Itaú BBA - Calm day in LatAm markets amid 4th of July holiday

Latam FI Strategy Daily

< Back

Calm day in LatAm markets amid 4th of July holiday

July 4, 2017

Thin liquidity day as US markets were closed due to the independence holiday.

With information available until 6:30pm Brasilia time

Highlights

  • Thin liquidity day as US markets were closed due to the independence holiday. Asian equity markets were on the red and gold prices increased (+0.31%) amid brand new geopolitical tensions in the pacific.
  • In LatAm FX, the MXN outperformed (+0.16% to 18.20/USD). The COP stood flat at 3,045.96/USD due thin liquidity. On the other hand, the CLP depreciated 0.22% to 663.65/USD and the BRL posted losses of 0.24% to 3.3096/USD. 

Macro Backdrop

BRAZIL
  • Industrial production rose 0.8% in May, seasonally adjusted. The figures topped median market estimates and our own forecasts (0.6% and 0.7%, respectively). There was a 4.0% yoy increase, influenced by more business days than one year ago. The April figures were revised slightly upward by 0.4%, which explains the greater surprise in the year-over-year comparison: expansion of 4% compared with market consensus of 2.9% and our own forecast of 3.4%. The breakdown by economic category shows gains for all components, with an emphasis on capital goods (3.5%) and durable consumer goods (6.7%). Production of all other consumer goods expanded 0.7% and intermediate goods expanded 0.3% over the same period. The breakdown by economic activity shows an expansion of 1.2% in manufacturing and of 0.2% in extraction and mining. On a more detailed breakdown, 17 out of 24 activities posted monthly gains. 
  • However, the drop in industrial confidence in June with the increasing political uncertainty could negatively affect industrial production going forward. It is important that reforms continue to move forward in order to offset the recent drop in confidence and consolidate the recovery in economic activity. Full Report
  • Vehicle sales rise further in June, despite the rise in political uncertainty. According to Fenabrave, vehicle sales reached 195k in June, rising 3.3% mom/sa and up for the fifth month in a row. The breakdown shows a 3.3% increase in “passenger cars + light vehicles” and a 4.2% increase in “trucks + buses”, according to our seasonal adjustment. Our forecast for auto production (Anfavea, to be released on July 6) is 220k in June (-1.3% mom/sa). The result shows that the recent increase in political uncertainty has not interrupted the recovery in the auto sector yet. Nonetheless, expectations in the economic outlook are a strong demand driver for both trucks and passenger cars. Therefore, if expectations remain weak in the following months after a steep decline in June, the recovery in the auto sector may be affected.
  • According to Broadcast, the president of the Constitutional and Justice Committee (CCJ) in the Lower House, Rodrigo Pacheco, announced Deputy Sergio Zveiter (PMDB-RJ) to be the rapporteur responsible for President Temer’s accusation in the committee. 
  • According to Broadcast, the Senate approved the petition for “urgency” to the labor reform by 46 senators in favor versus 19 against. 
ALL LATAM
  • Positive surprises in Brazil, disappointing data elsewhere. Our Itaú Activity Surprise Index retraced to 0.13 in June (from 0.22 in May), as the Mexico, Chile and Peru sub-indices fell back into negative territory. Construction investment and oil production dragged down Mexican industrial production. In Chile, commercial activity disappointed the most, while Peru’s GDP proxy fell short of expectations owing to the labor market deterioration and negative wealth effects caused by El Niño. On the other hand, Brazilian data releases surprised to the upside, but the economic growth outlook remains subdued. Full Report
  • LatAm inflation keeps surprising to the downside. Our Itaú Inflationary Surprise Index oscillated downwards to -0.19 in June, coming from -0.11 in May. Peru’s index registered the largest downside surprise, as the El Niño-led shock on food prices reverted faster than expected by the market. Conversely, Mexican indexes came in above median expectations again, but the magnitude of the surprises was considerably lower than in the previous month. In Brazil, the official inflation index (IPCA) registered a sharp downside surprise. Full Report
GLOBAL
  • Global monetary policy monitor: looser monetary policy stance in Latin America. In June, there was monetary policy decision in 20 of the 33 countries we monitor. Policy rates were reduced in Russia (by 25bps, in line with expectations) and Colombia (by 50bps, in line with the consensus, but above our expectation of 25bps). On the other hand, in Mexico and the U.S., the monetary authorities hiked rates again by 25-bp, in line with expectations. In July, we expect central banks in developed countries to continue to signal the gradual removal of stimulus, given lower global risks and falling unemployment. In Latin America, we expect further easing of monetary policy. We see cuts in Brazil (75-bp), Colombia (25-bp) and Peru (25-bp). Full Report
Market Developments 
  • GLOBAL MARKETS: Thin liquidity day as US markets were closed due to the independence holiday. Asian equity markets were on the red and gold prices increased (+0.31%) amid brand new geopolitical tensions in the pacific. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were stable due to thin liquidity. Oil priced edged lower (Brent: -0.14% to USD 49.61/bbl) and copper prices fell x%. In LatAm FX, the MXN outperformed (+0.16% to 18.20/USD). The COP stood flat at 3,045.96/USD due thin liquidity. On the other hand, the CLP depreciated 0.22% to 663.65/USD and the BRL posted losses of 0.24% to 3.3096/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads, once again, traded range bound in the session. For the –year tenor, Brazilian risk premium inched up 1bp to 241bps. In Chile and Colombia, both spreads fell 1bp to 65bps and 135bps, respectively. In Mexico, CDS stood flat at 113bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, while short rates fell at the margin (Jul-18: -1bp to 8.63%), long ones went up considerably (Jan-21: +2bps to 10.00%; Jan-25: +6bps to 10.73%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates traded lower. In TIIE swaps, the 1-year fell 4bps to 7.17% and the 10-year inched down 1bp to 7.20%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Long Chilean yields widened 1-3bps. In Camara swaps, while shorter rates (until 2-year) stood broadly flat, long widened (5-year: +1bp to 3.52%). Chile Rates Tracker In Colombia, rates were mixed. In nominal yields, the 1-year fell 4bps to 7.92% and the 10-year widened 6bps to 6.11%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will focus on June's IPCA (Fri.). We expect it to register a 0.15% monthly decrease. Then, Anfavea’s auto production wil, be released (Thu.).  
  • In Mexico, central bank will publish the minutes of June’s monetary policy meeting on (Thu.). Banxico surprised the market by signaling the end of the tightening cycle in its latest monetary policy meeting. However, the statement didn’t close the door completely to additional rate hikes, so the minutes could hint what would be potential triggers for further tightening. INEGI will announce June’s CPI inflation (Fri.), for which we expect a 0.20% month-over-month print. The statistics institute (INEGI) will publish April’s gross fixed investment (Wed.). We forecast a 6% year-over-year contraction, given the deterioration in coincident indicators and a negative calendar effect. 
  • In Chile, a busy week brings key activity and inflation releases. The central bank will publish the Imacec GDP proxy (Wed.) for the month of May. We expect mining activity to support a 0.5% expansion from April, resulting in an annual increase of 1.0%. The National Institute of Statistics (INE) will publish nominal wage growth for May (Thu.). In April, nominal wage growth was stable at 4.3% year-over-year (4.9% in December 2016). Wage inflation is likely to stay low and possibly moderate further amid a loose labor market and low headline inflation. The INE will publish inflation for the month of June (Fri.). We expect prices to fall 0.1% from May. As a result, annual inflation would dip to 2.0% reaching the lower bound of the 2%-4% tolerance range.Finally, the central bank will release the trade balance figures for June (Fri.). We forecast a USD 100 million surplus.
  • In Colombia, external data and inflation are on the spotlight. The DANE will publish export data for May (Wed.). We expect exports to come in at USD 3.4 billion, representing annual growth of 23.3%, led by mining (coal, ferronickel and oil). The national institute of statistics will release inflation for June (Wed.). We expect consumer prices to gain 0.19% from May, taking annual inflation down to 4.07%.
  • In Argentina, the car-makers association (ADEFA) will release June data on production, exports and domestic sales to car dealers (Wed.). In May, auto production rose by 13.8% year over year, exports grew 9.7% year over year, and domestic sales expanded by 31.7% year over year in the same period.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




< Back