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Chilean rates widen as inflation surprises to the upside

August 8, 2017

Chilean yields widened substantially as inflation came in higher than expectations

With information available until 6:30pm Brasilia time


  • Chilean yields widened substantially as inflation came in higher than expectations (See Macro Backdrop). In Camara swaps, the 1-year widened 9bps to 2.41% and the 5-year went up 7bps to 3.38%. The CLP (+0.38% to 648.46/USD) posted gains on the back of higher copper prices (+1.32%). 
  • Elsewhere, the BRL posted losses of 0.02% to 3.1265/USD and the COP closed at 2,997 (-0.46%). As this piece is written, the MXN is trading at 17.8514/USD (+0.43%). 

Macro Backdrop

  • We published our Scenario Review for the month of August. We revised our BRL estimates to 3.35/USD in 2017 (from 3.50/USD) and 3.50/USD in 2018 (from 3.60/USD), reflecting a more benign international scenario. Also, we increased our estimate for 2017 inflation to 3.4% from 3.3% due to the recent tax hike; our call for 2018 remains at 4.0%. Full Report
  • Consumer prices increased 0.2% from June to July, in line with the gain recorded one year ago. The monthly rise was above both the market consensus and our expectation of 0.1%. The bulk of the surprise to us came from larger gains in various food prices along with a milder decline in transportation prices. The food and non-alcoholic division led gains with a 0.7% increase from June (0.1 p.p. contribution), meanwhile the home maintenance division was the principal drag (-0.02 p.p. contribution). Tradable goods prices rose 0.1% (+0.3% last year), while non-tradable prices increased 0.4% from June (+0.1% one year ago). Excluding food and energy, prices gained 0.3% in the month (+0.1% one year ago). In all, the main drag on consumer prices remains tradable inflation, which dropped to 0.3% year over year (0.6% previously). Meanwhile, non-tradable inflation increased to 3.4%, from 3.1%, lifted by interurban transport prices amid winter vacation and some housing services. 
  • Low growth and a stable CLP combined with well-anchored inflation expectations are containing inflation pressures. Overall, inflation was stable at 1.7% year-over-year, inferior to the central bank’s 2%-4% tolerance range and at levels only previously seen in 2013. Considering the lack of a consecutive downside surprise, we do not expect the central bank to react already this month, but we continue to expect two additional 25-bp rate cuts this year. It is more likely the central bank will wait until adjusting its baseline forecast scenario in September before embarking on additional monetary easing. We expect inflation to remain low for the remainder of the year (2.4% yearend) and stay subdued during 2018. Full Report


  • The central bank left the monetary policy rate unchanged at 26.25%. The decision was expected by us and the market. The central bank last increased its policy rate in early April (by 150bps). The statement announcing the decision shows again the central bank currently sees no room for rate cuts, given the current evolution of inflation. Specifically, the central bank said it is not appropriate to reduce the “anti-inflationary bias” resulting from the April policy rate hike. Also, the central bank noted that inflation expectations were revised upward for this year and next in its latest survey with market participants. Analysts surveyed now expect 22% inflation for this year (measured by the national index), 0.4% above the previous survey. 
  • We expect the central bank to stay on-hold for a few more months, before engaging in a gradual easing cycle. We expect the reference rate at 25% by the end of this year. Rate cuts are unlikely before there is more clarity on the political scenario and, consequently, less pressure on the ARS. Furthermore, we note that an adverse outcome in mid-term elections can lead to more exchange rate depreciation, eventually forcing the central bank to increase interest rates. Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasuries widened (5-year: +2bps to 1.83%) and the USD appreciated (DXY: +0.21%) after the JOLTS report showed a surge in job openings in June. The number of positions rose by 461k, the biggest gain in almost two years, to a record 6.2 million. In addition, the number of people quitting their jobs fell 72k in the month, following a 162k increase in May. The Fed funds implied probability of a rate hike in 2017 increased to 45% from 42% as of Monday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: The oil benchmarks posted losses in the session (WTI: -0.83% to USD 49.16/bbl). In metals, iron ore rebounded (-2.22%) after Monday’s rally. In FX, currencies under our coverage were mixed. As this piece is written, the MXN is trading at 17.8514/USD (+0.43%). The BRL posted losses of 0.02% to 3.1265/USD and the COP closed at 2,997 (-0.46%). On the back of higher copper prices (+1.32%), the CLP appreciated 0.38% to 648.46/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: In LatAm, credit spreads rebounded after solid gains on Monday. For the 5-year tenor, CDS in Mexico and Brazil both inched up 1bp to 99bps and 196bps, respectively. Country risk in Colombia and Chile both were stable at 123bps and 61bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, while the front end narrowed 1bp (Jan-18: -1bp to 8.18%), the long end widened as much as 6bps (Jan-25: +5bps to 10.09%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates traded range bound. In TIIE swaps, the 1-year was flat at7.32% and the 5-year at 6.90%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean yields widened substantially as inflation came in higher than expectations (See Macro Backdrop). In Camara swaps, the 1-year widened 9bps to 2.41% and the 5-year went up 7bps to 3.38%. Chile Rates Tracker In Colombia, markets reopened after Monday’s national holiday. In IBR swaps, short rates narrowed as much as 8bps. The 1-year fell 7bps to 4.99% and the 5-year went down 3bps to 5.60%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on July’s IPCA consumer inflation (Fri.). We forecast a 0.17% monthly increase, with year-over-year inflation slowing to 2.64% from 3.00%. Despite this increase, inflation will thus continue its long-lasting course of decline, driven mainly by ample slack in the economy and the favorable food price shock. On economic activity, coincident indicators for industrial production in July may be released: traffic of heavy vehicles (ABCR) on toll roads and paper cardboard dispatches (ABPO). Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Thu.). At last, the report of the rapporteur in the Congress Commission debating the creation of the TLP (new BNDES benchmark rate) is scheduled to be read on Wednesday. 
  • In Mexico, the statistics institute (INEGI) will announce July’s CPI inflation (Wed.). We expect a 0.32% month-over-month variation, driven by the seasonal increase in the price of air tickets and tourism services, higher agricultural prices, and the hike of national highway tolls. Moreover, the National Association of Department Stores and Supermarkets (ANTAD) will announce July’s same-store-sales (Wed.). We expect the growth of ANTAD sales to slow down moderately (to 4.5% year-over-year, from 5.4% in June). Furthermore, Banxico will announce its policy rate decision (Thu.). We expect the board the leave the reference rate unchanged at 7%, considering the guidance provided in the latest statement, which signaled the end of the tightening cycle (400-bps since December 2015). Finally, the statistics institute (INEGI) will publish June’s industrial production (Fri.). We expect a 0% year-over-year expansion (down from 1% in May), based on coincident indicators – such as vehicle production, oil output, and public investment – which weakened in June. 
  • In Colombia, Banrep will release the minutes of the July monetary policy meeting (Fri.). 
  • In Argentina, the INDEC (the official statistical agency) will publish the National CPI for July (Thu.). According to private estimates, headline inflation likely increased to 2.1% in July mainly due to adjustments in regulated prices, while the core measure hit 1.8%. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa

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