Itaú BBA - Brazilian and Mexican assets end the week on a high note

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Brazilian and Mexican assets end the week on a high note

March 3, 2017

The Brazilian curve bull flattened on the back of the BRL correction and BCB governor interview.

With information available until 6:30pm Brasilia time


  • In LatAm FX, the currencies under our coverage were mixed. The CLP weakened 0.47% to 657.80/USD. The COP traded slightly lower at 2,981.66/USD (-0.02%). The MXN posted gains of 2.36% to 19.54/USD after the US Commerce Secretary, Wilbur Ross, stated that with a “sensible” Nafta deal, the Mexican peso may recover. The BRL appreciated 1.13% to 3.1182/USD.
  • The Brazilian curve bull flattened on the back of the BRL correction and BCB governor interview (see below). In DI Futures, the Jan-19 decreased 11bps to 9.73%. The Mexican curve also bull flattened, compressed by the appreciation of the MXN. In TIIE swaps, the 10-year decreased 15bps to 7.72%. 

Macro Backdrop

  • January’s job creation virtually in line with expectations. CAGED formal job creation registered -40.8k in January, in line with our estimate and market expectations (both at -36k). Seasonally-adjusted, 8k formal jobs were closed. The 3-month moving average improved to -57k from -81k. Overall, contractions have slowed and January’s result represents a slight improvement in the last two months, but the numbers are still compatible with a rise in the unemployment rate. We expect positive job creation only in the second half of this year. 
  • Nominal fiscal deficit indicators narrowed in January on the back of a significant increase of oil revenues. The rolling 12-month public sector borrowing requirements narrowed to MXN 544.5 billion in January 2017 (from MXN 556.6 billion in December 2016, 2.9% of GDP), with the public deficit moving to MXN 485.1 billion (from MXN 503.7 billion, 2.6% of GDP) and the primary balance posting a MXN 12.8 billion surplus (from a 24 billion deficit, -0.1% of GDP) during the same period. In our view, it is likely that the Mexican government will meet its fiscal targets for 2017 (primary surplus of 0.4% of GDP and public sector borrowing requirements of 2.9% of GDP), potentially preventing a rating downgrade. We believe that higher oil revenues (in spite of lower oil output) and a large dividend from the central Bank (possibly around 1.5% of GDP, resulting from exchange rate gains on international reserves) will be crucial. However, the recent decision of the government to smooth gasoline price variations through the adjustment of the excise tax (until the transition to full liberalization is completed in December 2017) introduces a new element of risk. Specifically, this means that any depreciation of the exchange rate will have a smaller positive effect on fiscal flows (considering that even though the local currency value of oil revenues would increase, the government would drain revenues from a lower IEPS that would need to decrease to stabilize gasoline prices). Full Report
  • Mexico’s gross fixed investment recovered somewhat in 4Q16, on the back of residential construction, but is seems bound to slowdown in coming quarters. Gross fixed investment expanded 0.9% y/y in December – in between our forecast (1%) and market expectations (0.8%) – leaving the growth rate of 4Q16 at 1% y/y (3Q16: -0.7% y/y). Investment in machinery & equipment weakened in 4Q16 (to 0.7% y/y, from 2.9% y/y in 3Q16), but this was offset by stronger construction activity (1.2% y/y in 4Q16, from -3.1% y/y previously). Within construction, the residential component picked up (5.5% y/y, from 0.6% y/y in 3Q16) while non-residential construction kept falling (-2.3% y/y in 4Q16, from 6.2% y/y previously). Looking ahead, we expect the uncertainty over the course of US policies to discourage investments in Mexico. Moreover, the deterioration of household balance sheets (amid higher inflation and rising domestic interest rates) coupled with sagging consumer confidence will likely affect residential construction. 
  • The continuance of business confidence at low levels does not point to a significant recovery in activity ahead. Think-tank Icare published its business confidence index for February, which came in at 46.0 (50 is neutral), from the 46.4 one year ago (January: 44.9). Confidence has now completed 35 consecutive months in pessimistic territory. Low inflation is leading to  an improvement in real wage growth, likely supporting the commerce sub-index staying in favorable territory at 51.0 (49.8 one year ago and 50.3 last month). Mining confidence is at 61.6, likely favored by the recovery in copper prices. The labor strike at the country’s largest copper mine continuing sentiment in the industry ahead could cool. Once the volatile mining confidence is excluded, business confidence sits at 42.4 (42.6 one year ago). We expect an activity recovery to 2.0% this year, from the anticipated 1.5% for 2016; however, risks remain tilted to the downside. As average copper prices improve, inflation declines and interest rates fall, the economy will likely react favorably. However, the political uncertainty leading up to the general election in November could keep private sentiment and investment subdued, while supply shocks in the mining sector could impede the recovery.
  • New sectorial indices released by the national statistics institute (INE) show retail activity remained robust at the beginning of the year. Retail and vehicle sales grew 3.8% m/m in January (previous: 2.7%), in line with market consensus and below our 4.5% forecast. The month was once again characterized by strong vehicle sales (21.8% y/y increase), helping lift durable goods sales growth to 17.4%. The 3.0% annual gain in retail sales (previous: 2.6%) was driven by the 11.3% rise in clothing, footwear and specialized leather products (explaining around one third of the 1.3 percentage point contribution to total commercial sales). When compared to the previous retail sales index, the new series hints at a downwards revision in retail activity in the latter part of last year. Meanwhile, supermarket sales increased 1.8% y/y, down from 3.4% at the close of 2016. With inflation expected to stay low and the interest rate likely to decline further, private consumption activity could see some benefit. However, the loosening labor market will partly counter this. Overall, we expect an activity recovery to 2.0% this year, from the anticipated 1.5% for 2016, however, risks remain tilted to the downside. Full Report
  • Our Activity Surprise Index decreased to 0.03 in February from 0.14 in January. Mexico and Colombia are the only economies with indexes in positive territory, while Peru’s index showed a significant decline. In Brazil, the surprises were negative for most monitored indicators, pointing to a weak 4Q16. The reality suggests that activity in the region is picking up, but that a recovery will be slow. Full Report
  • Global Monetary Policy Monitor: interest rate differential with the US to narrow further in South America. In February, monetary policy decisions were made in 18 of the 33 countries we monitor. The number of central banks hiking interest rates has equaled the number of central banks cutting rates. On the expansionary side, Brazil's central bank reduced rates by another 75 bps, in line with expectations, and in Colombia, the central bank surprised the market with a 25 bps rate cut (while it was expected to stay on hold). On the contractionary side, in Mexico, Banxico implemented another 50 bps rate hike, and in China, several interest rates were up. We expect the monetary easing process to continue in South America. We forecast additional rate cuts in Brazil, Chile, Colombia and Argentina. On the other hand, in Peru, our forecast is for interest rates to remain unchanged, while in Mexico, we expect rate hikes along with the Fed. In March, we highlight the decisions in developed countries. We expect the Fed to hike interest rates on strong current data, well-behaved financial conditions and the outlook for a more expansionary fiscal policy ahead. In Europe, England and Japan, we expect that the respective central banks will likely maintain the current stimuli. Full Report

Market Developments 

  • GLOBAL MARKETS: DM yields widened further, following the guidelines from Fed’s Yellen speech: “Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate”. In the 10-year sector, Treasuries increased 1bp to 2.49%. The Fed funds futures implied probability of a hike this month rose to 94%, from 90% as of March 2. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher in the session, as energy prices increased (Brent: +1.22% to USD 55.75/bbl) and copper posted gains (+0.54%). In LatAm FX, the currencies under our coverage were mixed. The CLP weakened 0.47% to 657.80/USD. The COP traded slightly lower at 2,981.66/USD (-0.02%). The MXN posted gains of 2.36% to 19.54/USD after the US Commerce Secretary, Wilbur Ross, stated that with a sensible Nafta deal, the Mexican peso may recover. The BRL appreciated 1.13% to 3.1182/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor decreased all across LatAm. Chilean spreads inched down 1bp to 71bps. Colombia traded at 133bps (-4bps). In Mexico, they went down 6bps to 131bps. Brazilian country risk went down 5bps to 219bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened. The central bank governor stated in an interview on Thursday that government-proposed reforms, that could reduce risks, weak activity and monetary policy were key factors in the decline in inflation. Regarding the idea of accelerating the pace in easing, he added that the board decided to leave “a bit more open the decision for the coming months”. In DI Futures, the Jan-19 decreased 11bps to 9.73% and the Jan-21 went down 12bps to 10.03%. The cuts implied in the front end increased to 94bps (+2bps) in April and 77bps (+4bps) in June. For the full year, the curve sees 287-330bps in rate cuts, pending on the term premium estimate. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened, compressed by the appreciation of the MXN. In TIIE swaps, the 1-year fell 7bps to 7.16% and the 10-year decreased 15bps to 7.72%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates were mixed in the session. In Camara swaps, the 1-year fell 1bp to 2.95% and the 5-year went up 2bps to 3.65%. Chile Rates Tracker  In Colombia, IBR swaps traded lower, on average. Very front end narrowed (1-year: -6bps to 6.23%) while the belly traded range bound (4-year: flat at 5.78%) and long end edged lower (10-year: -1bp to 6.48%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, 4Q16 GDP will be the week’s main economic release (Tue.). We estimate a contraction of 0.6% q/q seasonally adjusted. If our estimate is correct, GDP declined 3.5% in 2016. Moreover, January's industrial production will hit the wires (Wed.). We expect production to be broadly stable in the month, with a 0.1% m/m increase seasonally adjusted. Then, February’s vehicle production (Anfavea) will be released (Tue.), and we expect it to reach 190k. Moving to the inflation front, February’s IPCA will come out (Fri.), for which we forecast a 0.45% m/m rise. In annual terms, inflation will set back to 4.9% from 5.35% in January, further consolidating its downward trend.
  • In Mexico, INEGI will announce February’s CPI inflation (Thu.). We expect a 0.48% m/m variation. Assuming our forecast is correct, headline inflation would rise from 4.72% year-over-year in January to 4.76% year-over-year in February. 
  • In Chile, the central bank will publish the GDP proxy (Imacec) for the month of January (Mon.). We expect the GDP proxy to be flat from December (previous: 0.9%), resulting in an annual growth rate of 1.0% (previous: 1.2%). Then, the central bank will publish the trade balance for February (Tue.). We forecast a USD 650 million surplus (USD 720 million in January), taking the rolling 12-month trade balance to USD 4.3 billion (USD 4.6 billion in 2016). Later, the National Institute of Statistics (INE) will publish nominal wage growth for January (Tue.). We expect the current disinflation and the loosening labor market to limit wage growth ahead. Moreover, INE will publish inflation data for February (Wed.). We expect prices to gain 0.3% from January (+0.5% in January), but acknowledge upside risks. 
  • In Colombia, inflation for February will be released (Sat.). We expect consumer prices to gain 1.30% m/m. As a result, annual inflation will stay broadly stable at 5.49%. Moreover, the monetary policy meeting minutes from February will be published (Fri.). The minutes will likely confirm that the most likely scenario has the policy rate falling in coming months, but the timing will be data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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