Itaú BBA - Caution over reforms keep Brazilian assets under pressure

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Caution over reforms keep Brazilian assets under pressure

April 6, 2017

The Brazilian curve bear steepened on market concerns over the Social Security reform.

With information available until 6:30pm Brasilia time

Highlights

  • On the eve of the US Non-Farm Payroll, the Brazilian curve bear steepened on market concerns over the Social Security reform. In DI Futures, the Jan-18 increased 4bps to 9.80% while the Jan-21 widened 14bps to 9.99%, reaching late March highs. News flow signals that the Social Security rapporteur Maia will release his report by late April. 
  • In LatAm FX, once again, currencies under our coverage appreciated, except for the BRL. The CLP posted gains of 0.26% to 656.64/USD and the COP strengthened slightly to 2,855.96/USD (+0.13%). The MXN outperformed its LatAm peers, trading at 18.75/USD (+0.44%). However, the BRL ranked among the bottom performers of the day, closing at 3.1434/USD (-0.73%).

Macro Backdrop

BRAZIL
  • Auto production fell 8.1% m/m in March, still showing a volatile pattern. According to Anfavea, auto production reached 234k in March, below our forecast (250k). We estimate that production fell 8.1% m/m, maintaining a volatile pattern since a rebound in November 2016. Exports fell 5.6% m/m (but remain well above 2016 levels), while domestic sales rose 1.5% over the same period. Along with other economic activity indicators (such as energy consumption and capacity utilization) our preliminary forecast for industrial production in February is -0.7% m/m.
CHILE
  • Wage inflation continues to moderate as the labor market loosens, the economy cools and headline inflation stays low. The institute of statistics (INE) reported nominal wage growth of 4.2% y/y in February (previous: 4.4%). Wages fell 0.4% from the previous month, more than the 0.2% drop one year ago, led by the mining sector. In the quarter ending in February, nominal wages grew 4.2% (4Q16: 4.9%; 3Q16: 5.1%). Adjusted for inflation, wage growth was 1.4% y/y (January: 1.5%). In the quarter, real wages were up 1.7%, down from 2.0% in 4Q16. The real wage bill growth worsened in the quarter, declining to 2.4% (4Q16: 3.0%) when considering total employment growth. Meanwhile, when only waged employment is included, the real wage bill fell 0.5% (4Q16: +1.9%), the lowest growth since the initiation of the new labor survey in 2010. The deteriorating real wage bill hints that private consumption related activity could weaken ahead.
COLOMBIA
  • Food and base effects bring inflation down in March. Disinflation advanced in March, with consumer price inflation falling below 5% for the first time since August 2015. In the month, prices gained 0.47%, well below the 0.94% monthly gain recorded one year prior, falling between our forecast (0.44%) and the market consensus (0.51%). All consumer categories posted gains in the month. Communications recorded the largest rise (+1.53% m/m, +0.05 p.p. contribution to the headline gain), while housing prices led the headline gain (+0.53 m/m, +0.16 p.p.). Meanwhile, the monthly food inflation (0.1%) came in far below the headline figure as the impacts from the various supply-shocks (El Niño, transport strike, exchange rate weakening) fade. Annual inflation continues to retreat, led by the correction of food inflation. The 4.69% inflation recorded in March (February: 5.18%) was the lowest since July 2015 (4.46%). Food inflation dropped to 3.65% (February: 5.21%), entering the target range for the first time since September 2014. Excluding food prices, inflation came in at 5.13% (February: 5.17%). With activity remaining weak and the currency being more stable than in previous months, we see inflation continuing to decelerate throughout the year, reaching 4.1% by yearend. This would allow the central bank to proceed with the monetary loosening cycle that began late last year. We expect the policy rate being to be gradually lowered to 5.5% by yearend (from the current 7%). Full Report
ALL LATAM
  • Macro vision: Uncovering LatAm central bank’s reaction functions. We estimate reaction functions (“Taylor Rules”) for Banxico, BCCh, Banrep and BCRP. According to our models, Mexico’s central bank seems to be taking no chances at the current juncture: it is maintaining a higher reference rate than what our Taylor-rule models suggest – perhaps as reinsurance against the risk of further MXN depreciation. The policy rates in Chile and Peru are currently only a bit higher than what is predicted by their respective Taylor-rule models, while Colombia’s is in line with our model output. Full Report

Market Developments 

  • GLOBAL MARKETS: As US Jobless Claims decline to a five-week low of 234 thousand, Treasuries widened at the margin and the dollar strengthened (DXY: +0.15%). According to the US Labor Department report, jobless claims decreased by 25 thousand to 234 thousand in the week ended April 1, topping even the most optimistic market expectation of 240 thousand. In Treasuries, for the 5-year and 10-year, rates increased 1bp to 1.86% and 2.34%, respectively. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher (CRB Futures Index: +0.34%) as oil prices increase (Brent: +0.99% to USD 54.90/bbl). In LatAm FX, once again, currencies under our coverage appreciated, except for the BRL. The CLP posted gains of 0.26% to 656.64/USD and the COP strengthened slightly to 2,855.96/USD (+0.13%). The MXN outperformed its LatAm peers, trading at 18.75/USD (+0.44%). However, the BRL (-0.73% to 3.1434/USD) ranked among the bottom performers of the day, further depreciating on market concerns over the Social Security reform debate. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor were broadly stable in the session. CDS in Brazil, Chile and Mexico were flat at 224bps, 73bps and 131bps, respectively. Colombian spreads, however, inched down 1bp to 134bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened on market concerns over the Social Security reform. In DI Futures, the Jan-18 increased 4bps to 9.80% while the Jan-21 widened 14bps to 9.99%, reaching late March highs. News flow signals that the Social Security rapporteur Maia will release his report by late April. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates increased in the session, tracking US Treasuries. In TIIE swaps, the 1-year went up 2bps to 7.15% and the 5-year widened 6bps to 7.23%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields had a quiet session. In Camara swaps, while most rates were broadly stable (2-year: flat at 2.89%), some long yields inched down (5-year: -2bps to 3.48%). Chile Rates Tracker In Colombia, rates also traded higher. In IBR swaps, the 1-year increased 6bps to 5.77% and the 5-year went up 4bps to 5.51%. Colombia Rates Tracker

Friday Events

  • In Brazil, March’s IPCA consumer inflation will be released. We forecast a 0.27% monthly rise, with year-over-year inflation falling to 4.6% (February: 4.8%).
  • In Mexico, the statistics institute (INEGI) will announce March’s CPI inflation. We expect a 0.44% m/m variation, driven by an increase of core goods (tradable) prices - which are pressured by the lagged effects of exchange rate depreciation - and a rebound of agricultural prices. 
  • In Chile, The National Institute of Statistics (INE) will publish inflation data for March. We expect prices to gain 0.5% from February (previous: +0.2%). As a result, annual inflation would remain at 2.8%, hovering below the center of the central bank’s 2%-4% tolerance range. Then, the central bank will publish the trade balance for March. We forecast a USD 50 million surplus (previous: USD 236 million surplus), taking the rolling 12-month trade balance to USD 4.1 billion (2016: USD 5.3 billion). 
  • In Colombia, the monetary policy meeting minutes from March will be published. At the meeting, the central bank cut the policy rate by 25-bp to 7.0% in a three-way split decision. The minutes will likely confirm that the policy rate will keep falling at a steady pace in the months ahead, with the timing of each cut being data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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