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Brazilian yields are pricing lower rates for longer

September 21, 2017

After the 3Q17 Inflation Report (see Macro Backdrop), the entire DI futures curve is now below 10%.

With information available until 6:30pm Brasilia time


  • After the 3Q17 Inflation Report (see Macro Backdrop), the entire DI futures curve is now below 10%. The Jan-20 fell 12bps to 8.05%. Breakevens also narrowed as the 2-year fell 5bps to 4.20%. 
  • LatAm FX (-0.38%) posted losses across the board. The BRL depreciated 0.15% to 3.1382/USD and the MXN is trading 0.68% weaker to 17.8909/USD. Andean markets had a late-reaction to Wednesday’s FOMC meeting (CLP: +0.72% to 625.02/USD; COP: 0.83% to 2,916/USD). 
Macro Backdrop


  • Inflation report: low for long. The BCB's Inflation Report for 3Q17 updates forecasts, as usual, showing inflation at 4.3% at the end of 2018 and at 4.2% by 4Q2019 in the active scenario, with interest rate and exchange rate forecasts in line with market expectations (according to the Focus report). In the hybrid scenario, with a constant exchange rate and the interest rate following market expectations, forecasts are at 4.1% for end-2018 and 3.9% for 4Q2019. These forecasts seem to embed above consensus views on administered prices, hence may move down over time. Be that as it may, they are consistent with a gradual end of the easing cycle, in the 7.0% neighborhood by year-end. 
  • In summary, the IR released today shows that the signaling of moderately slower easing in October remains. The forecasts presented by the Copom suggest the Selic rate will reach 7.0% in December and remain at this level for a long period. For now, we maintain our call of Selic at 7.0% at the year-end and staying there in 2018, with a 75bps cut in October meeting, followed by a final 50 bps cut in December. Favorable inflation dynamics suggests the risk to our call is tilted to the downside. We will, as always, monitor events closely, in this particularly fluid and uncertain environment. Full Report
  • IPCA-15 rose 0.11% in September, as year-over-year change slid to 2.56%. The IPCA-15 result in September (0.11%) virtually matched our estimate (0.10%) and the median of market expectations (0.13%). The index rose 0.35% in the previous month and 0.23% in September 2016. Hence, the IPCA-15 is up by 1.90% year-to-date (down substantially from 5.90% in the year-earlier period). The year-over-year change slowed down to 2.56% (from 2.68% in August). According to census bureau IBGE, the year-to-date and year-over-year readings are the lowest for September since 1998. Breaking down by product groups, the largest upward contribution during the month came from transportation (0.22 p.p.), reflecting higher prices for fuels (0.17 p.p.) and airfares (0.06 p.p.). On the opposite end, the largest downward contribution came from food and beverages (-0.23 p.p.), following widespread price cuts. 
  • Based on the IPCA-15 report and other current information, our preliminary forecast for the headline IPCA in September is 0.10%, keeping the year-over-year change virtually unchanged at 2.5%. As in August, the largest upward contribution to the IPCA will come from the transportation group, still reflecting higher prices for fuels and airfares. On the other hand, the food group – posting negative change for a fifth consecutive month - will exert the most downward pressure on monthly inflation. Full Report
  • Job creation came in lower-than-expected in August. CAGED formal job creation came in at 35k in August, below our estimate (90k) and market expectations (54k). According to our traditional seasonal adjustment approach, 24.2k jobs were closed, taking the 3-month moving average to -6k (from +1k). However, different seasonal adjustment methodologies may print other results as the current formal job creation approaches an inflection point in the time series. Job closings have been moderating, in line with a gradual economic recovery. We continue to expect the economic recovery should begin impacting the formal labor market positively.
  • Temer’s request to suspend charges pressed against him by former Federal Prosecutor was rejected by the Supreme Court. Ten ministers (out of eleven) voted to not suspend the charges until the revision of evidence contained in the plea bargain deal grounding the President’s accusation. So, Mr. Temer’s accusation will now move to the Lower House. 
  • 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 22. 
  • Retail sales came in weak in July. The retail sales monthly indicator grew a modest 0.4% year-over-year in July, below median market expectations (1%) and our own forecast (1.5%). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was 0.6% year-over-year, with the three-month moving average growth rate decreasing to 1.4% year-over-year (from 2.7% in June). 
  • In any case, a sequential recovery of retail sales should begin in the coming months. Even though the year-over-year growth rate of the real wage bill has continued to slow down - as the fall of real wages has more than offset the strength of formal employment - we note that the real wage bill has rebounded sequentially. In fact, the real wage bill expanded 3.1% qoq/saar in August (from a trough of 0.6% qoq/saar in March), as inflation is moderated at the margin. We believe inflation will show a more significant decrease in coming months, driven by the lagged effects of MXN appreciation. Moreover, the acceleration of the US economy will likely support employment growth in Mexico. An important point to be considered, however, is the proximity of the presidential elections (with Andrés Manuel López Obrador leading the polls) which could affect private investment (and, consequently, job creation). Full Report
  • GDP in 2Q17 was consistent with the monthly result. On a year-over-year basis GDP grew by 2.7%, in line with the figure anticipated by the official monthly GDP proxy (EMAE), after posting a 0.4% gain in 1Q17. On a sequential basis, output increased by 0.7%, adjusted for seasonality, after rising by a revised 1.2% in 1Q17 and 1% in 4Q16. As a result, GDP grew 1.6% in 1H17 relative to the same period of 2016.
  • The economy will likely continue to grow at a solid pace in the second half of the year. Diverse coincident and leading indicators (industrial output, construction activity, tax collection, and consumer confidence) came in strong in July and August. We forecast a GDP growth rate of 2.5% in 2017, with risks tilted to the upside. Full Report

Market Developments 

  • GLOBAL MARKETS: The USD weakened at the margin and US treasuries widened 1-2bps on the day after the FOMC meeting. Also, US equity markets posted losses and the VIX is below 10 (at: 9.75 – lowest since July). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the red (CRB futures: -0.67%) in the session. Metals were the largest downward contribution (iron ore: -5.73%; copper: -1.06%). Bucking the trend, oil priced rose (WTI: +0.81% to USD 51.10/USD). LatAm FX (-0.38%) posted losses across the board. The BRL depreciated 0.15% to 3.1382/USD and the MXN is trading 0.68% weaker to 17.8909/USD. Andean markets had a late-reaction to the FOMC meeting (CLP: +0.72% to 625.02/USD; COP: 0.83% to 2,916/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) traded range bound. Chilean spreads widened 2bps to 61bps. In Brazil, CDS inched up 1bp to 203bps. CDS in Colombia remained stable at 129bps. On the other hand, Mexican country risk fell 1bp to 114bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The entire Brazilian curve is now below 10%. After the 3Q17 Inflation Report (see Macro Backdrop), the curve is pricing lower rates for longer. In DI futures, the Jan-20 fell 12bps to 8.05%. Breakevens also narrowed as the 2-year fell 5bps to 4.20%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields narrowed after retail sales came in weaker than expected (see Macro Backdrop). In TIIE swaps, the 5-year fell 7bps to 6.73% and the 10-year fell 6bps to 7.00%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields were mixed in the session. In Camara swaps, while the 1-year fell 2bps to 2.44%, the 5-year increased 1bp to 3.42%. Chile Rates Tracker Colombian rates widened, tracking US treasuries. In IBR swaps, the 5-year increased 4bps to 5.39%. Colombia Rates Tracker

Friday Events

  • In Mexico, the statistics institute (INEGI) will publish CPI inflation figures for the first half of September. We expect bi-weekly inflation to post 0.40%. Moreover, 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. We expect the annual expansion of the seasonally adjusted series of ISE to be 4.0%. 

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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