Itaú BBA - Brazilian benchmark nominal curve steepens once again

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Brazilian benchmark nominal curve steepens once again

August 25, 2017

The belly and the front end of the DI futures curve narrowed on the back of downward electricity tariff adjustments.

With information available until 6:30pm Brasilia time


  • The belly and the front end of the DI futures curve narrowed on the back of downward electricity tariff adjustments (see Macro Backdrop). In DI futures, the Jan-19 fell 5bps to 7.82%, while the Jan-25 increased 3bps to 10.26%. For next month’s Copom meeting, the curve implies 100bps in rate cut, from 93bps one week ago. 
  • On a weak dollar day (DXY: -0.79%), most currencies under our coverage strengthened. Andean pairs posted solid gains (COP: +1.17% to 2,926/USD; CLP: +0.54% to 635.02/USD). By the time of writing, the MXN is gaining 0.74% to 17.5957/USD. Bucking the trend, the BRL depreciated 0.16% to 3.1532/USD. 
Macro Backdrop

  • Tax collection came at BRL 110 billion in July, in line with our call and market expectations. Tax collection was close to stability in the month (-0.3% y/y in real terms), but included BRL 1.5 billion related to the second round of the repatriation bill. Excluding this extraordinary revenue, tax collection had a weak result, declining 1.7% y/y in real terms, limiting any optimism after the strong 3.0% y/y increase in June. As the Federal Revenue Service reported, tax collection has been specifically weak in the financial sector: the IRPJ/CSLL (tax on profits) collection in this sector is declining 15.8% YTD compared to 2016 while is increasing 2.6% in the other sectors. 
  • Tax collection continues close to stability in real terms. Tax collection excluding tax amnesty programs (REFIS/PRT) and repatriation revenues is stable in the 3-mma. We believe a strong tax collection rebound is unlikely, especially considering that indicators that matter the most for tax collection (real formal wage bill and retail sales) will underperform GDP. The central government primary result from July will be released next week. We expect a BRL 19.3 billion deficit. 
  • According to FGV monthly consumer survey, consumer confidence fell 1.3% mom/sa in August, extending the decline seen in June and July. The decline was driven by expectations (-2.7%), while the current situation component improved slightly (1.4%). The percentage of people reporting that jobs are hard to get fell 0.1 p.p. to 92.2%. The percentage remains at high levels and is consistent with high unemployment rate for a while. The components of expected inflation fell further and intention to purchase durable goods remained stable.
  • Likewise, confidence in the retail sector (from FGV’s monthly commerce survey) fell 1.2% mom/sa in August to 82.4, also extending declines in the previous two months. The decline was more driven by the current situation component (-2.3%) than by expectations (-0.3%). The sequence of four consecutive declines breaks the recovery shown between the end of 2015 and April 2017. In all, both results go in the opposite direction of the industry confidence (up 1.7% in August and back to the May level). 
  • Power regulator Aneel changed to yellow from red mode in the tariff flag system for September. We estimate a -7bps impact over September IPCA monthly inflation. 
  • The current account deficit (CAD) is narrowing significantly, on the back of a strong US economy (benefiting manufacturing exports and remittances) and slower internal demand growth. In the first quarter of 2017, the CAD came in at USD 0.3 billion - below our forecast (USD 3.8 billion) and median market expectations (USD 4.3 billion) - which brought the four-quarter rolling deficit to USD 17.6 billion (1.7% of GDP), from USD 23.3 billion (2.2% of GDP) in 1Q17. At the margin, the seasonally-adjusted CAD was 0.2% of GDP in 2Q17, according to our estimations. Looking at the breakdown of the last four quarters, we note that: the trade deficit is on a narrowing path; transfers are solid (supported by a more dynamic U.S. economy); the services deficit is gradually widening; and net income payments are becoming smaller, although they still account for the bulk of the CAD.
  • Given the results observed in 2Q17, we have revised our current account deficit forecast for 2017 (to 1.4% of GDP, from 1.7%). The CAD (accumulated in four quarters) will likely narrow a bit more, as manufacturing exports grow strongly, while internal demand expands at a more moderate pace. Also, it is worth pointing out that the narrowing of the current account deficit also reflects a lower fiscal deficit, improving Mexico’s fundamentals. Full Report
  • Labor market conditions remained tight in July. The unemployment rate posted 3.4%, in line with our forecast and slightly below median market expectations. The unemployment rate is standing 0.6 p.p. below the level recorded in the same month of last year. Moreover, the seasonally-adjusted unemployment rate decreased to 3.2% (from 3.3% in June), reaching the lowest level in 11 years. 
  • Looking ahead, however, we expect the slowdown of gross fixed investment (hurt by tighter macro policies and the uncertainty on Nafta renegotiation), to have a negative impact in formal employment growth, and hence weaken labor market conditions somewhat. Nevertheless, we also acknowledge that the uncertainty affecting investments has diminished over the past months (with more clarity on the course of Nafta renegotiation, and the rating agencies revising the outlook on Mexico’s sovereign debt to stable from negative), so the negative risks posed on the labor market have also diminished.    
  • Moody's announced yesterday that while Chile's long term debt rating will remain at Aa3 / (P) Aa, the agency has downgraded its outlook to negative from stable. Of the three main rating agencies, Moody's holds the highest sovereign debt rating for Chile, with S&P (A+) and Fitch (A) each having recently downgraded Chile's rating by one notch (now sitting one and two notches below Moody's rating, respectively), both with a stable outlook on the rating. The move is not a surprise, and follows similar arguments to those Fitch and S&P used to justify their rating cuts. The agency is concerned with low growth following the structural shock caused by the end of the commodity price super cycle, as well as losses in productivity. Moody's sees low growth amid increased social demands has affected Chile's fiscal position leading to public debt estimated to surpass 25% of GDP in 2017. In reaffirming the sovereign rating, Moody's still sees the country preserves important strengths (governability and good policy framework) that put Chile in line with other Aa peers and well above the region. 


  • Economic activity recovery consolidated in 2Q17. The EMAE (official monthly GDP proxy) grew by a solid 4.0% yoy in June, following a 3.4% expansion in May, bringing growth in 2Q17 to 2.7% (1Q17: 0.3%). On a sequential basis, the index gained 0.3% relative to May (after a 0.7% gain in the previous month) bringing annualized quarter-over-quarter growth to 3.3%, from 4.3% in 1Q17. On a year-over-year basis, the index advanced 1.6% in the first half of the year. 

  • We expect the economy to grow 2.5% in 2017. The carry-over of EMAE yields a comfortable 2.0% year-over-year expansion this year. For 2018, we expect 2.8%. Given recent activity figures and the more constructive political scenario, we acknowledge there are upside risks to our forecasts. Full Report

  • The external accounts continue to deteriorate due to a strong ARS and a recovery of internal demand. The trade balance registered a USD 798 million deficit in July, significantly down from the USD 331 million surplus posted in the same month one year ago and above expectations (USD -480 million). As a result, the 12-month rolling deficit reached USD 2.3 billion, from USD 1.2 billion registered in June. At the margin, the trade deficit is deteriorating even faster, with the three month annualized deficit at USD 9.3 billion (seasonally-adjusted), from a USD 2.0 billion deficit in 1Q17 and a USD 2.1 billion surplus in 2016.   

  • We see downside risks to our forecast for the trade balance this year (a deficit of USD 3.5 billion), which is already a strong deterioration from the USD 2.2 billion surplus registered in 2016. We expect the current account deficit to hit 3.9% of GDP (2.8% in the previous year), financed mostly by portfolio investment in hard-currency debt. Full Report

Market Developments 
  • GLOBAL MARKETS: Despite market conjectures, Fed’s Yellen refrained from talking about monetary policy in her Jackson Hole speech. Likewise, ECB Draghi’s speech did not reference the recent EUR strengthening (+13.4% YTD). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices (WTI: +0.73% to USD 48.05/USD) increased as Baker Hughes’ data showed the US oil rig count fell by 4 last week. On a weak dollar day (DXY: -0.79%), most currencies under our coverage strengthened. Andean pairs posted solid gains (COP: +1.17% to 2,926/USD; CLP: +0.54% to 635.02/USD). By the time of writing, the MXN is gaining 0.74% to 17.5957/USD. Bucking the trend, the BRL depreciated 0.16% to 3.1532/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed once again in LatAm. Mexican spreads narrowed the most to 104bps (-2bps). In Colombia and Brazil, CDS fell 1bp to 127bps and 197bps, respectively. In Chile, however, country risk was stable at 61bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. The belly and the front end narrowed after Aneel announced the yellow tariff mode for September (see Macro Backdrop). In DI futures, the Jan-19 fell 5bps to 7.82% while very long yields widened (Jan-25: +3bps to 10.26%). For next month’s Copom meeting, the curve implies 100bps in rate cut, from 93bps one week ago. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed, again tracking US Treasuries. The 5-year TIIE swap fell 1bp to 6.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean yields were mixed in the session. In Camara swaps, while the 4-year widened 1bp to 3.13%, the 10-year fell 1bp to 4.07%. Chile Rates Tracker In Colombia, most yields narrowed in the session. In IBR swaps, the 18-month fell 1bp to 5.04% and the 10-year went down 4bps to 6.27%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the main highlight of economic activity will be the 2Q17 GDP (Fri.). We expect it to be flat on quarter-over-quarter seasonally adjusted terms. In addition, the nationwide unemployment rate for July will come out (Thu.), for which we expect a flat figure at 12.9% (according to our seasonal adjustment). Then, FGV’s monthly surveys for August on industry, construction and services will be released through the week. The economic uncertainty indicator for August, also from FGV, will come out (Wed.). On fiscal accounts, the consolidated primary budget balance for July will come through (Wed.). We expect a BRL 14.0 billion deficit, with the central government result (due Tue.) posting a BRL 19.3 billion deficit. On external accounts, we expect August’s trade balance (due Fri.) to once again post a strong surplus (USD 4.3 billion). At last, after the approval of the TLP (new Long Term Interest Rate) base text in the Lower House Floor this week, Lower House Speaker Maia said some remaining amendments will be voted next Tuesday (August 29). The voting of this matter may start on the Senate as well. The provisional measure that creates the TLP expires on September 6.
  • In Mexico, the statistics institute (INEGI) will announce July’s trade balance (Mon.). We expect the trade deficit to continue narrowing in July. Then, Banxico will publish the quarterly inflation report (3Q17) (Wed.). We expect the central bank to reaffirm that rate moves are unlikely in the near term. Still, the Ministry of Finance (Hacienda) will announce July’s fiscal balance (Wed.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of July (Wed.). We expect manufacturing production to expand 2.7% from last year. Moreover, INE will publish the national unemployment rate for the quarter ending in July (Thu.). As we expect job growth dynamics to endure, we see the unemployment rate reaching 7.0%. Then, the BCCh will publish the minutes of the August monetary policy meeting (Fri.). The minutes will build the base for the upcoming Inflation Report, providing details on the central bank’s evaluation of inflation dynamics and the course for monetary policy. Going forward, the national statistics agency (INE) will publish the private consumption activity indicators for July (Fri.). We expect the commercial activity index to have increased 3.5% from last year.
  • In Colombia, the unemployment rate for the month of July will be released (Thu.). We expect the urban unemployment rate to rise to 10.7% in July. Then, Banrep hosts its monthly monetary policy meeting (Thu.). We expect a 25-bp cut to 5.25%, the last expected move for the year as the board will likely wait for inflation to revert to a downward trend early next year before engaging in further policy rate cuts. 
  • In Argentina, the INDEC will publish the manufacturing and construction data for July (Thu.). Then, tax collection for August will see the light (Fri.). We expect taxes to increase 30% yoy to ARS 215.5 billion in August. 

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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