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BCCh cuts the TPM by 25bps

April 13, 2017

The move surprised us in a month when the market was divided.

With information available until 6:30pm Brasilia time

Highlights

  • BCCh cut the policy rate by 25-bp to 2.75%, surprising us (see Macro Backdrop). 
  • Ahead of the Easter holiday, the Brazilian curve bear steepened. The LTN (Oct-17, Apr-19, Jul-20) and NTN-F (2023, 2027) auctions also put pressure on rates. In DI Futures, the Jan-19 increased 3bps to 9.45% and the Jan-21 went 7bps up to 9.95%. 
  • In LatAm FX, currencies under our coverage were mixed. The CLP, on the back of higher copper prices (+0.83%), strengthened 0.68% to 649.22/USD. On the other hand, the MXN depreciated, trading at 18.58/USD (-0.16%). The BRL was the regional laggard, closing at 3.1442/USD (-0.59%). After closing, the Brazilian Central Bank announced a roll over auction of up to 16,000 contracts on April 17. If this pace is maintained throughout the month, the BCB will have rolled over the entire amount expiring in May (USD 6.4 billion).
  • Mexican and Colombian markets were closed for the Holy Thursday holiday. 

Macro Backdrop

BRAZIL
  • Copom: no surprise for now. The Copom delivered Wednesday the widely expected outcome, a 100bps rate cut taking the Selic rate to 11.25% p.a., in an unanimous vote. In the statement, the Committee assesses that since last meeting, domestic activity has shown signals, which in their view, are consistent with a stabilization of the economy in the short run. Also, the board reckons that the available evidence suggests a gradual recovery throughout the year. The committee notes that the pace of easing will depend on the envisaged cycle and on how much frontloading is intended, which will also depend on the behavior of economic activity, the other risk factors mentioned above, inflation forecasts and expectations. While the committee reckons that the current (100bps) pace is adequate, the economic juncture requires monitoring the determinants of the degree of frontloading. This statement suggests that we will probably see another 100bps move in May, barring surprises, in either direction, of the often cited risk factors. We think that after that, with downside risks to activity somewhat mitigated by a strong 1Q17 GDP release, the Copom will revert to a slower pace, 75bps. We'll learn more about the reasoning behind the Copom decision with the release of the minutes on Tuesday (April 18). Full Report
  • Service sector real revenue rose in February and January, as the new series was recalibrated. According to the IBGE monthly services survey (PMS), services sector real revenue rose 0.7% m/m in February, after rising 0.2% in January. The whole ‘new’ series (which begins in Jan-17) was heavily adjusted upwards, as IBGE saw the need to recalibrate the 2014 base series during the second monthly survey. The series until 2016 remained the same. The revised series shows a moderate recovery since the end of 2016. It is clearly a brighter picture than suggested by January’s release. Given that several components correlated with GDP were revised upward, 1Q17 GDP tracking will be up as well. 
  • Itaú Unibanco monthly GDP advanced in February. Our monthly GDP proxy rose 2.6% m/m, marking a fourth consecutive increase at the margin, yet the index receded 1.7% y/y. The change over 12 months was -4.1%. Overall, the recent trend shown by the PIBIU reinforces a positive outlook for 1Q17 GDP. The seasonally-adjusted monthly advance was driven by agriculture, with a 5.2% gain that more than offset the decline in public administration (0.5%). Five out of ten indexes that form our monthly GDP indicator advanced (50% diffusion). For March, we expect a small decline in industrial production, retail sales and agricultural production. These figures will likely contribute to a drop in PIBIU during the month, erasing some of the gains seen early in the year. 

              Full Report

  • In our April Scenario Review we changed our 2017 inflation expectation to 3.9% from 4.1%. This revision takes into account a reassessment of forecasts for food at home and industrial prices, amidst more favorable results on the margin, principally in the wholesale prices. On a cumulative, twelve-month basis, we expect inflation to fall back to 4.1% in April; 3.8% in June; and 3.6% in September. We note that disinflation tends to trigger a welcome debate about reducing the inflation target. Full Report
  • After closing, the Central Bank announced a roll over auction of up to 16,000 contracts on April 17. If this pace is maintained throughout the month, the BCB will have rolled over the entire amount expiring in May (USD 6.4 billion).
CHILE
  • The central bank of Chile cut its policy rate by 25-bps to 2.75% at its April monetary policy meeting. The move surprised us (who expected the central bank to remain on hold) in a month when the market was divided as to what the decision would be. The board noted that inflation expectations remain anchored at the 3% target for the relevant forecast horizon. However, the labor market deterioration has been more severe than estimated by the central bank. In our view, this triggered the earlier-than expected response. In the 1Q17 IPoM, the central bank’s baseline scenario expanded the easing cycle by 25-bps to 75-bps, now already delivered. However, the press release announcing the decision retained an easing bias, signaling that further monetary easing on the near horizon is a possibility. Specifically, the board stated that it will evaluate the need for "some" additional monetary stimulus. The bias is consistent with our view that one more rate cut will materialize. While we see the next rate cut in 3Q17, we cannot rule out the cut occurs as early as this quarter. Our baseline scenario has the policy rate ending the year at 2.5%. Full Report

Market Developments 

  • GLOBAL MARKETS: Equity markets were on the red and volatility remains around recent highs. Geopolitical risks are likely to fade in the absence of a new trigger. Russia and US diverge on Syria chemical attack and Assad remaining in power, but no new sanctions/escalation is expected. US has offered a better trade deal to China (not currency manipulator on Treasury FX report due on Saturday) to help deal with North Korea. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Strong Chinese imports data boosted commodities (CRB futures index: +0.21%). Oil prices fell (WTI: -0.30% to USD 52.95/bbl) as, according to Baker Hughes, US drillers added 11 rigs targeting crude this week, bringing the total to 683 – a 23-month high. In LatAm FX, currencies under our coverage were mixed. Andeans posted gains as the COP went to 2,869.25/USD (+0.09%) and the CLP, on the back of higher copper prices (+0.83%), strengthened 0.68% to 649.22/USD. On the other hand, the MXN depreciated, trading at 18.58/USD (-0.16%). The BRL was the regional laggard, closing at 3.1442/USD (-0.59%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor fell at the margin. CDS in Chile, Mexico and Colombia inched down 1bp to 75bps, 129bps and 134bps, respectively. In Brazil, spreads were flat at 226bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Ahead of the Easter holiday, the Brazilian curve bear steepened. The LTN (Oct-17, Apr-19, Jul-20) and NTN-F (2023, 2027) auctions also put pressure on rates. In DI Futures, the Jan-19 increased 3bps to 9.45% and the Jan-21 went 7bps up to 9.95%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: In Mexico, markets were closed due to the Holy Thursday holiday.
  • LOCAL RATES – Chile and Colombia: In Chile, short yields narrowed. In Camara swaps, the 1-year fell 3bps to 2.62% while the 10-year was flat at 3.91%. The curve implies 45-57bps in rate cuts by the end of the year. Chile Rates Tracker In Colombia, markets were closed due to the Holy Thursday holiday.

Upcoming Events

  • In Brazil, the Social Security reform’s rapporteur, Rep. Arthur Maia (PPS Party), is expected to conclude revisions to the original proposal and issue his report in the Lower House Special Committee (Tue.). See our Macro Vision report on the fiscal impact of alternative transition rules. Then, the BCB’s Copom minutes will be released (Tue.). In its last meeting, the committee delivered the widely expected outcome, a 100-bp rate cut taking the Selic rate to 11.25% p.a. Moreover, 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. Our forecast may be adjusted following Industry Employment Data for the State of São Paulo (FIESP) (Wed.). Our CAGED estimate is consistent with a 4.9% y/y decline in FIESP employment. In addition, the BCB will release its monthly activity index (IBC-Br) for February (Mon.). We expect a 0.3% m/m increase. 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, the National Institute of Statistics (DANE) will release activity data for February (Mon.). Activity in February likely remained at low levels, and will be negatively affected by the leap-year effect. We expect industrial production to contract 2.0% y/y (January: -0.2%). Meanwhile, retail sales are likely to fall 1.5% in twelve months (previous: -2.2%), as car sales declined. Then, 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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