Itaú BBA - BCCh hints further easing is on the table

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BCCh hints further easing is on the table

July 28, 2017

In Chile, the front end of the curve narrowed after BCCh’s minutes.

With information available until 6:30pm Brasilia time


  • In Chile, the front end of the curve narrowed after BCCh’s minutes. We see the report as the groundwork for additional easing (see Macro Backdrop). In Camara swaps, the 1-year fell 5bps to 2.35% and the 5-year went down 2bps to 3.37%. 
  • The USD weakened vis-à-vis G-10 (DXY: -0.60% to 93.35 – weakest level since May 2016) after a disappointing US Advance GDP release. Both LatAm FX (+0.22%) and commodity-linked FX (+0.22%) posted some gains in the session. The COP closed at 3,001/USD (+0.41%) and the BRL appreciated 0.61% to 3.1316/USD. On the other hand, the CLP depreciated 0.70% to 653.93/USD and MXN, by the time of writing, is trading 0.29% weaker to 17.7769/USD. 

Macro Backdrop

  • Unemployment falls in June, driven by gains in informal jobs. The nation-wide unemployment rate reached 13.0% in June, below our estimate (13.2%) and the median of market expectations (13.3%).The indicator increased 1.7 p.p. from 11.3% one year earlier. Applying our seasonal adjustment, the unemployment rate receded to 12.9% from 13.0% in the previous release. The labor force expanded 0.2% at margin and 1.3% yoy. The participation rate (ratio of the labor force to the working-age population) inched up to 61.7% from 61.6%, and is slightly higher than its historical average (61.3%). Employment advanced for a third consecutive month, by 0.2% mom/sa. However, formal jobs in the private sector declined 0.1% at the margin, so that the gain in employment was driven by the other categories, particularly informal jobs in the private sector and self-employment. 
  • Using models that show the sensitivity of different types of occupation to activity, we forecast unemployment rate to rise slightly in the next months, reaching 13.4% in 1Q18 (compared to 12.9% in June) and receding slowly thereafter. Full Report
  • The consolidated public sector posted a primary deficit of BRL 19.6 billion in June, slightly better than our forecast (-21.9 billion) and in line with market consensus (-20 billion). The consolidated primary deficit accumulated over 12 months widened to 2.6% of GDP from 2.5% in May. The central government’s result, published by the National Treasury, came in line with expectations (-19.8 billion, while we estimated -20.2 billion), and for a second consecutive month included anticipated payment of judicial deposits (the so called “precatorios”), which used to be paid in November and December. However, the distortion between the primary results published by the Treasury and the Central Bank was milder, due to methodological changes made by the Treasury. Furthermore, regional governments and state-owned companies posted each a surplus of BRL 0.2 billion, while we expected zero readings for both. 
  • All in all, achieving the primary deficit target of BRL 142 billion this year remains challenging. Even after the tax hike announced last week, meeting the target depends on extraordinary revenues that are still uncertain (such as the Refis/PERT tax-amnesty program and auctions of hydropower plants) and on the government’s capacity to implement the deep cost cuts that were announced. Meanwhile, the nominal deficit remained high (at 9.7% of GDP over 12 months, excluding the Central Bank’s gains on FX swap transactions) and the general government’s gross debt reached 73.1% of GDP, reinforcing the extreme importance of reforms (particularly the pension reform) to reverse the structural trend of fiscal deterioration. Full Report
  • FGV’s economic uncertainty indicator receded in July. The indicator for July declined 650bps to 136, giving back part of the increase observed in the previous month (to 142.5 from 128.1) associated to a heightened political uncertainty. This survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators. A high figure is associated with greater uncertainty that is negatively related to economic activity. The result adds to the July’s industrial business confidence positive print, while the retail and consumer confidences fell even more in the month. 
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced a smaller auction of up to 7,500 contracts (USD 375 million) on July 28 to complete the roll over. 
  • The minutes of the July monetary policy meeting show the appetite for further easing has gained momentum. A split central bank board - the first since December 2016 - saw four of the five board members in favor of keeping the policy rate at 2.5%, while Pablo Garcia believed that the latest data had done enough to move inflation away from the 2Q16 Inflation Report (IPoM) baseline scenario and thereby warranted some additional easing in the form of a 25-bp cut. In the same line, opinions differed on the appropriate bias to include in the communication of the decision. Mr. Garcia preferred the re-introduction of an easing bias, particularly if the policy rate was to stay stable, in contrast to the final retention of a neutral bias. The discussion confirms that a rate cut is gaining footing as the likely next move. 
  • We now see the central bank taking the policy rate to 2.0% by yearend, but it is likely the next move will only come after the 3Q17 IPoM. We believe muted inflationary pressures, alongside weak activity, justify further easing to ensure the inflation trajectory to the 3% target. Full Report
  • The industrial production index fell 2.1% year over year in June, leading to a 1.8% contraction in 2Q17. Although this is an improvement from the -5.9% in 1Q17, activity continues to surprise to the downside. The main reason behind this laggard development is the slower mining pick-up following the end of the extensive labor strike at a prominent mine in 1Q17. This evolvement is partly due to low ore-grade, maintenance programs and temporary plant closures amid poor climate conditions. Mining production in the quarter declined 3.4% (-13.4% in 1Q17), meanwhile, utilities led growth with an increase of 1.3%, from 0.3% in 1Q17. Manufacturing fell 1.1% in 2Q17 (-0.4% in 1Q17), but showed an evident improvement to +0.9% (from -1.1% in 1Q17) once calendar effects are taken into account. Industrial production recovered somewhat at the margin, posting growth of 0.3% qoq/saar (-5.4% in 1Q17).
  • We still expect activity to post some recovery ahead. Firming growth in China and recovering copper prices should support the economy. Loose monetary policy and low inflation will also assist an activity recovery. We expect growth of 1.6% this year, stable from 2016. Full Report


  • Banrep reduced the policy rate by 25bps (following a 50-bp rate cut in the previous month), but reinforced that there is limited room for additional easing. The policy rate now stands at 5.5%. In the ninth consecutive non-unanimous decision, the board was split 6-1, with the sole member preferring to stay on hold (the first such vote since March). In the lead up to the meeting, several board members (including two of those calling for faster monetary easing) indicated the space for rate cuts had narrowed. In the press conference announcing the decision, Governor Echavarría went further by indicating this space is even more reduced. 
  • We expect only one additional 25-bp rate cut this year (in the August meeting). As inflation picks up in 2H17 and consistent with the view of several board members that space for rate cuts is limited, we see a pause in the cycle approaching. However, because the central bank does not see the current level of policy rate as expansionary, we expect further rate cuts in 2018 (to 4.5%), also considering our forecasts for lower inflation and weak growth. Full Report
Market Developments 
  • GLOBAL MARKETS: The USD weakened vis-à-vis G-10 (-0.60% to 93.35 – weakest level since May 2016) after disappointing activity data in the US. 2Q17 GDP growth came in at 2.6% qoq/saar, below market expectations (2.7%) and the 1Q17 was revised down to 1.2% (from 1.4%). Consumption, however, grew 2.8% qoq/saar in the quarter, in line with expectations, and was revised up to 1.9% (from 1.4%) in 1Q17. In addition, the Employment Cost Index also came in below expectations in 2Q17. In all, the releases were positive for risk assets as growth remains solid but without price pressures. Global Markets Tracker
  • CURRENCIES & COMMODITIES: A strong day for commodities on rising oil prices. WTI went up 1.42% to USD 49.87/bbl in the session. On a weak dollar day, LatAm FX (+0.24%) posted some gains. The COP closed at 3,001/USD (+0.41%) and the BRL appreciated 0.61% to 3.1316/USD. On the other hand, the MXN is trading 0.29% weaker to 17.7769/USD by the time of writing and the CLP depreciated 0.70% to 653.93/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor marginally narrowed in the session. CDS in Colombia fell 2bps to 129bps. In Mexico and Brazil, spreads inched down 1bp to 104bps and 214bps, respectively. In Chile, however, country risk was stable at 66bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, the Jan-19 fell 5bps to 8.09% and the Jan-25 went up 5bps to 10.19%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Short Mexican yields narrowed, following the US treasuries trend. In TIIE swaps, the 1-year inched down 1bp to 7.30% and the 5-year was flat at 6.83%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the curve narrowed after BCCh’s minutes. We see the report as the groundwork for additional easing (see Macro Backdrop). In Camara swaps, the 1-year fell 5bps to 2.35% and the 5-year went down 2bps to 3.37%. Chile Rates Tracker In Colombia, short rates were flat and long went down. In IBR swaps, the 1-year was stable at 5.11% and the 10-year narrowed 2bps to 6.34%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will focus on the Copom minutes (Tue.). 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. Moreover, Congress will return from recess and the Lower House is scheduled to vote on charges against President Michel Temer (Wed.). A quorum of 342 lawmakers is required for the vote, same number needed for the charges to be accepted and passed to the Supreme Court. On economic activity, June’s industrial production will be released (Tue.), for which we expect a 0.2% seasonally adjusted monthly decrease. In addition, July’s coincident indicators will be released: Fenabrave’s vehicle sales (Tue.) and Anfavea’s auto production (Fri.). Also, FGV’s service sector confidence will be released (Mon.). On external accounts, we expect July’s trade balance (due Tue.) to once again post a strong surplus (USD 6.0 billion), topping the surplus of USD 4.6 billion in the same month last year. 
  • In Mexico, all eyes on activity releases. The statistics institute (INEGI) will publish the flash estimate of Q2’s GDP growth (Mon.), which we expect to come in at 1.6% year-over-year (down from 2.8% in Q1). INEGI will also publish May’s gross fixed investment (Fri.). We forecast 1.5% year-over-year growth (up from a sharp 8.6% contraction in April). 
  • Activity data is on the market’s radar in Chile. The national statistics agency (INE) will publish the private consumption activity indicators for June (Wed.). We expect the commercial activity index to have increased 4.8% from last year (5.8% previously), resulting in growth of 3.3% in 2Q17 (2.6% in 1Q17). INE will also publish the national unemployment rate for the 2Q17 (Mon.). We expect the unemployment rate to reach 7.2%.
  • In Colombia, export data for the month of June (Wed.) will come through. We expect exports to come in at USD 2.8 billion, representing annual growth of 1.3%.
  • In Argentina, fiscal data is on the limelight. We expect tax collection for July (Tue.) to increase 28% yoy to ARS 230.5 billion. In activity, the INDEC will publish the manufacturing and construction data for the month of June (Mon.). Also noteworthy, the car-makers association (ADEFA) will release July data on production, exports and domestic sales to car dealers (Thu.). Finally, the central bank will release its monthly survey of economists (Wed.). It will be important to monitor the behavior of inflation expectations as guidance for future monetary policy decisions.

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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