Itaú BBA - Brazilian rates narrow on better than expected tax collection

Latam FI Strategy Daily

< Back

Brazilian rates narrow on better than expected tax collection

September 20, 2017

Brazilian yields narrowed as tax collection real growth accelerated (see Macro Backdrop).

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian yields narrowed as tax collection real growth accelerated (see Macro Backdrop). The BRL strengthening could also have pressured yields. In DI futures, the Jan-20 fell 5bps to 8.17%. Real rates (until Aug-26) also went down as the May-21 decreased 3bps to 4.22%. 
  • The USD appreciated versus G-10 (+0.68%) following the Fed meeting. Nevertheless, LatAm currencies posted gains. Andean markets were closed by the time of the FOMC (CLP: +0.78% to 620.54/USD; COP: 0.41% to 2,891/USD). Then, the BRL appreciated 0.14% to 3.1310/USD as tax collection surprised to the upside. The MXN is 0.14% stronger to 17.7727/USD. 
Macro Backdrop

BRAZIL

  • Tax collection came at BRL 104.2 billion in August, above our call (BRL 99.5 billion) and market expectations (BRL 99.4 billion). Tax collection increased sharply in the month (10.8% y/y in real terms) and growth accelerated in real terms. Excluding tax amnesty programs (REFIS/PRT) and repatriation, revenues increased 3.8% in the 3-mma. The rebound in revenues is becoming widespread among its components. Revenues that depend on consumption (PIS/COFINS, IPI) increased 10.4% (y/y in real terms), revenues related to profits (IRPJ/CSLL) increased 24.6% (y/y in real terms) and those related to the wage bill (IRPF and social security) increased 5.5% (y/y in real terms). 
  • BCB placed the full offering of 12,000 FX swaps. After closing, the central bank announced another rollover auction of up to 12,000 contracts (USD 600 million) on September 21. 

COLOMBIA

  • The September survey of market analysts shows inflation expectations remain broadly stable ahead of next week’s monetary policy meeting. According to the survey, the 2017 yearend inflation expectation inched up to 4.20% (4.15% in the July survey; our call: 4.2%), while the one-year horizon expectation sits at 3.63% (3.64% previously). The 2018 inflation expectation recorded a fifth consecutive month at 3.5% (Itaú: 3.8%), while the 2-year horizon inflation expectation retreated to 3.27% from 3.5%. The core inflation expectation measure (excluding food prices) inched down to 3.5% for a 1-year horizon (3.6% previously) and 3.1% for two-years ahead (from 3.2%). 
  • Regarding monetary policy, the market sees rates stable at the current 5.25% level until November – so no movement is expected this month – followed by a 25pbs cut in the last month of the year, to 5.0% (previously; Itaú: 5.25%). The policy rate would be lowered until 4.5% by May next year (broadly in line with our baseline scenario). A majority vote saw the policy rate lowered by 25bps last month to 5.25% amid concerns with the pace of disinflation, while a minority pushed for a larger 50bps rate cut. We expect stable rates until yearend as a divided board continues to ponder the ascending inflation against a mild recovery in activity in 2H17. 
Market Developments
  • GLOBAL MARKETS: US treasuries rose (2-year: +4bps to 1.44%) and the USD appreciated after the FOMC meeting. As expected, the Fed confirmed the balance sheet unwind process starting in October. Median Fed dots remained consistent with another rate hike this year, but the longer-term were revised down (from 3.0% to 2.8%). The Fed funds implied probability of another rate hike this year increased to 64% from 53% as of Tuesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities, oil priced surged (WTI: +1.58% to USD 50.69/USD), like agriculture commodities (sugar: +2.25%; wheat: +1.52%). The USD appreciated versus G-10 (+0.68%) following the Fed meeting. Nevertheless, LatAm currencies posted gains. Andean markets were closed by the time of the FOMC (CLP: +0.78% to 620.54/USD; COP: 0.41% to 2,891/USD). Then, the BRL appreciated 0.15% to 3.1308/USD as tax collection surprised to the upside. The MXN is 0.15% stronger to 17.7700/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) widened in the session. In Brazil, CDS increased 23bps to 203bps. In Mexico, they widened to 116bps (+16bps). In Chile, spreads increased 9bps to 61bps. Colombian country risk is at 130bps (+17bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed after tax collection came in higher than expected (see Macro Backdrop). The BRL strengthening could also have pressured yields. In DI futures, the Jan-20 fell 5bps to 8.17%. Real rates (until Aug-26) also went down as the May-21 decreased 3bps to 4.22%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve steepened in the session. In TIIE swaps, the 1-year fell 2bps to 7.26%, whereas the 10-year inched up 1bp to 7.07%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets reopened after the prolonged holiday (Monday and Tuesday). Yields traded slightly lower in the session. In Camara swaps, the 9-month fell 2bps to 2.43% and the 5-year narrowed 2bps to 3.41%. Chile Rates Tracker In Colombia, rates also traded lower. In IBR swaps, the 18-month fell 1bp to 4.88%. 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 will be released (Thu.). We expect a net creation of 30k jobs seasonally adjusted. Finally, FGV’s industrial business confidence preview and consumer confidence for September will both be released on Friday. 
  • 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 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