7.5%. 
  • In Mexico, the statistics institute (INEGI) will publish February’s trade balance (Mon.). We expect the trade deficit to continue narrowing at the margin, driven by an improvement in the non-energy balance. Then, INEGI will also publish January’s monthly GDP proxy (IGAE) (Mon.), for which we forecast at 2.3% y/y. Moreover, INEGI will announce February’s unemployment rate (Tue.). We expect the unemployment rate to post 3.6% (one year ago: 4.2%). The Central Bank’s board will meet to decide on the reference rate (Thu.). Given the upward trend of inflation, we expect a 25-bp rate increase to 6.50%. Finally, the Ministry of Finance (“Hacienda”) will announce February’s fiscal balance (Thu.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation is implemented. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of February (Thu.). We expect manufacturing production to contract 3.3% from last year (January: -1.1%), negatively affected by metal related manufacturing amid a prominent mining strike. Then, the central bank will publish the minutes from the March monetary policy meeting (Fri.). In the meeting, the board of the central bank cut the policy rate by 25-bp to 3.25%, in line with expectations. Also, INE will publish the national unemployment rate for the quarter ending in February (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.3% from 5.9% in the equivalent period last year. 
  • In Colombia, the national unemployment rate for the month of February will be released (Fri.). The labor market has shown continued signs of loosening through the low quality of job creation and the rise in discouraged workers. We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

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