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Brazil outperformed ahead of Social Security Special Committee voting

May 2, 2017

The BRL outperformed the majors, as the market had a positive interpretation of government officials’ communication about pension reform.

With information available until 6:30pm Brasilia time


  • The BRL outperformed the majors in the session, closing at 3.1514/USD (+0.81%), as the market had a positive interpretation of government officials’ communication about social security reform. Social Security Committee President Marun said the government doesn’t see the necessity for more delays in the voting of rapporteur Maia’s report. Lower House speaker Rodrigo Maia confirmed the Social Security voting to take place Wednesday (May 3), as scheduled. DI futures bull flattened (Jan18x23: -6bps). The Jan-18 went down 4bps to 9.45% and the Jan-25 narrowed 11bps to 10.37%.
  • Elsewhere in LatAm, currencies depreciated. The MXN depreciated 0.15% trading at 18.77/USD and the CLP was the regional laggard posting losses of 0.35% to 668.21/USD. The COP, however, was broadly stable at 2,942.43/USD (-0.01%).

Macro Backdrop

  • 2018 inflation expectations revised down again. According to BCB’s Focus survey, inflation expectations for 2017 declined to 4.03% (-1bp), and 2018 expectations fell to 4.30% (-2bps). Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. BRL expectations also remained stable throughout the three years. Also, 2017 GDP growth expectations increased to 0.46% from 0.43%. BCB Report
  • According to Fenabrave, vehicle sales reached 152k in April, rising 0.3% mom s.a. The result follows increases in both February (7.1%) and March (2.5%). Auto sales continue to show a material improvement over 4Q16, yet remain stable at low levels if compared to 2011-2015 levels. The breakdown shows a 0.2% increase in “passenger cars + light vehicles” and a steep increase in production of “trucks + buses” (+5.6% mom s.a.), according to our seasonal adjustment. Our forecast for auto production (Anfavea) is 197k in April (+1.4% mom s.a., according to our estimates). This data will be released Friday (May 5).
  • The trade surplus reached USD 7.0 billion in April, in line with our forecast and market consensus. Over 12 months, the trade surplus increased again to USD 56 billion. The seasonally-adjusted annualized three month moving average also expanded, to USD 83 billion. The year-to-date trade surplus is a record-high (the time series starts in 1992). Exports increased 27.8% yoy, adjusting for the number of working days. Growth was widespread among categories, but sales of basic items (29.2% yoy) stood out with a fourth consecutive monthly gain. Meanwhile, imports advanced for a fifth consecutive month in year-over-year terms, by 13.3%, led by intermediate goods (16.5% yoy), consumer goods (6.3% yoy), and fuels and lubricants (28.5% yoy). Only purchases of capital goods declined, by 5.9% yoy. Notwithstanding some signs of recovery (especially in year-over-year terms), imports remain at low levels. Along with higher prices for the main commodities exported by Brazil and larger shipments of many products, this situation has ensured all-time high surpluses in the early months of 2017. 
  • We maintain our assessment of larger trade surplus this year (as in 2016) and robust year-to-date readings represent some upside to our forecast, due to higher export prices and volumes. Nevertheless, a slightly stronger BRL (on average, in real terms), a rebound in domestic demand and commodity prices below current levels will lead to weaker results in the coming months.
  • Datafolha released its poll on the 2018 presidential elections, which shows support for former president Lula, rising to 30% from 25% in the last poll (Dec.), when put against candidates Bolsonaro, Marina and Aecio Neves. In addition, Bolsonaro grew from 9 to 15% during that same time period.
  • The Central Bank of Mexico published April’s expectations survey, with expectations of higher GDP growth and a stronger MXN as the main highlight. Notably, the positive surprise of GDP growth in 1Q17 (flash estimate posting 2.7% y/y, above expectations) and the more constructive dialogue between U.S. and Mexico policymakers has moderated uncertainty, persuading some economists to increase their short-term growth forecasts. In fact, the median expected GDP growth for 2017 increased to 1.7% (from 1.5%) and was unchanged for 2018 (2.2%). Exchange rate expectations also adjusted in response to such developments. The median expectation of the USDMXN exchange rate decreased/appreciated for 2017 and 2018 to 19.6 (from 20.2) and 19.6 (from 19.8), respectively. Another recent event which has exerted appreciation pressure on the Mexican peso is the improvement of the fiscal accounts, which reduce the odds of a sovereign rating downgrade. Turning to inflation, we note that inflation expectations increased for the short-term (2017 at 5.7%, up from 5.6% in the previous survey), possibly because of the increase of services inflation, which challenges the view that there is no demand pressure on prices. However, inflation expectations decreased for longer-term measures such as 2018 (3.7% down from 3.8%) and next 5-8 years (3.4%, down from 3.5%) amid Banxico’s tightening.
  • Nominal fiscal indicators improved in 1Q17, even if the effect of the Central Bank’s dividend is excluded. Over the past years, MXN depreciation has created exchange rate gains on international reserves - MXN 31 billion in 2015 (0.2% of GDP) and MXN 239 billion in 2016 (1.2% of GDP) - reaching a record-high of MXN 322 billion this year (1.6% of GDP). This year the dividend was recorded in March, unlike in 2016 (when it was recorded in April), so the 12-month rolling results have posted a massive improvement in 1Q17. The gross and net debt of the public sector decreased to MXN 9,773 billion (from MXN 9,934 billion) and MXN 9,173 billion (from MXN 9,693 billion) between 1Q17 and 4Q16, respectively. In addition to the dividend proceeds, the MXN appreciation observed in 1Q17 reduced the local currency value of foreign debt.
  • The developments on the fiscal front reduce the odds of a sovereign rating downgrade and, thus, provide support to the valuation of the Mexican peso. In fact, last Thursday Moody’s re-affirmed Mexico’s credit rating, also highlighting the progress on the fiscal consolidation, although it still maintains a negative outlook. The market and rating agencies will keep a close eye on whether the proceeds of the dividend are squandered to accommodate more spending (and reduce the pace of fiscal consolidation). We forecast that the public sector nominal deficit will narrow to 2.1% of GDP in 2017 (from 2.6% in 2016), a larger deficit compared to the government’s updated forecast (after the dividend) of 1.3% of GDP. Importantly, it is likely that the Mexican government will achieve to reduce the public debt to GDP ratio in 2017, for the first time in ten years.
  • In another split decision, Banrep cut the policy rate by 50 bps, to 6.50%. Out of the six voting members, two co-directors opted for a 25-bp cut. This was the sixth consecutive divided board, with the decision surprising two-thirds of Bloomberg’s respondents, as well as us, who expected a 25bp rate cut. The press release announcing the decision highlights the disappointing activity in 1Q17 (industrial production, retail sales and consumer confidence), leading the technical staff to lower its 2017 growth forecast to 1.8%, from 2% previously (2% in 2016). Despite the measurement error regarding the output gap, the board considered the risk that excess capacity widens has increased. Meanwhile, inflation is evolving in line with expectations, led by the dilution of previous supply-side shocks. In fact, the central bank’s medium-term inflation forecast has declined amid the recent disinflation. At the same time, falling inflation expectations have resulted in an even more contractionary real policy rate. Nevertheless, the board does note that indexation mechanisms and the increased stickiness of some prices (as reflected by non-tradable inflation) could delay the convergence of inflation to the 3% target. The latter comment likely means this is not a permanent shift in the velocity of the expected loosening cycle. We expect the central bank to continue lowering the policy rate, but the pace of rate cuts will be data-dependent. We see the policy rate ending the year at 5.5% (7.50% in 2016). Full Report
Market Developments 
  • GLOBAL MARKETS: On the eve of the FOMC and US employment data (ADP), equity markets were strong on the green while volatility (VIX) is still hovering around its lowest levels since July 2014. Also, Treasuries narrowed (5-year: -3bps to 1.81%) as US vehicle sales came in slow. The Fed Funds futures implied probability of a hike in June went down to 59% from 61% as of Monday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB: -0.69%) as oil decreased (WTI: -1.66% to USD 48.03/bbl – close to year-to-date lows) and copper prices fell 0.79%. In LatAm FX, currencies under our coverage were mixed. The BRL outperformed the majors in the session, closing at 3.1514/USD (+0.81%), as the market had a positive interpretation of government officials’ communication. Social Security Committee President Marun said the government doesn’t see the necessity for more delays in the voting of rapporteur Maia’s report. The COP was broadly stable at 2,942.43/USD (-0.01%). On the other hand, the MXN depreciated 0.15% trading at 18.77/USD and the CLP was the regional laggard posting losses of 0.35% to 668.21/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Most credit spreads for the 5-year tenor decreased in LatAm. CDS in Chile stood flat at 72bps. Country risk in Colombia fell 2bps to 124bps and in Mexico they went down 3bps to 115bps. Meanwhile, Brazilian spreads narrowed the most to 213bps (-4bps) – close to mid-March lows. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Despite concerns regarding the Social Security reform over the prolonged weekend, the Brazilian curve bull flattened (Jan18x23: -6bps) after the Lower House speaker Rodrigo Maia confirmed the Social Security voting to take place Wednesday (May 3), as scheduled. In DI futures, the Jan-18 went down 4bps to 9.45% and the Jan-25 narrowed 11bps to 10.37%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: After the Labor Day holiday, the Mexican curve bull flattened in the session. In TIIE swaps, the 1-year decreased 3bps to 7.20% and the 5-year went down 8bps to 7.19%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean markets reopened after the Labor Day holiday. In Chile, rates traded 2-3bps lower. In Camara swaps, the 1-year narrowed 2bps to 2.46% and the 5-year decreased 2bps to 3.37%. Chile Rates Tracker In Colombia, after the Banrep 50-bp rate cut last Friday (see Macro Backdrop), short rates narrowed substantially. In IBR Swaps, the 1-year fell 15bps to 5.34% and the 5-year decreased 8bps to 5.14%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will remain focused on the social security reform discussions in Congress. According to the Lower House Speaker Rodrigo Maia and Social Security Committee President Carlos Marun, the Special Commission is scheduled to begin voting on the Social Security reform at 9:30 SPT (Wed.). Then, March industrial production will be the main highlight on economic activity (Wed.). We expect a 0.7% seasonally-adjusted drop. Additionally, Anfavea (Fri.) will release data from the automobile sector in April, which helps to estimate industrial production and retail sales for that month. 
  • In Mexico, the statistics institute (INEGI) will publish February’s gross fixed investment (Thu.). We forecast that gross fixed investment grew 0.1% year-over-year (up from a 0.5% contraction in January).
  • In Chile, the national statistics agency (INE) will publish the private consumption activity indicators for March (Wed.). We expect the commercial activity index to have increased 1.0% from last year. Then, the central bank will publish the minutes from the April monetary policy meeting (Wed..). It will be key to see if the decision to cut rates received the full backing of the board, whether there is widespread appetite for additional easing and what economic conditions would trigger additional rate cuts. Moreover, central bank will publish the GDP proxy (Imacec) for the month of March (Fri.). We expect the GDP proxy to decline 0.9% from February (-0.7% in the previous month), resulting in an annual growth rate fall of 1.0% (-1.3% in the previous month), concluding the weakest quarterly activity since the global financial crisis.  Finally, the National Institute of Statistics (INE) will publish nominal wage growth for March (Fri.). Wage inflation has continued to moderate as the labor market loosens, the economy cools and inertia stays low (as inflation is running below the target). 
  • In Colombia, DANE will publish export data for March (Wed.). We expect to see exports of USD 3.1 billion (USD 2.3 billion one year ago). Then, inflation for April will be released (Fri.). We expect consumer prices to gain 0.37% from March, taking annual inflation down to 4.55%, with core prices (inflation excluding food and energy) remaining sticky. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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