Itaú BBA - Brazilian yields narrow further as the market expects lower inflation

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Brazilian yields narrow further as the market expects lower inflation

March 13, 2017

The Brazilian curve tightened as inflation expectations for 2017 went down to 4.19% and Selic expectations for YE17 fell to 9.0%.

With information available until 6:30pm Brasilia time

Highlights

  • The Brazilian curve tightened as Focus survey indicates lower inflation and Selic rate ahead. Inflation expectations for 2017 retreated to 4.19% (-17bps) and interest rate expectations for YE17 fell to 9.0% from 9.25% (see Macro Backdrop). In DI Futures, the Jan-18 went down 5bps to 10.02% and the Jan-21 decreased 4bps to 9.93% - lowest since mid-2013.
  • As the market awaits for the FOMC, all the currencies under our coverage depreciated. The MXN and the COP slightly fell to 19.62/USD (-0.05%) and to 2,984.10/USD (-0.02%), respectively. The BRL posted losses of 0.35% to 3.1529/USD. The CLP was the regional laggard, trading at 666.74/USD (-0.41%). 

Macro Backdrop

BRAZIL
  • 2017 inflation expectations retreat to 4.19%. According to BCB’s Focus survey, inflation expectations for 2017 retreated once again, remaining below the central bank’s target, to 4.19% (from: 4.36%), while 2018 and 2019 remained stable at 4.50%. Year-end Selic expectations for 2017 and 2018 dropped 25bps to 9.00% and 8.75%, respectively, while 2019 remained stable at 9.00%. Also, the market left unchanged its expectations for the exchange rate (2017: 3.30/USD, 2018: 3.40/USD). GDP growth expectations slightly changed to the downside in 2017 (to 0.48%, from 0.49%) and to the upside in 2018 (to 2.40%, from 4.39%), while in 2019 stood flat at 2.50%. BCB Report
MEXICO
  • Mexico's supermarket and department store (ANTAD) same-store-sales slowed down significantly in February. ANTAD sales grew 2.7% y/y, below our forecast and consensus (both 3.0%), and less than half the average growth rate recorded in 4Q16 (6.3%). Real wage growth was negative in January and February (as inflation exceeded the growth of nominal wages) and consumer confidence fell to an all-time low in January (with only a shy recovery in February). Overall, our take from the ANTAD indicator is that it points to weaker consumption and retail sales in 1Q17.
COLOMBIA
  • The latest inflation expectations bolster the likelihood that Banrep will cut the policy rate at the March 24 monetary policy meeting. Last month’s survey showed a slight tick-up in the 2017 inflation expectation to 4.6%, likely due to the expected effect of the sales tax hike. Since then, the February inflation surprised to the downside, and inflation expectations have subsequently shown some reversion. Market analysts’ CPI forecasts for 2017 now sit at 4.41% (previous: 4.60%). Meanwhile, the one-year forward expectation dropped to 3.76% (previous: 4.01%), entering the tolerance range for the first time since October 2015. Inflation expectations for the 2-year horizon are now at 3.22% from 3.50% one month ago.
  • In this context, analysts still see the policy rate ending this year at 6.0% with the implementation of consecutive rate cuts until July. This is unchanged from the previous month, only that the 6% is now reached one month earlier given the rate cut surprise last month. We too see the need for a less contractionary policy rate to support weak activity. With inflation and inflation expectations retreating and activity remaining weak, we see increased probability that another rate cut will be implemented this month. Thereafter, the timing of future moves will depend on the evolvement of inflation expectations, activity and the impact from the revamped monetary policy board. We see the policy rate ending the year at 5.5%.

Market Developments 

  • GLOBAL MARKETS: Equity markets on the green and Treasuries widening ahead of the FOMC meeting. For the 5-year and 10-year, rates increased 3bps to 2.13% and 4bps to 2.61%, respectively. We expect the FOMC will hike rates Wednesday, raising the Fed funds target range by 25-bps to 0.75%-1.0%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Metals posted gains and oil traded range bound. Copper increased 1.35% and iron ore went up substantially (4.28%) as a senior Chinese official said Sunday that industrial production indeed will come above 6.0% y/y and hinted at strong headlines in the other results, lowering considerably the odds risks of weaker data. WTI slightly fell to USD 48.43/bbl (-0.12%). In LatAm FX, all the currencies under our coverage depreciated. The MXN and the COP slightly fell to 19.62/USD (-0.05%) and to 2,984.10/USD (-0.02%), respectively. The BRL posted losses of 0.35% to 3.1529/USD. The CLP was the regional laggard, trading at 666.74/USD (-0.41%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor traded range bound. Colombian and Brazilian spreads stood flat at 138bps and 233bps, respectively. Chile CDS fell 1bp to 74. Mexican country risk inched up 1bp to 138bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve took the route south as professional forecaster’s revised inflation and interest rate expectations to the downside (see Macro Backdrop). In DI Futures, the Jan-18 went down 5bps to 10.02% and the Jan-21 decreased 4bps to 9.93% - lowest since mid-2013. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Most Mexican rates traded lower in the session, echoing below than expected sales print (see Macro Backdrop). In TIIE swaps, the 1-year decreased 1bp to 7.19% and the 10-year fell 2bps to 7.77%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, short rates had a quiet session and long ones marginally increased. In Camara swaps, the 9-month stood flat at 2.94% and the 10-year went up 2bps to 4.29%. Chile Rates Tracker In Colombia, IBR swaps were mixed in the session. The 1-year increased 1bp to 6.11% and the 10-year decreased 4bps to 6.50%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, February’s Industry employment data for the state of Sao Paulo (FIESP) will be in focus (Thu.). In recent months, employment has shown more modest marginal declines. Then, industrial business confidence (CNI) for March will be released (Fri.). In the previous month, confidence increased 6.7%, representing a second relevant gain at the margin. We expect the current upward trend in industrial confidence to continue ahead.
  • In Mexico, the statistics institute (INEGI) will publish January’sindustrial production (Tue.). We expect a 0.4% y/y expansion, up from a 0.6% contraction recorded in December, driven by a pick-up of manufacturing exports (which accelerated in January).
  • In Chile, the central bank of Chile will hold the Marchmonetary policy meeting (Thu.). We expect the board to cut the policy rate by 25bps to 3.0% and to retain the easing bias.
  • In Colombia, the National Institute of Statistics (DANE) will release January’s activity data (Tue.). We expect industrial production to expand 2.3% y/y (previous: 2.2%), aided by a favorable calendar effect. Meanwhile, retail sales are likely to grow 3.0% in twelve months (previous: 6.2%), as car sales slowed down. Moving forward, think-tank Fedesarrollo will release the February consumer confidence (Wed.). In the previous month, consumer confidence reached a historic low following the approval to increase the sales tax rate. Then, the trade balance for the month of January will be published (Fri.). We expect a trade deficit of USD 815 million, smaller than the USD 1.5 billion deficit recorded one year ago. Moreover, the central bank may publish the current account balance for 4Q16. We expect a USD 2.2 billion deficit (4Q15: USD 4.1 billion deficit).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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