Itaú BBA - Brazilian yields rally after inflation surprises downwards

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Brazilian yields rally after inflation surprises downwards

February 8, 2017

In Brazil, the DI curve bull-flattened, as inflation came close to the lowest of market expectations.

With information available until 6:30pm Brasilia time


  • In Brazil, the DI curve bull-flattened, as inflation came close to the lowest of market expectations (see Macro Backdrop). In Chile, however, the scenario is the opposite, as inflation surprised to the upside (see Macro Backdrop). The Chilean curve bear-flattened as the 1s10s spread tightened 6bps. 
  • In LatAm FX, the BRL and the MXN both appreciated, to 3.1156/USD (+0.17%) and 20.48/USD (0.69%), respectively. The CLP depreciated (-0.11% to 648.03/USD) and the COP was the regional laggard (-0.92% to 2,880.69/USD), on the back of idiosyncratic concerns.

Macro Backdrop

  • The consumer price index IPCA rose 0.38% m/m in January, below our estimate (0.43%), and testing the lowest of market expectations (0.37%, with the median at 0.42%). According to IBGE, it was the lowest reading for January since 1994, when the Real Plan was implemented. The annual change slid to 5.35% y/y (December: 6.29%). Transportation (+0.14 p.p.), food and beverages (+0.9 p.p.) provided the largest upward contributions during the month. The apparel group posted a negative change (-0.02 p.p.). Food consumed at home (0.17% m/m) and mobile phone services represented the biggest deviations from our expectation. Our preliminary estimate for the IPCA in February stands at 0.47% m/m, driven by seasonal pressure from the education group, pushing the annual change down again, to 4.9% y/y. Full Report
  • CPI surprised to the upside in January, which will likely delay the next rate cut. Prices gained 0.5% m/m, above both our expectations (0.2%) and the consensus’ (0.2%). The majority of the upside in the month was explained by larger increases in inter-urban transportation, alcoholic beverages, natural gas prices, while there were more moderate drops in apparel and seasonal fruit prices than we expected. Annual inflation came in at 2.8%, slightly up from 2.7% in December, but still below the BCCh’s 3.0% target. Overall, we see constrained inflationary pressures going forward, as our diffusion index continues to moderate, with roughly the same amount of goods posting inflation above the target than below it. In our opinion, the January inflation figure affects the timing of the next rate cut; given the better-than-expected activity numbers published earlier this week, the upside inflation surprise and the gradual monetary policy easing approach adopted by BCCh, we expect the next rate cut to be postponed to March. Be that as it may, the data does not change the size of the easing cycle by us: we see the policy rate ending the year at 2.5% (3.25% currently). Full Report
  • We publish our commodities review for February. Commodity prices extended 4Q16 gains into 2017, driven by strong global economic activity, a weaker USD and renewed discipline among producers. We expect our commodity index to fall 7% from current levels in 2017 due to a slowdown in China (by mid-year) and supply responses to current prices, particularly in oil (US shale producers) and iron ore. Despite the almost full compliance with Opec’s deal, Brent prices have remained between USD 55/bbl and USD 57/bbl in 2017. The reason is that shale producers are increasing drilling activity at the same time, reinforcing expectations of a partial rebound in the US crude production through 2017. In addition, increasing uncertainty over the US approach to Middle-East countries is now neutral to prices, because current prices depend on compliance with Opec’s deal. This way, rising tension between the US and Iran or other Opec countries, increases risks of an early deal break-up, a scenario that leads to lower prices. Full Report
Market Developments 
  • GLOBAL MARKETS: Long DM rates tightened overall. In the US, long Treasuries (10-year and 30-year) narrowed 3bps to 2.36% and 4bps to 2.98%, respectively. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher (CRB futures index: +0.47%). Copper increased 1.39%, amid increased market concerns over possible supply disruptions in Chile and Indonesia. In FX, high-beta currencies paid back to Tuesday’s losses (EMFX: +0.23%). Within the currencies under our coverage, the BRL and the MXN both appreciated, to 3.1156/USD (+0.17%) and 20.48/USD (0.69%), respectively. The CLP depreciated (-0.11% to 648.03/USD). The COP was the regional laggard, weakening to 2,880.69/USD (-0.92%), on the back of idiosyncratic concerns. FX & Commodities Tracker 
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads, for the 5-year tenor, remained flat in Mexico at 158. In Chile and Colombia, they widened to 79 (+1bp) and 148 (+3bps), respectively. In Brazil, the spread fell 1bp to 240 – the lowest since June 2015. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: DI Futures receded all over the curve (Jan-18: -5bps to 10.73%), as inflation surprised downwards (see Macro Backdrop). The curve implies 325bps of rate cuts until YE17. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve shifted south, on average, 5bps. In TIIE swaps, the 1-year tightened 7bps to 6.94% and the 10-year decreased 6bps to 7.81%. The curve implies roughly 115bps in rate hikes for 2017. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia:  The Chilean curve bear-flattened (1s10s: -6bps), following the higher-than expected CPI (see Macro Backdrop). In Camara swaps, the 1-year fell 5bps to 2.95%. Chile Rates Tracker In Colombia, the IBR swaps curve bull flattened, as the 7-year and 8-year both decreased 6bps to 5.94% and 6.05%, respectively. Colombia Rates Tracker

Upcoming Events

  • In Brazil, two industry indicators may be released: paper cardboard dispatches (ABPO) and heavy vehicle highway traffic (ABCR). Lower House Speaker Rodrigo Maia announced that the Social Security & labor reform proposals’ Special Committees will be created Thursday.

  • In Mexico, all eyes will be on the Central Bank's monetary policy meeting (Thu.). We believe the Banxico will hike 50bps, taking the reference rate up to 6.25%. Also, the INEGI (the statistics institute) will announce January’s inflation (Thu.). We expect the headline to accelerate to 4.73% y/y. Moreover, INEGI will also publish December’s industrial production (Fri.), which we expect to contract -0.3% y/y. Finally, the ANTAD (National Association of Department Stores and Supermarkets) will announce January’s same-store-sales (Fri.). We forecast sales to grow 6% y/y.
  • In Colombia, the Banrep will release (Fri.) the monetary policy minutes from January. The minutes could provide insight on which conditions Banrep is monitoring before resuming the easing cycle.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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