Itaú BBA - Brazilian CDS at the lowest since 2014

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Brazilian CDS at the lowest since 2014

August 7, 2017

Brazilian risk premium outperformed, amid the risk-on mood abroad and the iron ore rally (+3.83%).

With information available until 6:30pm Brasilia time


  • Brazilian risk premium outperformed, amid the risk-on mood abroad and the iron ore rally (+3.83%). Credit spreads narrowed to 195bps (-4bps) – recovering the lows last seen on May 17. Accordingly, the BRL appreciated 0.19% to 3.1260/USD. 
  • Elsewhere, CDS also narrowed: in Colombia and Chile both inched down 1bp to 123bps and 61bps, respectively; country risk in Mexico fell 2bps to 98bps. The other currencies under our coverage were broadly stable. The CLP posted losses of 0.10% to 650.95/USD. The MXN is trading at 17.9279/USD (-0.22%) by the time of writing. 
  • In Colombia, markets were closed due to a national holiday. 

Macro Backdrop

  • YE17 Selic expectations declined 50bps. According to Focus survey, IPCA expectations increased to 3.45% (+5bps) for 2017, while it has remained flat for 2018 at 4.20% and 2019 at 4.25%. Year-end Selic expectations fell 50bps for 2017 (at 7.50%) and 25bps for 2018 (at 7.50%) and 2019 (8.00%). The BRL slightly appreciated for the three years horizon: to 3.25/USD for 2017 (from 3.30/USD); to 3.30/USD for 2018 (from 3.43/USD); and to 3.45/USD for 2019 (from: 3.50/USD). At last, GDP growth expectations did not change for 2017 (0.34%), 2018 (2.00%), and 2019 (2.50%). See BCB Report
  • Gross fixed investment has stood out as the weakest component of domestic demand so far this year, although it improved somewhat in May. The monthly GFI indicator expanded 2.3% year-over-year in May, above our forecast (1.5%) and median market expectations (2.1%). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was lower (1.2% year-over-year), with the three-month moving average falling by 1% year-over-year (-2.4% in April). At the margin, seasonally-adjusted gross fixed investment gained 2.9% from the previous month, but posted a quarter-over-quarter annualized contraction (-0.9%, from -5.9% qoq/saar in April), which shows momentum remains negative.
  • Looking at the breakdown, gross fixed investment has been dragged by construction while investment in machinery & equipment has gained traction (particularly imported capital goods, which becomes more competitive with MXN appreciation). Construction investment fell 7.9% qoq/saar (from -10.8% in April), with residential construction (-0.1% qoq/saar, -4.2% previously) performing better than non-residential construction (-12.6% qoq/saar, -16.3% previously). We highlight that non-residential construction investment is vulnerable to the on-going fiscal consolidation. Turning to investment in machinery & equipment, quarter-over-quarter annualized growth reached 4.1% (from 1.2% qoq/saar in April), driven by imported M&E (10.6% qoq/saar, 1% previously). Investment in national M&E, nevertheless, contracted sharply (-7.1% qoq/saar, -2.9% previously). 
  • We expect gross fixed investment to benefit from diminishing uncertainty over trade relations with the US. Still, it will likely grow at a subdued pace during the rest of 2017, also considering the on-going fiscal consolidation impact on the construction component of investment.
  • On another note, private consumption is facing headwinds, as real wages fall (due to higher inflation) and other fundamental determinants turn less supportive (more recently, consumer credit and remittances converted into Pesos). Adjusting for calendar-effects, private consumption growth was 4% in May, with the three-month moving average growth rate posting 3.7% year-over-year (compared to 3.6% in April). However, at the margin seasonally-adjusted private consumption was flat on a quarter-over-quarter basis (from 1.2% qoq/saar in April).
  • Looking at the breakdown, we note that the slowdown in the consumption of national goods & services is being partly offset by strong consumption of imported goods (also reflecting the stronger MXN). At the margin, the consumption of national goods & services posted a quarter-over-quarter annualized contraction (-1.9%, from -1.2% qoq/saar in April). Conversely, the consumption of imported goods grew at a strong 14% qoq/saar (28.8% in April), rebounding from negative growth rates in late-2016 and early-2017.
  • We expect private consumption to pick-up somewhat in the next months on a sequential basis. In fact, the real wage bill is already recovering at the margin (3.5% qoq/saar in 2Q17 vs. 0.4% in 1Q17), given that inflation at the margin peaked in 1Q17. 
  • We published our Scenario Review for the month of August. The economic slowdown in Mexico is likely to be short-lived, given that the shocks that battered activity are subsiding. The official announcement by the Trump administration regarding the Nafta renegotiation objectives – featuring a few contentious issues, but no game-changers – has reduced the uncertainty surrounding the process and lowered the risk of US protectionist policies. Inflation, which eroded real wages in 1H17, has begun to stabilize. Moreover, the improvement in fiscal accounts recently led S&P and Fitch to revise the country’s credit rating outlook to stable from negative. We therefore expect only a moderate slowdown in GDP, to 2% in 2017 (from 2.3% in 2016), and a pick-up to 2.1% in 2018. Full Report
  • Activity improved modestly in the second quarter of the year as the mining drag moderated. Nevertheless, activity in 1H17 was extremely weak. The Imacec (monthly proxy for GDP) grew 1.4% year over year in June (1.3% in May), above our 1.0% forecast and the market consensus of 1.1%. Growth in 2Q17 - to be confirmed with the release of the National Accounts on August 18 - came in at 1.0%, up from 0.1% in the first quarter of the year, leading to growth of 0.5% year-to-date (well below the 2.1% recorded in 1H16). Once corrected for seasonal and calendar effects, growth in the quarter was higher at 1.3% (0.3% in 1Q17), resulting in growth year-to-date of 0.8%. At the margin, mining led overall growth to 3.0% qoq/saar from 0.6% qoq/saar in 1Q17. With output recovering from the labor strike, mining production accelerated to 22.4% qoq/saar (-25.9% qoq/saar). On the contrary, the non-mining activity slowdown to 1.6% qoq/saar from 3.1% in 1Q17 points at still weak activity ahead. 
  • An activity recovery is expected during the remainder of the year. Firming growth in China and rebounding copper prices are likely to support the economy, as are a loose monetary policy and low inflation. We expect a GDP growth rate of 1.6% this year, stable compared with 2016, but downside risks persist to our forecast. The weak activity dynamics alongside muted inflationary pressures will likely lead the central bank to implement additional easing (totaling 50-bps) before yearend. Full Report
  • In the month of July, the trade balance surprised market analysts to the upside, showing external accounts remain solid. The USD 231 million trade surplus came in above the USD -69 million market consensus with mining and industrial exports growing at double-digit rates in the month. The rolling 12-month trade surplus came in at USD 4.1 billion, remaining broadly stable and at a comfortable level (USD 4.3 billion as of 1Q17 and USD 5.3 billion in 2016). Our seasonally adjusted series shows that, at the margin, the trade balance surplus picked up to USD 4.6 billion (annualized) in the quarter ending in July, largely due to mining, from the USD 2.1 billion annualized surplus recorded in 2Q17 (USD 0.9 billion in 1Q17). In the quarter ending in July, exports grew 11.9% as it continues to improve from the 4.7% growth in 1Q17 (7.4% in 2Q17). The recovery of copper exports (to 16.2% from 2.0% in 1Q17), from lows reached amid the extensive labor strike in 1Q17, is the main driver of exports. Meanwhile, total imports increased 11.9% in the quarter ending in July, broadly stable from 1Q17. 
  • We expect a current-account deficit of 1.2% of GDP in 2017 (broadly stable compared with last year), as the trade balance is favored by higher copper prices. With mining exports expected to remain firm ahead as copper prices stay high, Chile’s external vulnerabilities are likely to stay minimal. Full Report
  • Nominal wage growth of 4.4% in the second quarter of the year was broadly stable from 1Q17. However, as inflation falls, real wage growth increased 2.0% year-over-year in 2Q17 (1.5% in 1Q17). The real wage bill growth increased to 3.9% in the quarter (3% in 1Q17 and 4Q17), when total employment growth is considered. Additionally, when only salaried employment is included, the real wage bill in the quarter rose 3.5% year over year (1.0% in 1Q17 and 1.9% in 4Q16). The low inflation expected ahead will help keep real wage growth elevated, while a loosening labor market will likely keep nominal wage growth subdued. The improving real wage growth could partly explain the robust consumption performance recorded since the beginning of the year.  
  • Consumer confidence is improving. In July, Adimark’s consumer confidence moved to 41 points, an 8 p.p. gain over the last 12-months (June: 40.8 points), but remained in pessimistic territory (below 50) for the 38th consecutive month. All sub-indices posted an improvement since July 2016. Household goods consumption confidence is in optimistic territory for the third consecutive month (at 53.4; 7.5 points higher than one year ago), while the 12-month expectations of the economy picked up 12.1 points from July last year to reach 48.9 (July 2017: 44.6). The evaluation of the current economic state is at 36.7 points and the 5-year forecast sits at 31.4 points, still deep in pessimistic territory but around 10 p.p. up from one year ago. Consumer confidence will likely be favored as inflation stays low and interest rates drop further, while uncertainty regarding the upcoming electoral process could contain a significant recovery. We expect economic growth of 1.6% this year, stable from 2016, with a sentiment improvement aiding a growth recovery next year. 
  • We published our Scenario Review for the month of August. Chile’s sovereign credit rating was downgraded for the first time since the 1990s, as rising debt levels and an unfavorable growth outlook elevated credit concerns. With inflationary pressures likely to remain muted and activity still weak, we foresee further monetary easing, with the policy rate reaching 2.0% by the end of this year. Full Report


  • In July, inflation was the lowest since October 2014. The 0.05% monthly price fall (+0.52% one year before) came in below our +0.08% inflation forecast and the +0.11% market consensus. The monthly fall alongside the highest base of comparison from last year, led annual inflation down to 3.40% (previous: 3.99%). The monthly change was the first negative reading for a month of July since 2012. The retreat in housing (-0.11% month-over-month), entertainment (-0.89%), and food prices (-0.06%) together contributed -0.07 p.p. to the monthly fall in consumer prices. Meanwhile, health costs and other items pulled prices up (+0.02 p.p. contribution). In annual terms, the 0.20% food price inflation (+1.37% in the previous month, and the lowest recorded since February 2010) pulled headline inflation down to 3.40%. Excluding food prices, inflation has decelerated but remains above the upper bound of the 2-4% range around the target, at 4.79%. 
  • The weak headline inflation reading will likely support another 25-bp rate cut in the August meeting, before Banrep opts for a pause as inflation picks up during the remaining months of the year. As highlighted by the behavior of prices for non-tradable items, inertia prevails. Actually, annual inflation will likely resume an upward trend in August, ending the year at 4.2%. Full Report


  • Commodities Monthly Review: higher metal prices. Commodity prices rebounded in July, due to good global demand and a weaker dollar. We now expect iron ore prices of USD 60/mt (USD 55/mt previously) and copper prices of USD 5700/t (USD 5600/t, previously) by year-end. However, we still expect a 5.8% drop in the ICI (Itaú Commodity Index) from its current level by year-end, led by metal and energy prices. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk-on day with equity markets were on the green and volatility gauges hovering at low levels. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodities, oil prices posted losses (WTI: -0.46% to USD 49.50/bbl). On the other hand, metallic commodities outperformed in the session, as iron ore increased 3.83% and copper +0.80%. In FX, LatAm pairs were broadly stable starting the week. The MXN is trading at 17.9279/USD (-0.22%) by the time of writing. The CLP posted losses of 0.10% to 650.95/USD. Finally, the BRL appreciated 3.1260/USD (+0.19%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads in LatAm narrowed across the board. For the 5-year tenor, CDS in Colombia and Chile both inched down 1bp to 123bps and 61bps, respectively. Also, country risk in Mexico fell 2bps to 98bps. Finally, Brazilian spreads narrowed 4bps to 195bps – lowest level since December 2014. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened amid increased inflation expectations for 2017 (see Macro Backdrop). In DI futures, the Jan-18 was flat at 8.19% while the Jan-21 went up 6bps to 9.22%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve slightly flattened in the session. In TIIE swaps, while the 6-month inched down 1bp to 7.40%, the 5-year widened 2bps to 6.90%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end widened 1bp as the GDP proxy came in better than expected (see Macro Backdrop). In Camara swaps, the 1-year widened 1bp to 2.32% and the 5-year was flat at 3.33%. Chile Rates Tracker In Colombia, markets were closed due to a national holiday. 

Upcoming Events

  • In Brazil, all eyes will be on July’s IPCA consumer inflation (Fri.). We forecast a 0.17% monthly increase, with year-over-year inflation slowing to 2.64% from 3.00%. Despite this increase, inflation will thus continue its long-lasting course of decline, driven mainly by ample slack in the economy and the favorable food price shock. On economic activity, coincident indicators for industrial production in July may be released: traffic of heavy vehicles (ABCR) on toll roads and paper cardboard dispatches (ABPO). Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production on (Thu.). At last, the report of the rapporteur in the Congress Commission debating the creation of the TLP (new BNDES benchmark rate) is scheduled to be read on Wednesday. 
  • In Mexico, the statistics institute (INEGI) will announce July’s CPI inflation (Wed.). We expect a 0.32% month-over-month variation, driven by the seasonal increase in the price of air tickets and tourism services, higher agricultural prices, and the hike of national highway tolls. Moreover, the National Association of Department Stores and Supermarkets (ANTAD) will announce July’s same-store-sales (Wed.). We expect the growth of ANTAD sales to slow down moderately (to 4.5% year-over-year, from 5.4% in June). Furthermore, Banxico will announce its policy rate decision (Thu.). We expect the board the leave the reference rate unchanged at 7%, considering the guidance provided in the latest statement, which signaled the end of the tightening cycle (400-bps since December 2015). Finally, the statistics institute (INEGI) will publish June’s industrial production (Fri.). We expect a 0% year-over-year expansion (down from 1% in May), based on coincident indicators – such as vehicle production, oil output, and public investment – which weakened in June. 
  • In Chile, the National Institute of Statistics will publish inflation for the month of July (Tue.). We expect prices to increase 0.1% from June (0.2% in July 2016). As a result, annual inflation would dip further to 1.6%, from 1.7% previously, below the lower bound of the 2%-4% tollerance range. 
  • In Colombia, Banrep will release the minutes of the July monetary policy meeting (Fri.). 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting (Tue.). We expect the central bank to stay on hold for longer before embarking on an easing cycle. Then, the INDEC (the official statistical agency) will publish the National CPI for July (Thu.). According to private estimates, headline inflation likely increased to 2.1% in July mainly due to adjustments in regulated prices, while the core measure hit 1.8%. 

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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