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Brazilian yields tighten after Copom statement

February 23, 2017

In rates, after the Copom’s 75-bp cut, DI Futures tightened further.

With information available until 6:30pm Brasilia time

Highlights

  • In rates, after the Copom’s 75-bp cut, DI Futures tightened further. BCB suggested its next moves will depend on estimates about the “structural interest rate” (which is likely in a falling trend) and also left the door open for a further acceleration of the pace of cuts. Also, on the economic front, the release of the central government primary result was a good surprise. This way, the Jan-19 inched down 16bps to 9.82%.
  • Risk appetite fell and volatility measures went up as uncertainties regarding the US tax plan increased. Benchmark US 10-year yields hit two-week lows (-3bps to 2.39%). In LatAm FX, all currencies under our coverage appreciated amid positive sentiment in the region, due to incoming data. The MXN appreciated 1.11% to 19.69/USD, as the central bank minutes indicate further hikes. The CLP traded at 641.53/USD (+0.09%). The COP strengthened to 2,869.01/USD (+0.91%). Finally, the BRL traded range bound and settled at 3.0631/USD (+0.05%). 

Macro Backdrop

BRAZIL
  • Better-than-expected central government primary result in January. The central government posted a BRL 19.0 billion surplus in January, much better than market estimates (BRL 9.4 billion) and our call (BRL 2.0 billion). Revenues came BRL 2 billion higher than our forecast, while expenditures were BRL 15 billion lower, mainly due to the surprise in discretionary spending (investment, administrative costs), due to the government implementing fiscal adjustment and also lower payments of delayed expenses.  . According to the Treasury report, low discretionary expenditures in January reflect the “organization of public accounts realized in 2016, which resulted in lower fiscal pressure for January 2017”. In fact, the government paid several expenditures in delay by December last year, opening room for lower spending early this year (see chart below). The consolidated primary result for January (including regional governments and state-owned companies) will come through tomorrow. We expect a BRL 27 billion surplus. 
  • January credit report in line with stabilization of new loans. The daily average of new non-earmarked loans for both consumers and businesses inched up, increasing 0.3% m/m in both segments - in real terms, seasonally adjusted. The NPL ratio stood flat at 6.0% for consumers and at 5.5% for businesses. Average interest rates on consumer loans increased 1 p.p. for both consumers and businesses, to 72.7% in the former and to 28.8% in the latter. Public banks’ market share increased to 55.9% from 55.7%. The report suggests continuous stabilization in new loans for businesses and households. Full Report
  • Retail confidence (FGV) increased for the third consecutive month in February. The confidence in the retail sector increased 4.6% m/m in February, led by the current situation (8.0%). Expectations also increased (1.8%). Although this data has low correlation with the other retail data, the result shows some upward trend in confidence in the last months. 
  • We forecast a 0.6% decline in Brazilian 4Q16 GDP. Our Macro team has published a study anticipating the eight consecutive GDP decline in the last quarter of 2016. From the supply standpoint, we expect the eighth straight drop in service activity. The industrial sector should also decline during the quarter. On the demand side, household spending probably fell for the eighth consecutive quarter. Furthermore, investments and exports also dropped, but spending by public administration and imports likely advanced. Hence, GDP probably shrank 3.5% in 2016. In our view, the economy will grow again in 1Q17. Full Report
  • BCB placed the full offering of 6,000 FX swaps. 
MEXICO
  • The Central Bank published the minutes of February’s monetary policy meeting, in which the Board decided to increase the policy rate by 50-bps (to 6.25%), indicating that the decision was unanimous. February’s statement added a new sentence which reads: the board “will deliver the hikes that are necessary in 2017”, whereas previous statement did not make such explicit reference to future moves. The minutes show tougher language on inflation, for instance, all board members agreed that inflation expectations have increased, in contrast with previous communications. The board also discussed the possibility of observing higher exchange rate pass-through, which is a key risk for the outlook. The board believes that activity is heading to a slowdown. Most believe that the deterioration of bilateral relations with the US will hurt investment, and that private consumption will also suffer a slowdown. We expect Banxico to take the reference rate to 7.0% in 2017, with three 25-bp rate hikes following each move of the same magnitude by the Fed. Full Report
  • CPI increased 0.33% between the second half of January and the first half of February. The data came in broadly in line with our forecast (0.32%) and market expectations (0.30%). Core goods were up by 0.7%, contributing 0.24 p.p. to the bi-weekly inflation. Even though the update of gasoline prices that was scheduled to take place in the first half of February was postponed (resumed on February 18), energy prices increased 0.4% because of higher natural gas (5.7%) and liquefied petroleum gas (1.3%) prices. Annual headline inflation increased 4.71% y/y (previous: 4.66%), above the 3% target. Non-core inflation decelerated to 6.25% y/y in the same period (previous: 6.79%) driven by a low agricultural inflation (to -2.92%, from -0.71%) while energy and regulated prices remain high (to 12.26%, from 11.63%). Core inflation increased, reaching 4.20% (previous: 3.95%), with inflation for goods at 5.27% (previous: 4.96%) and services at 3.29% (previous: 3.10%). We expect inflation to increase to 5% by the end of 2017, driven by the lagged effects of peso depreciation. Looking beyond that, we believe inflation will moderate to 3.3% in 2018, as temporary shocks (gasoline spike and peso depreciation) dissipate and domestic demand slows down. Moreover, in our view, the tightening of monetary policy will likely keep long-term inflation expectations anchored and thus prevent the materialization of second-round effects. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk appetite fell and volatility measures went up as uncertainties regarding the US tax plan increased. Benchmark US 10-year yields hit two-week lows (-3bps to 2.39%), while the 30-year slid for the fifth straight session (-1bp to 3.02%). The Fed funds futures implied probability of a March hike increased to 38% from 34% as of Wednesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed (CRB Futures Index: +0.21%) and oil prices increased (+1.09% to USD 56.45/bbl). While soybean prices went up 1.35%, Copper and Iron Ore posted losses of 3.26% and 2.80%, respectively. In LatAm FX, all currencies under our coverage appreciated due to uncertainties in the external environment and positive sentiment in the region, amid incoming data. The MXN appreciated 1.11% to 19.69/USD, as the central bank minutes indicate further hikes. The CLP traded at 641.53/USD (+0.09%). The COP strengthened to 2,869.01/USD (+0.91%). Finally, the BRL traded range bound and settled at 3.0631/USD (+0.05%). FX & Commodities Tracker 
  • CDS SPREADS & EXTERNAL BONDS: All over LatAm, spreads for the 5-year tenor fell. In Chile, spreads went to 74 (-1bp). The Mexican fell 6bps to 141bps. Colombian spreads fell 2bps to 136bps. CDS in Brazil fell 4bps to 220bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: After the Copom’s 75-bp cut, DI Futures tightened further. Besides the incoming data, the BCB also suggest its next moves will depend on estimated about the “structural interest rates” and also left the door open for a further acceleration of the pace of cuts. Also, on the economic front, the release of the central government primary result was a good surprise. This way, the Jan-19 inched down 16bps to 9.82% and the Jan-21 fell 14bps to 10.04%. Also, the big LTN auction pushed downwards the Apr-18, Apr-19 and Jul-20 rates. The curve now implies 441bps to 484bps (Wednesday: 342bps to 385bps) in rate cuts for 2017. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened again. Rates tightened as the 10-year fell 8bps to 7.74%. The curve now implies roughly 70bps in rate hikes by YE17, from the 100bps registered Tuesday. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Camara curve shifter downwards 3bps on average. The 6-month fell 5bps to 3.02%,and the 5-year fell 3bps to 3.65%. Chile Rates Tracker The IBR curve tightened substantially, ahead of the monetary policy meeting. The 1-year fell 4bps to 6.44% and the 7-year decreased 3bps to 6.02%. Colombia Rates Tracker

Friday Events

  • In Brazil, the nationwide unemployment rate for January will come through. We forecast the unemployment rate to reach 12.5%, which in seasonally-adjusted terms means unemployment will climb to 12.8% from 12.6%. Also, the final industrial business confidence reading by FGV will be released. Then, the consolidated primary budget balance for December will come through. 
  • In Mexico, INEGI will announce December’s retail sales. We estimate that retail sales growth at 6.8% y/y. Finally, the Central Bank will publish Q4’s current account balance. We expect the current account deficit at USD 4.4 billion in 4Q16. 
  • In Colombia the central bank will hold its second monetary policy meeting of 2017. We expect the central bank to stay on hold at this meeting.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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