Itaú BBA - Banrep unexpectedly cuts the policy rate

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Banrep unexpectedly cuts the policy rate

October 27, 2017

The front end of the Colombian curve rallied after Banrep surprised market forecasts by delivering a 25-bp cut to 5.0%.

With information available until 6:30pm Brasilia time

Highlights

  • The front end of the Colombian curve rallied after Banrep surprised market forecasts by delivering a 25-bp cut to 5.0% (see Macro Backdrop). In IBR swaps, the 1-year fell 16bps to 4.58%. We are received in the 18-month IBR swap since mid-September (see our “Receive 18m IBR rates in Colombia as non-tradable inflation starts to fall”). 
  • LatAm FX posted gains (+1.02%), partly giving back Thursday’s losses. The BRL rallied 1.91% to 3.2356/USD. On the back of rising oil prices, the MXN is trading at 19.1629/USD (+0.22%) and the COP appreciated 0.17% to 3,010/USD (+0.17%). 
  • In Chile, markets were closed due to a national holiday. 

Macro Backdrop

BRAZIL
  • The BCB released today the credit figures for September. The daily average of new non-earmarked loans expanded 5.1% mom/sa in real terms, while new earmarked loans fell 4.0%. Overall seasonally-adjusted delinquency slid 0.1 p.p. to 3.6%. Interest rates charged on non-earmarked loans receded to 43.3% from 45.6%, dropping for non-financial corporations and households. Average spreads in these transactions also narrowed for both segments. Meanwhile, average interest rates charged on earmarked loans slipped to 9.3% from 10.0%, falling for non-financial corporations and households. Average spreads in these transactions declined for non-financial corporations and increased for households. Full Report
  • Confidence in the retail sector (from FGV’s monthly commerce survey) rose 3.7% mom/sa in October to 92.5, the highest level since August 2014. The increase was driven by both the current situation component (2.7%) and by expectations (4.3%).

COLOMBIA

  • Banrep surprised market expectations and resumed interest rate cuts with a 25-bp move to 5%, after staying on-hold for only one month. Five board members voted for the decision, while 2 members favored staying on-hold. This is in sharp contrast with the previous month, when only two board members voted for a 25-bp rate cut (with the majority favoring an unchanged policy rate). According to the statement, a more favorable inflation outlook led to the decision to loosen policy despite a somewhat better outlook for activity. However, the central bank warned the move should not be taken as the beginning of a continuous sequence of rate cuts. According to the press statement, the board is more confident with the activity recovery (the central bank’s technical team revised the growth forecast for 2018 to 2.7% from 2.4% previously), but activity growth would still be below potential. 
  • We maintain our forecast that the easing cycle will end with a policy rate of 4.5%, following two additional 25-bp rate cuts. The timing of rate cuts, however, will be (activity and inflation) data dependent. Full Report

Market Developments 

  • GLOBAL MARKETS: US Trasuries narrowed (5-year: -3bps to 2.04%) on market conjectures that there will be no major shift in the Fed board, even though the 3Q17 GDP came in better than forecasts (actual: 3.0%; consensus: 2.6%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities space, oil prices climbed (Brent: +1.83% to USD 60.12/bbl – highest since July 2015) as the Opec’s secretary general Mohammad Barkindo said Saudi Arabia and Russia declared their support for extending a global deal to cut oil supplies for another 9 months, according to Reuters. Additionally, Baker Hughes showed the US crude rig count fell by 15 to 913. LatAm FX posted gains (+1.02%), partly giving back Thursday’s losses. The BRL rallied 1.91% to 3.2356/USD. On the back of rising oil prices, the MXN is trading at 19.1629/USD (+0.22%) and the COP appreciated 0.17% to 3,010/USD (+0.17%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) narrowed in LatAm. In Brazil and Colombia, CDS decreased 3bps to 174bbps and 112bps, respectively. Chilean and Mexican spreads went down 2bps to 52bps and 108bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened as the BRL (+1.91%) recovered Thursday’s losses. In DI futures, the Jan-19 fell 6bps to 7.30%. Real rates went south by 1-2bps (Aug-22: -1bp to 4.55%). Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican rates narrowed on the back of lower US Treasury yields. In TIIE swaps, the 1-year went down 2bps to 7.53% and the 10-year fell 5bps to 7.40%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to a national holiday. Colombian yields rallied after Banrep surprised market forecasts by delivering a 25-bp cut to 5.0% (see Macro Backdrop). In IBR swaps, the 1-year fell 16bps to 4.58%. We are received in the 18-month IBR swap since mid- September (see our "Receive 18m IBR rates in Colombia as non-tradable inflation starts to fall"). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom minutes will be released (Tue.). The statement following the decision suggests that the plan remains to slow down the pace of easing moderately, which we read as a signal that the December move will probably be a 50-bp rate cut, taking the Selic to 7.0%. Furthermore, the consolidated primary result for September will be released (Mon.). We expect a BRL 24.8 billion deficit with regional governments posting a BRL 0.5 billion deficit and state-owned companies a BRL 0.4 billion deficit. On economic activity, September’s industrial production will be released (Wed.). We expect a 0.7% mom/sa increase. Moreover, the nationwide unemployment rate for September will come out (Tue.). We expect it to decrease 0.1 p.p. to 12.5% (unchanged at 12.6% according to our seasonal adjustment). Then, FGV will release its economic uncertainty indicator for October (Mon.) and the business confidence surveys on industry and services (Tue.). Also, Fenabrave’s vehicle sales for October will come through (Wed.). On external accounts, we expect October’s trade balance (due Wed.) to once again post a strong surplus (USD 5.0 billion).
  • In Mexico, the Ministry of Finance (Hacienda) will announce September’s fiscal balance (Mon.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. Then, INEGI will publish the flash estimate of Q3’s GDP growth (Tue.), which we expect to come in at 1.6% year-over-year.
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of September (Mon.). We expect manufacturing production to decline 2.0% from last year. Then, INE will release the national unemployment rate for the third quarter of the year (Tue.). We see the unemployment rate reaching 6.6%. Finally, INE will publish the private consumption activity indicators for September (Fri.). We expect the commercial activity index to have increased 3.2% from last year.
  • In Colombia, DANE will publish exports for the month of September (Wed.). We expect exports to come in at USD 3.3 billion, boosted by a recovery of coal exports.
  • In Argentina, the INDEC will publish the manufacturing and construction data for September (Tue.). Then, tax collection for October will see the light (Wed.). We expect taxes to increase 35.6% yoy (to ARS 227.2 billion) in October. Moreover, the central bank will release its monthly expectations survey. At last, the car-makers association (ADEFA) will release October’s data on production, exports and domestic sales to car dealers.

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa



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