Itaú BBA - Chilean rates narrow as GDP proxy fell short of expectations

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Chilean rates narrow as GDP proxy fell short of expectations

July 5, 2017

In Camara swaps, the 1-year fell 1bp to 2.47% and the 7-year fell 2bps to 3.88%.

With information available until 6:30pm Brasilia time


  • Chilean yields narrowed 1-3bps as May’s Imacec came in weaker than expected (see Macro Backdrop). In Camara swaps, the 1-year fell 1bp to 2.47% and the 7-year fell 2bps to 3.88%. 
  • In LatAm, oil-linked currencies posted losses. The MXN is trading 0.57% weaker to 18.30/USD and the COP depreciated 1.25% to 3,084.66/USD. On the back of lower copper prices, the CLP weakened 0.33% to 665.88/USD. Bucking the regional trend, the BRL appreciated 0.62% to 3.2891/USD. 

Macro Backdrop

  • Gross fixed investment stood out as the weakest component of domestic demand in 1Q17, and deteriorated further in the beginning of 2Q17. The monthly GFI indicator fell 8.6% year-over-year in April, surprising our forecast (-6%) and median market expectations (-5.9%) to the downside. According to calendar-adjusted data reported by the statistics institute, gross fixed investment contracted by 2.9% year-over-year, with the three-month moving average growth rate falling to -2.4% (from -2% in March). So the deterioration is also visible even after netting out the calendar effects.  At the margin, seasonally-adjusted gross fixed investment fell 1.3% from the previous month, leaving quarter-over-quarter annualized growth at -7.2% (from -7.5% qoq/saar in March).
  • We expect gross fixed investment to continue weakening, which will likely have negative effects in the labor market and, thus, pose more headwinds on domestic demand. The uncertainty surrounding bilateral relations with the US seems to be affecting investment, adding to the effects of fiscal consolidation. We note that because an important part of the fiscal consolidation is carried out by Pemex, and due to the fact that non-residential construction includes oil drilling activities (differently from the construction component of industrial production), non-residential construction investment is particularly sensitive to the current fiscal policies. Employment growth is still robust, but will likely slow as a result of falling investment, weakening consumption in the months to come. Full Report
  • The gradual recovery of consumer confidence came to a halt in June. After hitting an historical low in January (amid the spike of gasoline prices and a diplomatic row with the US), the seasonally-adjusted consumer confidence index increased for four consecutive months (February, March, April and May), but fell 0.8% month-over-month in June (to 84.4). In spite of the recovery observed during the course of 2017, we note that the current level of consumer confidence is still low, not far from the average of 2009 (80.5) when the Mexican economy was undergoing a deep recession. The headline (non-seasonally adjusted) consumer confidence came in at 87.2, below median market expectations (88). We attribute the recent decrease of consumer confidence to the overall deterioration of variables that explain consumer sentiment. As of the first half of June, CPI inflation was running at the highest level in 8 years (6.3% year-over-year). In fact, inflation has outstripped the growth of nominal wages in every month of 2017, so real wages have been falling. 
  • Looking ahead, we expect high inflation (above the upper bound of the tolerance range around the Central Bank’s 3% target, at least until 1Q18); high domestic interest rates (affecting consumer credit, which slowed down in June); and softer labor market conditions (which should deteriorate as a consequence of weaker investment) to keep consumer confidence at subdued levels.
  • Activity is set to only gradually recover in 2Q17. The Imacec (monthly proxy for GDP) grew 1.3% year over year in May (0.1% in April), below our 1.5% forecast and market consensus of 1.7%. Once adjusted for seasonal and calendar effects, economic growth was stable at 1.3%. Growth in the quarter ending in May was 0.6% (1Q17: 0.1%). The annual increase was pulled up by the non-mining component (1.9% vs. 0.4% in April), while mining activity remains weak (-4.6%, from -4.0% in April). At the margin, mining grew 2.6% from April (15.3% previously) as output recovers from the mining strike, lifting Imacec growth to 0.5%. Non-mining activity gained 0.3% from April (-0.1% previously). Even so, growth slowed down to 0.1% qoq/saar (1Q17: +0.5% qoq/saar), as non-mining activity weakened to 1.2% qoq/saar (1Q17: 2.4% qoq/saar).
  • We expect some activity improvement through the remainder of the year as mining activity recovers, copper prices remain elevated, inflation is low and monetary policy supportive. However, a significant recovery will require an improvement in confidence that would lead to an investment pick-up. Icare’s June business confidence came in at 43.2 points, below the neutral 50 level for the 39th consecutive month, although this represents an improvement from one year before. In our view, political uncertainty in an electoral year could hamper the recovery of confidence over the next months. In this context, we see downside risks to our 1.6% growth forecast for this year. Full Report


  • Exports picked up in the month of May, boosted by what is likely a temporary jump in volumes of coal exports. Commodity price gains, which supported export performance in earlier months, continues to moderate. In the month of May, total exports rose 23.4% year over year (6.5% in April), with coal exports at the forefront. The volatile coal exports almost doubled from one year ago as export volumes jumped (likely transitorily) to their highest level in three years. Meanwhile, oil exports grew 1.4% (37.7% previously) as quantities dropped 18.3% year over year (-5.3% previously), while price gains slowed to 24.1% (45.4% in April). In the quarter ending May, exports increased 23.3% year over year (32.4% in 1Q17 and 13.7% in 4Q16). Coal (77.2%) and oil (22.8%) exports remain the driving forces, while exports excluding Colombia’s traditional goods (coal, coffee, oil and ferronickel) improved to 9.5% (8.8% in 1Q17). At the margin, exports slowed to -5.2% qoq/saar from +22.5% qoq/saar in 1Q17 as oil exports turned negative and coffee exports deteriorated. We expect a current account deficit of 3.7% of GDP this year (4.3% last year), as weak internal demand limits import growth.
  • In spite of the large downward surprise in May’s CPI, inflation expectations for 2017 in the Greater Buenos Aires remained flat and increased for 2018. Analysts maintained unchanged their expectations for this year at 21.6%, slightly below our forecast of 22% and consistently above the target set by the central bank (12%-17%). Expectations for 2018 deteriorated for the second consecutive month to 15.4% from 15.0% in the previous survey and 14.6% before (Itaú forecast: 16%). The central bank targets an inflation range of 8%-12% for 2018. So, market participants do expect disinflation to continue, but at a more gradual pace than targeted by the monetary authority.
  • Given these developments, rate cuts in July are unlikely. In fact, the central bank even increased slightly (15bps) the yield paid on its short-term bills (Lebac’s), by selling these securities in the secondary market. Furthermore, we note the president of the central bank recently emphasized that overconfidence in the disinflation process led to excessive cuts in the reference rate in late 2016 (200bps, to 24.75%), suggesting a cautious approach for monetary policy going forward. While a gradual easing cycle this year is still likely, more evidence on disinflation is needed before rate cuts come. So, we see upside risks to our current repo rate forecast by the end of this year (22%). Full Report
  • Auto production continued to grow in June. Output increased by 9.2% YoY in June, to 45,496 units, marking the second consecutive gain. On a sequential basis, production fell 2.9% MoM/sa in June, after gaining 12.2% in the previous month. Car production increased 3.7% QoQ/sa from -10% in the previous month. Exports also improved in June.  External sales increased by 36.1% YoY in June, to 19,701 units. Total sales in the domestic market continued to gain volume, up 26.9% YoY to 80,172 units, led by imported units. During the first half of the year, auto production fell 2.1% YoY despite an 11.0% increase in exports. Total sales expanded by a solid 19.8%. 
Market Developments 
  • GLOBAL MARKETS: FOMC meeting minutes little changed our expectations (balance sheet reduction in September and rate hike in December), other than the start of balance sheet reduction could happen sooner (in July). No specific guidance about the timing of the next hike, but still gradual pace baseline. A few participants see less tightening than median, if softer core inflation proves more persistent. The Fed funds implied probability of a rate hike in September is at 22.1%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses (CRB futures: -1.42%) pushed by oil and metals. Oil priced dropped (WTI: -3.19% to USD 45.57/bbl) on market news flow that Russia could not support deeper crude output cuts. Also, copper prices fell 1.23% and iron ore went down 2.95%. Therefore, in LatAm FX, oil-linked currencies posted losses. The MXN is trading 0.57% weaker to 18.30/USD and the COP depreciated 1.25% to 3,084.66/USD. On the back of lower copper prices, the CLP weakened 0.33% to 665.88/USD. Bucking the regional trend, the BRL appreciated 0.62% to 3.2891/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor widened. In Chile, spreads inched up 1bp to 66bps and in Mexico they went up 2bps to 115bps. In Colombia, CDS increased substantially to 140bps (+5bps). On the other hand, Brazilian country risk stood flat at 242bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve shifted 2-4bps in the session as the BRL strengthened. In DI futures, the Jan-18 narrowed 3bps to 8.81% and the Jan-25 wen down 2bps to 10.72%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates went up. In TIIE swaps, the 1-year widened 8bps to 7.25% and the 5-year increased 4bps to 6.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean yields narrowed 1-3bps as May’s Imacec came in weaker than expected (see Macro Backdrop). In Camara swaps, the 1-year fell 1bp to 2.47% and the 7-year fell 2bps to 3.88%. Chile Rates Tracker In Colombia, coming back from Monday’s national holiday and Tuesday’s holiday in the US, most rates widened. In IBR swaps, the 1-year increased 4bps to 4.96% and the 5-year widened 10bps to 5.37%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will focus on June's IPCA (Fri.). We expect it to register a 0.17% monthly decrease. Also, Anfavea’s auto production will be released (Thu.) and we expect 220k in June (-1.3% mom/sa). 
  • 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. 
  • In Chile, a busy week brings key activity and inflation releases. 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.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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