Itaú BBA - Brazilian yields rally after the U.S. labor report

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Brazilian yields rally after the U.S. labor report

February 3, 2017

Brazilian nominal rates staged another rally, echoing the post-payroll risk on mood.

With information available until 6:30pm Brasilia time

Highlights

  • The details of the labor report came in softer than expected. Overall, the data suggests there is a bit more slack in the labor market than previously thought. Hence, we moved our baseline for the next FOMC rate hike from March to May.
  • Brazilian nominal rates staged another rally, echoing the post-payroll risk on mood. The DI Futures curve bull-flattened again (Jan19x25: -9bps). The Jan-19 narrowed 6bps to 10.25%. The curve prices-in 350bps in rate cuts for 2017 and further 50bps of easing for next year. The front end and the belly of the Colombian curve widened, as the market reassessed the timing of Banrep’s easing cycle after the presentation of the 4Q16 inflation report. In the event, Governor Echavarria stated that inflation is not slowing as fast as the board would want. In IBR swaps, the 1-year rose 3bps to 6.47% and the 5-year edged up 2bps to 5.81%.
  • In FX, most LatAm currencies strengthened after the U.S. labor report; the COP outperformed (0.92% to 2,851.94/USD), followed by the MXN (0.82% to 20.39/USD). The CLP also appreciated (0.74% to 638.82/USD), whereas the BRL closed near the opening level (-0.04% to 3.1230/USD).

Macro Backdrop

MEXICO
 

  • Gross fixed investment (GFI) is heading for slowdown. GFI expanded by 2.8% y/y in November - above the consensus forecast (2.5%). In November, the 3-month moving average growth rate increased to 0.9% y/y (previous: 0.3%), on the back of residential construction. Non-residential construction weakened, dragged by the fiscal consolidation, as well as investment in machinery & equipment (particularly hurt by the MXN depreciation). Looking ahead, we expect the uncertainty over the course of US policies to discourage investments in Mexico. Moreover, the higher inflation and rising domestic interest rates, coupled with weak consumer confidence, will likely affect residential construction. Full Report Below
  • Consumer confidence hits lowest point in historic series.  Mexico’s consumer confidence fell to 68.5 in January, following the higher gasoline prices (as the government eliminated fuel subsidies) and tensions in bilateral relations with the U.S.. In January, the 3-month moving average growth rate of consumer confidence decreased to -14.1% y/y (December: 7.8%). Full Report Below

CHILE
 

  • BCCh’s monetary policy minutes revealed that the discussion was only rate cuts. The board decided unanimously to lower the policy rate by 25bps to 3.25%. In line with our expectations, the discussed options and comments from some board members suggest there is growing scope for additional monetary stimulus than currently communicated. Moreover, the recent slowdown in inflation is mainly viewed to be due to the evolution of the exchange rate and less so to the output gap. However, the technical staff notes that its medium term inflation forecasts depend significantly on the assumption of an activity recovery. In spite of the unanimous decision to cut the policy rate, the board is divided on the extent, timing and signaling of further easing. In addition to the 25bp cut, staying on hold still held weight in term of giving the board more time to evaluate the persistence of recent soft activity and inflation readings. We see the BCCh discretely building the expectation that easing beyond the 50-bp baseline scenario may be necessary, and we do not expect any adjustment to the official communication until at least the publication of the 1Q17 Inflation report (IPoM). We forecast an easing cycle of 100bps this year, taking the policy rate to 2.5%. Full Report

Market Developments

  • GLOBAL MARKETS: The U.S. payroll report showed consistency, but with less wage pressures and higher unemployment rate allowing the Fed to remain on-hold for a bit longer. Non-Farm Payroll grew 227k in January, above the consensus median (175k) and not far from the most optimistic forecast. On the other hand, the U3 rose to 4.8%, surprising the consensus expectation (4.7%). Moreover, wage inflation came soft at 0.1% m/m, disappointing the median of market expectations (0.3%). Overall, the data suggests there is a bit more slack in the labor market than previously thought. Hence, we moved our baseline for the next FOMC rate hike from March to May. U.S. Treasuries narrowed after the labor report, but later reverted the movement after Fed’s Williams said in an interview that he sees arguments for hiking sooner rather than later. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil traded a higher (Brent: 0.30% to USD 56.7/bbl), whereas copper fell (-2.40%) as the market downplayed the odds of a strike in Chile’s largest copper mine taking place in the short term. Most LatAm currencies strengthened after the U.S. labor report; the COp outperformed (0.92% to 2,851.94/USD), followed by the MXN (0.82% to 20.39/USD). The CLP also appreciated (0.74% to 638.82/USD), whereas the BRL closed near the opening level (-0.04% to 3.1230/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads tightened substantially after the U.S. labor report. For the 5-year tenor, Brazil dropped 6bps to 238bps – an 18-month low. Colombian spreads fell to 145bps (-3bps) and Chile narrowed to 76bps (-3bps). Mexican risk premium receded to 156bps (-6bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Nominal rates staged another rally, echoing the post-payroll risk on mood. The DI Futures curve bull-flattened again (Jan19x25: -9bps). The Jan-19 narrowed 6bps to 10.25%. The curve prices-in 350bps in rate cuts for 2017 and further 50bps of easing for next year. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The nominal curve had a mixed behavior. In TIIE swaps, the 1-year stood at 7.09% and the 10-year at 7.92%. Breakevens inched up 1bp past the 7-year, trading around 4.20%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates edged lower. In Camara swaps, the 5-year tightened 1bp to 3.59%. Chile Rates Tracker The front end and the belly of the Colombian curve widened, as the market reassessed the timing of Banrep’s easing cycle after the presentation of the 4Q16 inflation report. In the event, Governor Echavarria stated that inflation is not slowing as fast as the board would want. In IBR swaps, the 1-year rose 3bps to 6.47% and the 5-year edged up 2bps to 5.81%. Colombia Rates Tracker

Upcoming Events 

  • In Brazil, January’s IPCA consumer inflation (Wed.) will be on focus. We forecast an inflation of 0.43% m/m, this means that, in annual terms, inflation will set back to 5.4% from 6.3% in December. Moreover, Anfavea’s vehicle production for January will be released (Mon.) – we estimate the production to reach 182k.  Also, two other industry indicators may be released: paper cardboard dispatches (ABPO) and heavy vehicle highway traffic (ABCR). In Congress, the Lower House will resume activities on the government’s Social Security reform proposal, so the Special Committee that will discuss and analyze the proposal may be formed throughout the course of the week.
  • In Mexico, the INEGI (the statistics institute) will announce January’s inflation (Thu.). We expect the headline to accelerate to 4.73% y/y. Also, the Central Bank’s board will meet to decide on the reference rate. We believe the Banxico will hike 50bps, taking the reference rate up to 6.25%. 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 Chile, the BCCh will publish December’s Imacec (Mon.). We expect the GDP proxy to be 0.7% y/y. Also, the central bank will publish January’s trade balance (Tue.), for which we forecast a USD 590 million surplus. Moreover, the National Institute of Statistics (INE) will publish (Tue.) nominal wage growth for December. The INE will also publish (Wed.) inflation data for January. We expect an inflation of 2.5% y/y (December: 2.7%).
  • In Colombia, inflation for January will be published (Sat.). We expect a deceleration of consumer prices to 5.66%, the lowest reading since September 2015. Moreover, 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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