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BCB minutes reveal the board discussed sharper cuts

April 18, 2017

Short DI Futures tightened after the Copom minutes revealed that it considered a more aggressive move than the 100-bp cut that was delivered.

With information available until 6:30pm Brasilia time

Highlights

  • In rates, short DI Futures tightened (Jan18: -10bps to 9.54%) after the Copom minutes revealed that it considered a more aggressive move than the 100-bp cut that was delivered (see Macro Backdrop). For the next meeting (May), the curve prices 110bps in rate cuts. In Colombia, rates traded substantially lower on a late reaction to weaker-than-expected activity data (see Macro Backdrop). Then, Banrep co-director Meisel stated in an interview that he sees higher risks for growth and lower for the inflation outlook. In IBR Swaps, the 1-year fell 13bps to 5.60%. 
  • In LatAm FX, most currencies under our coverage depreciated. The CLP went to 648.72/USD (-0.47%) and the MXN posted losses, trading at 18.59/USD (-0.51%). The BRL weakened to 3.1081/USD (-0.26%). On the other hand, the COP appreciated 0.50% to 2,839.01/USD – level last seen in May 2016. 

Macro Backdrop

BRAZIL
  • The minutes from Copom’s April meeting bring back the asymmetric signaling on future policy moves that the meeting statement had removed. One particular segment indicates the committee considered a more aggressive move than the 100bps cut that was delivered. But the Copom ended up opting for "moderate" acceleration due to the forward looking nature of policymaking and uncertainty around the scenario. 
  • We think the committee will deliver another 100-bp rate cut at the next policy meeting. However, renewed frustration with activity data and, to a lesser extent but also relevant, a faster fall in inflation expectations and resolution of the economic reform process in Congress might lead it to accelerate some more. In sum, asymmetry is back. Full Report
  • According to FIESP, Sao Paulo state industry employment decreased 0.1% m/m in March (-4.8% y/y). Along with other economic activity data, we forecast a creation of 19k formal jobs (CAGED) in March. Nonetheless, the results means a destruction of 18k jobs in seasonally adjusted terms (3mmavg will stay in -32k).
  • BCB placed the full offering of 16,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 16,000 contracts on April 19. 
COLOMBIA
  • Growth of oil refining limited the overall industrial production decline. Industrial production contracted 3.2% y/y (previous: -0.3%), well below market consensus (-1.2%) and our expectation (-2.0%). Even after controlling for seasonal and calendar effects, industrial production contracted 2.6% from last year. The 13.0% drop in beverage processing was once again the main drag in the month (-1.4 p.p.), hampered by a high base of comparison due to hot weather last year during the peak of the El Niño phenomenon. The weakness is widespread with around 70% of the categories shrinking from last year. Meanwhile, oil refining continues to grow – albeit at single digit rates vs. 23% in 2016 – and is still the principal driver of activity. Once excluded, industrial production contracted by an even greater 5.7%. In the quarter, industrial production fell 0.2% y/y (4Q16: +1.6%), the first decline since the quarter ending in May 2015. At the margin, industrial production contracted 3.9% q/q (4Q16: +3.9%).
  • Meanwhile, private consumption is weak across the board. The loosening labor market and depressed confidence do not hint at a swift recovery ahead. Retail sales declined 7.2% y/y, a slowdown from the 2.2% drop in January and the largest annual fall in the new series (2013 onwards), and likely since international financial crisis. The weak print surprised the -1.6% market consensus as well as our -1.5% forecast. The implementation of the increased sales tax could explain weaker activity. Durable goods sales (vehicles and parts as well as appliances and furniture), which had been the driving force behind activity in recent months, subtracted 2.5 p.p. from the overall retail sales growth rate (December: +5.2 p.p.; January: -0.3 p.p.). Approximately 85% of the divisions registered contractions, much like the previous month. In the quarter ending in February, retail sales fell 0.3%, down from the +3.7% in 4Q16. Adjusting for seasonal and calendar effects, retail sales excluding fuel sales, fell 2.7% y/y in February. Moreover, at the margin, this indicator decelerated to -4.4% q/q (4Q16: +21.6% q/q). Our recovery outlook for Colombia – growth picking up to 2.3% in 2017 from 2.0% last year – includes downside risks. Declining inflation and higher average oil prices will aid the recovery, however, a loosening labor market and political concerns will likely counter these gains. 
  • All in all, we see the Banrep advancing the loosening cycle began last December. The data, alongside falling inflation and declining inflation expectations, leads us to believe a rate cut at this month’s meeting is very likely. While central bank General Manager Echavarría recently noted that the data at the time did not warrant the use of deeper cuts, we cannot rule out a move to a more aggressive strategy in coming meetings amid a disappointing evolution of internal demand. Full Report

Market Developments 

  • GLOBAL MARKETS: European markets reopened after the Easter holiday. DM rates narrowed across the board as US Treasury Mnuchin warned in an interview that tax reform may delay after healthcare law failure, as the latter is part of the funding for tax cuts. In Treasuries, the 5-year decreased 8bps to 1.70% and the 10-year fell 9bps to 2.16%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded as oil prices slightly fell (Brent: -1.03% to USD 54.79/bbl) and metals posted losses. The GBP posted strong gains (2.15%) as markets reduced the probability of a “cliff Brexit” scenario as UK Prime Minister May called for early elections. In LatAm FX, most currencies under our coverage depreciated. The CLP went to 648.72/USD (-0.47%) and the MXN posted losses, trading at 18.59/USD (-0.51%). The BRL weakened to 3.1081/USD (-0.26%). On the other hand, the COP appreciated 0.50% to 2,839.01/USD – 11-month high. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded higher across the board. CDS in Chile and Mexico inched up 1bp to 78bps and 131bps, respectively. In Brazil and Colombia, spreads increased by 2bps to 227bps and 137bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates fell after the Copom minutes (see Macro Backdrop). In DI Futures, the Jan-18 fell 10bps to 9.54% and the Jan-21 went 4bps down to 9.88%. For the next meeting (May), the curve prices 110bps in rate cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened in the session. In TIIE swaps, the 6-month fell 1bps to 7.00% and the 10-year decreased 5bps to 7.34%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates traded range bound. In Camara swaps, the 1-year stood flat at 2.53% while the 5-year increased 2bps to 3.32%. Chile Rates Tracker In Colombia, rates traded substantially lower on a late reaction to weaker-than-expected activity data (see Macro Backdrop). Then, Banrep co-director Meisel stated in an interview that “in the balance of risks, growth has risen, while inflation has fallen”. In IBR Swaps, the 1-year fell 13bps to 5.60% while the 5-year decreased 16bps to 5.33%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, according to the president of the Special Committee, Carlos Marun, the Social Security reform’s rapporteur, Rep. Arthur Maia, is expected to issue his report on Wednesday (April 19). Then, the IPCA-15 consumer inflation preview for April will be released (Thu.). We forecast a 0.28% monthly rise, with year-over-year inflation decelerating to 4.5% from 4.7%. On economic activity, CAGED formal job creation for March may come through. We expect net creation of 19k jobs, the second positive reading in a row. Yet in seasonally adjusted terms, this represents net closing of 18k jobs. Finally, industrial business confidence (CNI) for April will be released (Wed.), for which we expect the current upward trend to continue ahead. 
  • In Mexico, INEGI will announce March’s unemployment rate (Fri.). We expect the unemployment rate to post 3.2% (March 2016: 3.7%) given that labor market conditions remain tight. 
  • In Colombia, think-tank Fedesarrollo will release the March consumer confidence (Wed.). The index, which has completed 14 consecutive months in pessimistic territory, has declined on the back of the terms-of-trade shock as well as tightening monetary and fiscal policies. Moreover, the trade balance for the month of February will be published (Thu.). We expect a trade deficit of USD 824 million, smaller than the USD 1.0 billion deficit recorded one year ago. Finally, the February activity coincident indicator (ISE) will be published (Fri.). Recent indicators reaffirmed that the economy started the year on a weak footing. In the previous month, ISE grew a mild 1.2% y/y.

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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