Itaú BBA - Brazilian rates narrow as markets see the BCB on hold throughout 2018

Latam FI Strategy Daily

< Back

Brazilian rates narrow as markets see the BCB on hold throughout 2018

September 18, 2017

Brazilian yields narrowed as Selic expectations for 2018 fell to 7.00%, matching our call.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian yields narrowed as Selic expectations for 2018 fell to 7.00%, matching our call (see Macro Backdrop). In DI futures, the belly narrowed 6bps (Jan-19: -6bps to 7.46%) whereas longer yields fell 2-3bps (Jan-25: -2bps to 9.91%). 
  • In LatAm FX (-0.61%), the BRL was the regional laggard, closing at 3.1363/USD (-0.83%). Then, the MXN is trading 0.56% weaker to 17.7595/USD. Finally, the COP depreciated 0.36% to 2,908/USD. 
  • In Chile, markets were closed due to a national holiday (Independence Day). 
Macro Backdrop

BRAZIL

  • YE18 Selic expectations declined 25bps to 7.00%. According to Focus survey, year-end Selic expectations remained flat for 2017 and 2019 (at 7.00% and 8.00%, respectively) and it has receded 25bps for 2018 (to 7.00%). Also, IPCA inflation expectations declined further to 3.08% (-6bps) for 2017 and to 4.12% (-3bps) for 2018, while it has remained flat at 4.25% for 2019. GDP growth expectations also remained flat for 2017 and 2019 (at 0.60% and 2.50%, respectively), and increased 10bps for 2018 (to 2.20%). Finally, the BRL did not change for the three years horizon: at 3.20/USD for 2017 and 3.40/USD for 2019), while it has appreciated for 2018 to 3.30/USD (from 3.35/USD). See BCB report
  • BCB placed the full offering of 12,000 FX swaps. After closing, it announced another roll over auction of up to 12,000 contracts (USD 600 million) on September 19. 

COLOMBIA

  • The trade deficit in July came in at USD 520 million, below market consensus and our forecast (both at USD 591 million) forecast. This represents a narrowing from the USD 967 million deficit recorded one year ago and resulted in a rolling 12-month trade deficit of USD 9.3 billion, from the USD 9.7 billion as of 2Q17 (USD 11.4 billion in 2016). The trade deficit adjustment came amid an improvement in the energy balance, especially the oil and coal components, while the non- energy balance was broadly stable. At the margin, the trade deficit came in at USD 8.8 billion (seasonally adjusted and annualized), improving from the USD 11.3 billion in 2Q17 and broadly stable from 1Q17 (USD 8.5 billion), mostly due to a narrowing non-energy component.
  • A gradual improvement in the trade balance is expected during the remainder of the year amid a still weak internal demand. We expect a current-account deficit of 3.7% of GDP this year (4.3% in 2016). Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the FOMC, equity markets were strong on the green and US Treasuries widened (5-year: +2bps to 1.83%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses (CRB futures: 0.17%) in the session. Agriculture commodities were the main drag (wheat: -1.22%; corn: -0.92%; sugar: -1.65%). Also, oil prices fell at the margin (WTI: -0.20% to USD 50.34/USD). In FX, currencies under our coverage posted widespread losses. The BRL was the regional laggard, closing at 3.1363/USD (-0.83%). Then, the MXN is trading 0.56% weaker to 17.7595/USD. Finally, the COP depreciated 0.36% to 2,908/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed all across LatAm. In Brazil, Chile, Mexico and Colombia CDS inched down 1bp to 178bps, 51bps, 97bps and 111bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed as Selic expectations for 2018 fell to 7.00%, matching our call (see Macro Backdrop). In DI futures, the belly narrowed 6bps (Jan-19: -6bps to 7.46%) whereas longer yields fell 2-3bps (Jan-25: -2bps to 9.91%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened on rising US treasuries. In TIIE swaps, while short rates and the belly were mixed, the long end of the curve increased 2-3bps (15-year: +2bps to 7.27%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to a national holiday. Colombian yields were mixed in the session. In IBR swaps, the 1-year fell 1bp to 4.81% and the 5-year widened 3bps to 5.36%. Colombia Rates Tracker
Upcoming Events
  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for 3Q17 will be released (Thu.). The market will be especially watchful of the Central Bank’s communication regarding the next policy meeting on October 25. Then, September´s IPCA-15 consumer inflation preview will be released (Thu.). We forecast a 0.10% monthly rise, with year-over-year inflation slowing to 2.55% from 2.7%. On economic activity, August’s CAGED formal job creation may come through. We expect a net creation of 30k jobs seasonally adjusted. FGV’s industrial business confidence preview and consumer confidence for September will both be released on Friday. On fiscal accounts, August’s tax collection will be released throughout the week. Finally, the second round of corruption charges against President Temer have been sent to the Supreme Court, who may forward them to Congress. The Supreme Court Minister responsible for the Lava Jato case, Edson Fachin, decided to send the charges to Congress only after the Court decides whether or not to suspend the charges until the revision of evidence contained in the plea bargain deal grounding the charges set forth by Attorney-General Rodrigo Janot. This trial is scheduled for September 20 (Wed.). 
  • In Mexico, the statistics institute (INEGI) will announce July’s retail sales (Thu.). We estimate that retail sales’ growth picked up to 1.5% year-over-year. Then, INEGI will publish CPI inflation figures for the first half of September (Fri.). We expect bi-weekly inflation to post 0.40%. Still, INEGI will also publish 2Q’s aggregate supply, which we expect to grow at the pace of 2.3% year-over-year (down from 4% in 1Q17). 
  • In Colombia, the national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of July (Fri.). We expect the annual expansion of the seasonally adjusted series of ISE to be 4.0%. 
  • In Argentina, the fiscal accounts for August will see the light (Wed.). We expect the government to meet its official target deficit of 4.2% of GDP in 2017. Then, the INDEC will release the GDP figures for 2Q17 (Thu). The EMAE (an official monthly GDP proxy) anticipated that the economy has expanded 2.7% year over year in that quarter and 0.8% quarter over quarter, adjusted by seasonality.  

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




< Back