Itaú BBA - BCB keeps the easing pace

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BCB keeps the easing pace

July 26, 2017

The Copom delivered the expected outcome, a 100bps rate cut, leading the Selic rate to 9.25% pa.

With information available until 6:30pm Brasilia time


  • The Copom delivered the expected outcome, a 100bps rate cut, leading the Selic rate to 9.25% pa. This marks the return of the Selic rate to single digit territory, for the first time since November 2013. The statement suggests that the Copom may be leaning toward repeating the 100bps rate cut in its next policy meeting, on September 5-6. We still see the case for slowing down the pace of easing, given increased uncertainty about very important fiscal and institutional reforms, as well as the stage of the cycle, so for the moment our call remains that the next move will be of 75bps (which would already be pretty fast easing). However, we may revisit this call in line with further Copom signs, such as those that may be embedded in the meeting minutes, out next Tuesday, August 1. For the moment we envisage the Selic rate ending the year at 7.5%, against a consensus of 8%, and we reckon there is some downside risk to that call. 
  • After the FOMC, the USD weakened 0.65% vis-à-vis G10 currencies, as the DXY index hit a 13-month low. LatAm FX (+0.93%) strengthened in tandem with EM peers. By the time of writing, the MXN is trading 0.99% stronger to 17.5966/USD. The BRL closed at 3.1384/USD (+1.09%). Andean markets closed before the Fed’s statement. Still, the CLP appreciated 0.41% to 650.30/USD and the COP posted gains of 0.43% to 3,018/USD. 

Macro Backdrop


  • The central government posted a BRL 19.8 billion deficit in June, virtually in line with market expectations and our call (both at BRL 20 billion). Revenues came in BRL 0.4 billion higher while expenditures came in line with our forecast. The result included for the second month in a row a BRL 10 billion advance payment of court-ordered deposits (“precatórios”). This payment was made between November and December in the past years, but was brought forward this year. Also, the National Treasury started to take into account expenditures with the FIES program which will likely reduce the discrepancy with the results published by the BCB.
  • According to FGV’s monthly commerce survey, confidence in the retail sector fell 2.7% mom/sa in July to 83.4, extending a 3.3% fall in the previous month. The decline was more driven by expectations (-4.3%) than by the current situation component (-0.5%). The sequence of three consecutive declines halts the recovery shown between the end of 2015 and April 2017. 
  • Conversely, FGV’s construction survey shows a 0.5% confidence gain in July. The result might suggest that the sector was not affected by the increase in political uncertainty, but several indicators suggest construction had not yet started to recover in 2017. Therefore, construction faced less room for disappointment than sectors/agents showing the first signs of a recovery. The small gain was evenly distributed between the current situation component (0.8%) and expectations (0.4%). Seasonally adjusted capacity utilization in the sector rose 0.3 p.p. to 61.8. 
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 27.


  • In June, industrial confidence stopped deteriorating but remains depressed. According to think-tank Fedesarrollo, industrial confidence came in at -5.4% in (0 is neutral), below the +3.7% recorded one year earlier. Once corrected for seasonal factors, industrial confidence remains in negative territory but picked up 4 points from May. Of the three components of industrial confidence, there was deterioration in the volume of goods ordered. Meanwhile, lower inventory levels and better expectations for the next quarter led to the overall improvement. On the other hand, retail confidence remains in optimistic territory, but it continues to decline (down to 14.9% from 22.9% one year ago and 15.3% in May). The decline is driven by the increase of inventory levels. Activity in Colombia has disappointed and we expect confidence levels to remain low in the months ahead as an activity recovery is not imminent. We expect growth of 1.6% this year, down from 2.0% in 2016, and acknowledge downside risks to our forecast exist. 


  • Economic activity recovery continued in 2Q17. The EMAE (official monthly GDP proxy) increased 0.6% relative to April, bringing annualized quarter-over-quarter growth to 2.3%, from 0.3% in the quarter ending April. On a year-over-year basis, the index grew by a solid 3.3% in May and 1% in the first five months of the year. Activity recovery could also be seen in IGA (a GDP proxy published by OJF consulting firm), which increased 0.1% between April and May and 4.0% year over year. In general, Construction continues to benefit from higher public spending, while the Services sector is consistent with an improvement in private consumption. Meanwhile, manufacturing sector is posting positive growth rates (consistent with a better performance of manufacturing exports).
  • We expect the economy to grow 2.5% in 2017. The carry-over of EMAE yields a 2.3% year-over-year expansion in 2Q17, which would be a significant improvement relative to 1Q17 (0.3%). We expect construction to drive growth accompanied by further improvements in services due to higher real wages and a modest recovery in the manufacturing sector. Full Report
Market Developments 
  • GLOBAL MARKETS: The Fed kept rates unchanged at the meeting, as broadly expected. In the statement, the board made important changes to its inflation outlook. In the June communique, the FOMC stated: “inflation has declined recently and, like the measure excluding food and energy prices, is running somewhat below 2 percent”. The current statement acknowledges more persistent inflation weakness, stating that “overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent”. Additionally, the Fed signaled the start of balance sheet unwind relatively soon (in September) and kept the gradual rate hike guidance. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green in the session. Oil prices rose once again (WTI: +1.50% to USD 48.74/bbl – an eight-week high) after the weekly DOE report showed US crude inventories fell by 7.21 million last week – lowest since January 6. After the FOMC, LatAm FX (+0.93%) posted gains on a weak dollar day (DXY: -0.55% to 93.54 – 13-month low). By the time of writing, the MXN is trading 0.99% stronger to 17.5966/USD. The BRL closed at 3.1384/USD (+1.09%). Andean markets closed before the Fed statement. Still, the CLP appreciated 0.41% to 650.30/USD and the COP posted gains of 0.43% to 3,018/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor went down in the session. In Chile, rates inched down 1bp to 66bps. Colombian country risk fell 2bps to 132bps. In Mexico and Brazil, CDS narrowed 3bps to 105bps and 214bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates traded range bound ahead of the Copom. In DI futures, the Jan-19 inched down 1bp to 8.40% and the Jan-21 stood flat at 9.50%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed, tracking US treasuries. In TIIE swaps, the 1-year decreased 3bps to 7.30% and the 5-year went down 7bps to 6.82%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long fell 1-2bps in the session. In Camara swaps, while rates inched up (1-year: +1bp to 2.45%), longer yields narrowed (5-year: -2bps to 3.42%). Chile Rates Tracker In Colombia, the curve bear steepened in the session. In IBR swaps, the 1-year inched up 1bp to 5.08% and the 5-year widened 6bps to 5.58%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the nationwide unemployment rate for June will come out (Fri.). We expect a 10bps increase to 13.2% (according to our seasonal adjustment). In addition, FGV’s monthly survey for July on industry (Thu.) will be released. Additionally, the economic uncertainty indicator for July, also from FGV, will be released (Fri.). These surveys will provide an initial glimpse on economic activity in the third quarter. On fiscal accounts, the consolidated primary budget balance for June will come through (Fri.). We expect a BRL 21.8 billion deficit. 
  • In Mexico, INEGI will announce June’s trade balance (Thu.). We expect the trade deficit to widen in June, due to an upsurge of gasoline imports which likely affected the energy balance. Finally, the Ministry of Finance (Hacienda) will announce June’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. Oil revenues, however, will likely weaken, given the drop of international oil prices observed in June. 
  • In Chile, the central bank of Chile will publish the minutes of the July monetary policy meeting (Fri.). We expect the minutes to reveal additional details on the central bank’s evaluation of inflation dynamics. Additionally, we will be looking at whether other options (beyond staying on hold) were discussed and if the decision had the full backing of the board. Also, the national statistics agency (INE) will publish industrial activity indicators for the month of June (Fri.). We expect manufacturing production to expand 0.7% from last year (+1.9% in May), resulting in growth of -1.6% in 2Q17 (-0.4% in 1Q17). 
  • In Colombia, Banrep hosts its monthly monetary policy meeting (Thu.). Since the previous meeting, activity indicators for May disappointed the market further and headline inflation continued to fall. However, core inflation remains at a high level and medium-term inflation expectations ticked up. Additionally, numerous board members (including two who likely voted to lower rates by 50-bps) have communicated that they do not see room for much further easing. In this context, we expect only two additional 25-bp rate cuts before the end of this year (one this week and the other next month). 

Latam Macro Calendar

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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