Itaú BBA - BCB will target 4.25% inflation for 2019 and 4.0% for 2020

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BCB will target 4.25% inflation for 2019 and 4.0% for 2020

June 29, 2017

The government introduced an important change in the inflation-targeting framework: from now on, the CPI target will be set three years in advance.

With information available until 6:30pm Brasilia time

Highlights

  • The National Monetary Council (CMN) has decided to set the 2019 inflation target at 4.25% and the 2020 target at 4.00%. The CMN maintained the 1.5 p.p. tolerance band around the target. What’s more, the government introduced an important change in the inflation-targeting framework. From now on, the CPI target will be set three years in advance; in the previous setting, the CMN set the target for the calendar-year two years hence. According to a note published on BCB’s website, in June 2018, the CMN will define the target for 2021.
  • Risk aversion in global markets increased as volatility gauges spiked and corporate credit spreads widened strongly. Accordingly, all currencies under our coverage were deep on the red. The MXN was the regional laggard (-1.06% to 18.04/USD), followed by the COP (-0.94% to 3,047.52/USD). The BRL weakened 0.70% to 3.3029/USD and the CLP depreciated 0.36% to 665.14/USD, despite the rise in copper (+0.73%).

Macro Backdrop

BRAZIL
  • The CMN left the TJLP long term interest rate (benchmark for BNDES lending) unchanged at 7.00%, as expected. The TJLP rate influences the amount of off-budget credit subsidies paid by the federal government. We continue to believe the TJLP will remain at 7.0% going forward.
  • The central government posted a BRL 29.4 billion deficit in May, worse than our call and market expectations (both at BRL 20 billion). Revenues came in at BRL 1.2 billion lower than our forecast, while expenditures printed BRL 7.8 billion higher. The latter reflected a BRL 10 billion advancement in payments of judiciary deposits (aka. “precatórios”) in payroll and social security. Even excluding this distortion, the result disappointed. We believe that, in the absence of significant surprises in extraordinary revenues, tax hikes or further cuts in discretionary spending, complying with the central government primary target (BRL 139 billion deficit) will prove itself a very challenging task.
  • According to ABRAS, supermarket sales rose 2.2% mom/sa in May (using our calculation), offsetting losses from the previous month. The result follows other coincident indicators showing positive growth in May. IBGE will release its Monthly Survey of Commerce for May on July 12. We forecast a 0.3% mom/sa decrease in core retail sales (+2.2% yoy). Our preliminary forecast for the broad segment, which includes vehicle sales and construction material, is a 1.2% mom/sa decline (+4.0% yoy).
  • BCB placed the full offering of 7,600 FX swaps (USD 380 million), finishing the rollover of the outstanding contracts due in July.
  • Orange Book: Political uncertainty affects investment decisions. This report summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Before the uncertainty shock, incipient investment plans were observed in various sectors of the economy. Post-shock, investments are being postponed. On the consumption side, rising unemployment continues to negatively affect sales, albeit less sharply than during 2015/16. The improvement in consumer purchasing power may provide some support to sales ahead. Full Report
GLOBAL
  • Commodities Monthly Review: How low can oil prices go? We have reduced our year-end WTI price forecasts to USD 45/bbl for both 2017 and 2018 (from USD 52.5/bbl in 2017 and from USD 50/bbl in 2018). Despite the OPEC production freeze, oil inventories have failed to adjust as fast as anticipated. This oil oversupply appears to stem from better productivity by US shale-oil producers. However, with WTI approaching USD 40/bbl, it has now started to hurt US high-yield energy credit spreads, which in turn is likely to bring discipline to the shale industry and hence to global oil supply. Still, in the short term, there is a risk that prices may have to dip below USD 40 to force a faster adjustment. Full Report
Market Developments
  • GLOBAL MARKETS: Risk aversion increased as volatility gauges spiked and corporate credit spreads widened strongly. Strong US activity data compounded the market prospects of less accommodative monetary policy in G-4 (ex-Japan). In the US, 1Q17 GDP was unexpectedly revised to the upside: product grew 1.4% QoQ/saar in the third reading, up from the 1.2% growth reported in the second estimate. Importantly, the 2 p.p. upward revision (0.7 p.p. vis-à-vis the advance estimate) came chiefly from stronger personal consumption growth, which was revised to 1.1% QoQ/saar from 0.6% in the second estimate. Trade data also registered positive revisions, led by exports growth. Global Markets Tracker

  • CURRENCIES & COMMODITIES: Commodities extended gains in the session, as CRB futures gained 0.53%. High-beta FX were on the red (EMFX: -0.25%; commodity FX: -0.33%), amid the risk-off mood in global markets. In LatAm, the MXN was the regional laggard (-1.06% to 18.04/USD), followed by the COP (-0.94% to 3,047.52/USD). The BRL weakened 0.70% to 3.3029/USD and the CLP depreciated 0.36% to 665.14/USD, despite the rise in copper (+0.73%). FX & Commodities Tracker

  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads reacted to the soured mood overseas. The back end proved resilient to the external headwinds, owing to the lower inflation targets set for 2019 and 2020. In the 5-year sector, the Brazilian, Mexican and Colombian credit spreads widened 3bps to 242bps, 113bps and 135bps, respectively. Chilean inched up 1bp to 66bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: A large LTN auction (DV01: 413) put pressure on the belly of the nominal curve. In DI futures, the Jan-19 rose 6bps to 8.99% and the Jan-21 widened 5bps to 10.18%. The 5y5y breakeven edged up 3bps to 4.85%. Brazil Rates Tracker

  • LOCAL RATES - Mexico: Nominals tracked the movement of US Treasuries, widening 2-3bps in the belly. In TIIE swaps, the 5-year rose 3bps to 6.77% and the 10-year increased 5bps to 7.15%. Mexico Rates Tracker

  • LOCAL RATES – Chile and Colombia: Chilean yields widened past the 2-year, pressured by rising DM yields. Chile Rates Tracker In Camara swaps, the 5-year rose 3bps to 3.46% and the 10-year increased 5bps to 4.10%. Colombian rates bucked the regional trend: IBR swaps compressed 5-6bps up to the 4-year. Colombia Rates Tracker

Friday Events

  • In Brazil, the nationwide unemployment rate for May will come out. We expect a 0.2% increase to 13.4% (our seasonal adjustment). On fiscal accounts, we expect the consolidated primary budget balance for May to register a BRL 30.6 billion deficit.
  • In Mexico, the Ministry of Finance will announce May’s fiscal balance. We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway.
  • Activity data is on the spotlight in Chile. The national statistics agency (INE) will publish the industrial activity indicators for the month of May. We expect manufacturing production to decline 0.3% from last year (-7.5% in April). INE will also publish the national unemployment rate for the quarter ending in May. We expect the unemployment rate to reach 6.9% (6.8% one year ago).
  • In Colombia, we expect Banrep to deliver another 25-bp rate cut (taking the policy rate to 6.0%) in its monthly monetary policy meeting. In addition, we see the urban unemployment rate to rising to 10.7% in May.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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