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Brazilian yields tighten as inflation expectations retreat again

February 20, 2017

Quiet session, with the market operating with thin liquidity amid the US holiday (President’s day).

With information available until 6:30pm Brasilia time

Highlights

  • Quiet session, with the market operating with thin liquidity amid the US holiday (President’s day). Volatility measures stood flat and equities a bit stronger across the board. The DI Futures curve tightened, with short term rates decreasing the most. The Jan-19 went down 2bps to 10.05%.
  • Commodities traded higher and oil prices edged up. In LatAm FX, all currencies under our coverage appreciated. The COP traded at 2,889.20/USD (+0.08%) and the MXN registered gains of 0.28% to 20.37/USD. The BRL strengthened to 3.0878/USD (+0.32%) and the CLP went up 0.54% to 641.33/USD, outperforming its peers.

Macro Backdrop

BRAZIL
  • February’s industrial business confidence preview (FGV) points to a 2.0% m/m seasonally adjusted decline. The data came in lower than our +3.0% forecast (consistent with the 6.7% increase in the CNI release). Also, Industrial capacity utilization indicates a drop of 0.3 p.p., and continues stabilizing. We expect business confidence to follow an upward trend in the coming months. The definitive numbers will be published Friday (February 24). 
  • 2017 inflation expectations retreat again. According to BCB’s Focus survey, inflation expectations for 2017 declined to 4.43% (-4bps) and remained anchored at 4.5% for 2018 onwards. The median of professional forecasters’ expectations for the Selic policy rate stood flat at 9.50% for YE17 and at 9.00% for YE18. The market sees a stronger BRL ahead: 3.30/USD (from: 3.36) in YE17, 3.40/USD (from: 3.49) in YE18 and 3.50/USD (from: 3.55) in YE19. The median of GDP growth expectations wasn’t revised, for YE17 it stood at 0.48% growth. Forecasts for 2018 remained flat at 2.30%, and those for 2019 remained constant at 2.50%. See BCB Report
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 21. 
MEXICO
  • Finding MXN equilibrium in more challenging conditions. Traditional exchange rate models indicate that the Mexican peso is undervalued. This way, our Macro team has published a study to determine the fair value if the deterioration of the energy balance seen over the past few years is permanent, and how protectionism in the US would alter the equilibrium exchange rate. Full Report

Market Developments 

  • GLOBAL MARKETS: Quiet session, with the market operating with thin liquidity amid the US holiday (President’s day). Volatility stood flat, with the market trading in small ranges and equities a bit stronger across the board. Since US Treasuries didn’t change, DM rates stood mostly flat. However, long EONIA (10-year: +2bps to 0.52%) rates pushed the long DMs upwards. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher and oil prices edged up. There was an increase in iron ore (1.23%) and copper (1.65%). Brent went up to USD 56.15/bbl (+0.61%). In LatAm FX, all currencies under our coverage appreciated. The COP traded at 2,889.20/USD (+0.08%) and the MXN registered gains of 0.28% to 20.37/USD. The BRL strengthened to 3.0878/USD (+0.32%) and the CLP (+0.54% to 641.33/USD) outperformed its peers. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm spreads for the 5-year tenor stood flat, expect for Colombia. In Chile, spreads stood at 82bps. The Mexican remained unchanged at 158bps. CDS in Brazil was flat at 231bps. Meanwhile, the Colombian spread increased only 1bp to 146bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The DI Futures curve tightened. Short term rates decreased the most, with the Mar-17 and Oct-17 decreasing 5bps to 12.57% and 10.91%, respectively. The curve implies 333bps to 376bps in rate cuts for 2017. Accordingly, short breakevens fell and long breakevens went up (2-year: -5bps to 4.25%; 10-year: +3bps to 4.79%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded range bound, amid the US holiday. The 1-year stood flat at 7.25% and the 10-year went down 1bp to 7.96%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Camara rates traded higher. While the 1-year went down to 3.01% (-2bp), the 7-year increased 4bps to 3.98%. Chile Rates Tracker The IBR rates had a quiet session. The 9-month fell 1bp to 6.76% and the 10-year stood flat at 6.48%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Central Bank’s Monetary Policy Committee (Copom) meeting (Wed). We expect another 75 bps interest rate cut, lowering the Selic rate to 12.25%. Then, IPCA-15 consumer inflation preview for February will be released (Wed.), for which we forecast a 0.52% m/m rise. Furthermore, the nationwide unemployment rate for January will come through (Fri.). We forecast the unemployment rate to reach 12.5%, which in seasonally-adjusted terms means unemployment will climb to 12.8% from 12.6%. Moreover, CAGED formal job creation for the same month may come through. We expect net closings of 36k jobs, which is -4k in seasonally adjusted terms. Also worthy of note, the Central Bank’s credit report will come through (Thu.). Then, the consolidated primary budget balance for December will come through (Fri.). Finally, January’s tax collection may be released. We forecast BRL 137.8 billion. 
  • In Mexico, INEGI (the statistics institute) will publish 4Q’s and 2016’s GDP growth (Wed). We expect it to come in at 2.2% y/y and 2.3% y/y, respectively. INEGI will also publish December’s monthly GDP proxy (IGAE) (Wed.), for which we forecast at 1.8% y/y. Also, CPI inflation figures for the first half of February will be published (Thu.). We expect bi-weekly inflation to post 0.32%. Then, Banxico will publish (Thu.) the minutes of February’s monetary policy meeting. INEGI will announce December’s retail sales (Fri.). We estimate that retail sales growth at 6.8% y/y. Finally, the Central Bank will publish Q4’s current account balance (Fri.). 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. Moreover, the national statistics authority will publish (Wed.) the supply-side breakdown of GDP growth for 4Q16. We estimate activity gained 0.6% from the previous quarter, resulting in annual growth of 1.2%. Also, the December activity coincident indicator (ISE) will be published (Wed.). Then, Fedesarrollo will publish (Wed.) the January retail and industrial confidence levels.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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