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Brazilian yields narrow amid lower inflation expectations

June 19, 2017

Brazilian rates narrowed substantially, as the consensus revised inflation projections to the downside again.

STRATEGY TEAM:

Ciro Matuo, CNPI, ciro.matuo@itaubba.com
Eduardo Marzaeduardo.marza@itaubba.com
Pedro Correapedro.correa@itaubba.com


With information available until 6:30pm Brasilia time

Highlights

  • Brazilian rates narrowed substantially, as the consensus revised inflation projections to the downside again (see Macro Backdrop). DI futures narrowed by double digit figures past the 2020s; the Jan-2021 settled at 10.00% (-10bps), a level last seen at early May. Breakevens past the 5-year are running around 4.60%, with the 5y5y forward tightening 7bps to 4.67%. For the next Copom meeting (July 25-26), the curve now implies 85bps in cuts, from 82bps as of Friday.
  • In contrast, Mexican yields halted the rally initiated after the gubernatorial elections on June 4. In TIIE swaps, yields rose 4-6bps past the 4-year. The curve implies only one 25-bp hike for the remainder of the year; we expect Banxico to deliver a 25-bp hike next Thursday (June 22), taking the reference rate to 7%.
  • Colombian markets were closed due to a local holiday.

Macro Backdrop

BRAZIL
  • Market revised inflation expectations to the downside again. In BCB’s weekly survey with market participants, median IPCA inflation expectations for 17YE dropped to 3.64% (-7 bps) and for 18YE to 4.33 (-4 bps). GDP growth forecasts for 2017 were broadly stable at 0.40% (from 0.41%), and receded to 2.20% (from 2.30%) for 2018. The market sees the BRL at 3.30/USD by 17YE and at 3.40/USD by 18YE. Finally, year-end Selic expectations stood flat at 8.50% for both years. See BCB report
  • BCB alloted the full amount of FX swaps offered (8,200). After closing, the central bank announced another rollover auction for Tuesday (June 20).
Market Developments 
  • GLOBAL MARKETS: European equity markets were firm on the green, as France President Macron won an absolute majority in Sunday’s second round parliamentary elections.  As expected, Macron’s La République en Marche won 350 seats out of 577 in the National Assembly, a result that will likely allow him to push for reforms. The French Parliament ought to start debating reforms soon, with the labor market reforms set to take central stage (can be debated by this summer). President Macron now has wide support to follow on his proposals, which is set to further strengthen the Franco-German pro-EU alliance. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Brent crude traded lower to 46.82/USD (-1.16%). In FX, commodity-linked pairs (-0.64%) lagged EMFX (0.28%). The CLP outperformed LatAm peers (+0.43% to 661.52/USD), buoyed by the gains in copper (1.07%). By the time of writing, the MXN was trading at 17.96/USD (-0.25%), while the BRL appreciated a tad (0.28% to 3.2828/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads had a quiet session, as the Chilean 5-year CDS spreads stood flat at 69bps. Elsewhere, CDS oscillated up in Colombia (130bps) and Mexico (111bps), whereas Brazil inched down 1bp to 238bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed substantially again, as BCB’s survey show analysts revised down inflation projections (see Macro Backdrop). DI futures narrowed by double digit figures past the 2020s; the Jan-2021 settled at 10.00% (-10bps), a level last seen at early May. Breakevens past the 5-year are running around 4.60%, with the 5y5y forward tightening 7bps to 4.67%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields halted the rally initiated after the gubernatorial elections on June 4. In TIIE swaps, yields rose 4-6bps past the 4-year. The 5-year increased 5bps to 7.00%. The curve implies only one 25-bp hike for the remainder of the year; we expect Banxico to deliver a 25-bp hike next Thursday, taking the reference rate to 7%.Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed 1-3bps in the 5-yr/8-yr sector. In Camara swaps, the 5-year fell 3bps to 3.40%.Chile Rates Tracker Colombian markets were closed for a holiday.

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for Q2 will be released (Thu.). We expect the Central Bank’s inflation forecasts in the market scenario (BRL and interest rate according to the Focus survey) below 4.0% for 2017 and around the 4.5% target for 2018. Moreover, June’s IPCA-15 consumer inflation preview will be released (Fri.). We forecast a 0.14% monthly rise, with year-over-year inflation slowing to 3.5% from 3.8%. With this result, inflation will have reached 1.6% in the first half of the year, well below the 4.6% recorded during the same time window last year. In economic activity, May’s CAGED formal job creation will come through on Tuesday (June 20), for which we expect net loss of 9k jobs (seasonally adjusted), in line with milder contractions in job creation. Then, FGV’s industrial business confidence preview for June will be released (Thu.). Finally, CNI will release its industrial business confidence for June (Thu.). On fiscal accounts, May’s tax collection may be released throughout the week.
  • In Mexico, the statistics institute (INEGI) will publish Q1’s aggregate supply (Tue). We expect it to grow at the pace of 4.1% year-over-year (up from 1.9% in 4Q16). Then, INEGI will publish CPI inflation figures for the first half of June (Thu.). We expect bi-weekly inflation to come in at 0.15%. June usually features a seasonal decrease of agricultural prices, but price surveys reported by the Ministry of Economy indicate that agricultural prices increased during the first half of June. Assuming our forecast is correct, annual inflation would increase to 6.30% year-over-year (from 6.16% in the second half of May). Moreover, the Central Bank’s board will meet to decide on the reference rate (Thu.). We expect Banxico to deliver a 25-bp hike, taking the reference rate to 7%, in lockstep with the U.S. Fed. Finally, INEGI will announce the growth rate of April’s retail sales (Fri.), which we forecast at 1.5% year-over-year (down from 6.1% in March).
  • In Colombia, the trade balance for the month of April will be published (Tue.). We expect a trade deficit of USD 1.0 billion, broadly in line with the USD 1.1 billion deficit recorded one year ago. As a result, the rolling 12-month trade deficit would edge down to USD 10.0 billion, from USD 10.1 billion as of March and USD 11.5 billion in 2016. Then, the April activity coincident indicator (ISE) will be published (Thu.). The March index declined 0.9% year over year. Also, local think-tank Fedesarrollo will publish the May industrial and retail confidence indicators (Thu.). In April, the components of business confidence continued to deteriorate. Weak confidence suggests a solid recovery of Colombia’s economy is unlikely in the near term.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



MACRO RESEARCH TEAM:

Mario Mesquita - Chief Economist
Luiz Gustavo Cherman, lcherman@itaubba.com
Luka Barbosa, lbarbosa@itaubba.com

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