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Banxico hikes to keep inflation expectations well-anchored

February 9, 2017

The Mexican curve bear-flattened (1s10s: -7bps), as Banxico hiked more than implied in the front end.

With information available until 6:30pm Brasilia time

Highlights

  • The Mexican curve bear-flattened (1s10s: -7bps), as Banxico hiked more than implied in the front end (see Macro Backdrop). In TIIE swaps, the 1-year widened 16bps to 7.10% and the 5-year went up 13bps to 7.58%. The curve implies roughly 130bps in further hikes for 2017. In Brazil, DI Futures managed to trade range-bound, despite a big LTN auction and the widening US Treasuries; the Jan-21 stood afloat at 10.31%.
  • The currencies under our coverage tracked the broad EMFX strengthening; the MXN, the CLP and the COP appreciated, to 20.41/USD (+0.35%), 646.05/USD (+0.31%) and 2,860.58/USD (+0.70%), respectively. The BRL bucked the regional trend (-0.36% to 3.1268/USD), hurt by the soybean rout (-0.78%).

Macro Backdrop

BRAZIL
  • Paper cardboard dispatches (ABPO) increased 2.8% m/m in January. We maintain our preliminary forecast for January industrial production at 0.7% m/m.
  • The Lower House set up the special committee on pension reform.
MEXICO
  • Banxico decided to hike the reference rate by 50bps, as we expected. The board raised the reference rate to 6.25% from 5.75%, underscoring its commitment to keep long-term inflation expectations well-anchored. The decision was in line with the majority view, but several analysts were expecting a less aggressive move, probably because the economic outlook has deteriorated. In contrast to its previous outlook, the board now expects inflation to stay above the tolerance range (2%-4%) throughout 2017, and converge to close to 3% in 2018. Moreover, the communiqué mentions (twice) that the board will deliver the hikes that “are necessary in 2017” and includes the potential second-round effects from higher gasoline prices amongst the variables the Central Bank is monitoring (together with inflation expectations, exchange-rate pass-through, the rate differential with the US, and the output gap). We expect the central bank to take the reference rate to 7.0% before the end of this year, with three 25-bp rate hikes following each move of the same magnitude by the Fed. However, depending on the evolution of inflation, inflation expectations and of the MXN, we can’t rule out a hike before the Fed moves. Full Report
  • Inflation surprises to the upside. Mexico’s CPI posted a 1.70% m/m increase in January – in line with our forecast (1.71%) and market expectations (1.69%) – largely explained by the increase of gasoline prices which are currently being liberalized. Specifically, the inflationary pressure was driven by: gasoline prices (0.94p.p.); liquefied petroleum gas (0.29p.p.); regulated prices (0.11p.p.); and the MXN depreciation. The monthly figure was higher than the 5-year median (0.71%) causing an increase of short-term inflation expectations. Annual headline inflation increased to 4.72% (previous: 3.33%), the highest headline inflation in more than four years, surpassing the upper bound of the Central Bank’s tolerance range (2%-4%). Core inflation rose to 3.84% (previous: 3.44%) during the same period. 
  • Given the higher-than-expected inflation in January and the deterioration of inflation expectations, we now see for 2017 an inflation of 5% (from: 4.6%). There’s also a risk that domestic gasoline prices could increase somewhat more, if US gasoline prices increase and the exchange rate weakens. The government temporarily suspended the update of maximum regional gasoline prices, but it is unlikely that it will backtrack from the liberalization plan. Looking beyond, we believe inflation will likely moderate in 2018. Both exchange-rate depreciation and the increase in gasoline prices are temporary shocks that will fade as the year goes on, provided that there is no substantial change in Mexico’s trade relationship with the US and assuming tighter monetary policy in Mexico that prevents the materialization of second-round effects. Full Report
  • We publish our scenario review for the month of February. Mexico’s GDP growth rate likely reached 2.3% in 2016, but we expect a slowdown to 1.6% in 2017. Among the headwinds impeding growth are an erosion of real wages, tighter macro policies and, most importantly, the uncertainty over the US trade policies. Full Report
CHILE
  • We publish our scenario review for the month of February. A combination of supply shocks and limited demand took a toll on activity in 2016. A mild recovery is expected this year, to 2.0% (2016: 1.5%), as average copper prices improve, inflation declines and interest rates fall. However, uncertainty over the outcome of the presidential elections will likely have an unfavorable effect. Full Report

Market Developments 

  • GLOBAL MARKETS: Both volatility and US Corporate Credit Spreads fell and equity markets were firm on the green. Long US Treasuries went up, as US initial jobless claims data came stronger than expected by the market (near 43-year lows). Long Treasuries (10-year and 30-year) widened 5bps to 2.39% and 6bps to 3.01%, respectively. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher on average (CRB futures index: +0.26%). Soybean decreased -0.78%, amid the revision of future crops in Argentina, according to the USDA. However, the revision wasn’t as big as what the market expected. Also, the Brazilian state crop forecasting agency Conab said it now expects a record production in the 2016-17 season. In FX, high-beta currencies went up (EMFX: +0.25%). Within the currencies under our coverage, the MXN, CLP and COP appreciated, to 20.41/USD (+0.35%), 646.05/USD (+0.31%) and 2,860.58/USD (+0.70%), respectively. The BRL was the regional laggard, weakening to 3.1268/USD (-0.36%), hurt by the soybean rout. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: The 5-year tenor credit spreads fell all over LatAm, except for Chile. In Mexico and Colombia, they tightened to 155bps (-2bps) and 147bps (-1bp), respectively. Brazilian CDS fell the most, trading at 234bps (-4bps). In Chile, it stood flat at 78bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Despite a big LTN auction (659 DV/01) and the widening US Treasuries, DI Futures managed to trade range bound. The Jan-21 stood flat at 10.31%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear-flattened (1s10s: -7bps), as Banxico hiked more than implied in the front end (see Macro Backdrop). In TIIE swaps, the 1-year widened 16bps to 7.10% and the 5-year went up 13bps to 7.58%. The curve implies roughly 130bps in rate hikes for 2017. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia:  Camara rates ahd a quiet session. The 1-year stood flat at 2.95%. Chile Rates Tracker In Colombia, the IBR swaps curve flattened slightly (1s8s: -3bps). The 9-month widened to 6.70% (+3bps) and the 8-year receded to 6.32% (-1bp). Colombia Rates Tracker

Friday Events

  • In Brazil, heavy vehicle highway traffic (ABCR) indicator may be released.

     

  • In Mexico, INEGI will publish December’s industrial production. We expect it to contract -0.3% y/y. Also, the ANTAD (National Association of Department Stores and Supermarkets) will announce January’s same-store-sales. We forecast sales to grow 6% y/y.
  • In Colombia, the Banrep will release the monetary policy minutes from January. The minutes could provide insight on which conditions Banrep is monitoring before resuming the easing cycle.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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