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Chilean yields narrow as the market believes the easing cycle is not over yet

March 17, 2017

In our Monthly Strategy Report we argue that the Brazilian nominals have room to compress further.

With information available until 6:30pm Brasilia time

Highlights

  • In Chile, rates at the front end narrowed as BCCh’s communique accompanying Thursday’s decision retained an easing bias (see Macro Backdrop). In Camara swaps, the 1-year fell 4bps to 2.88% and the 5-year decreased 1bp to 3.70%.  The curve implies 65-75bps in rate cuts by yearend.
  • In LatAm FX, all the currencies under our coverage appreciated. The COP traded at 2,913.56/USD (+0.29%) and the CLP was broadly stable at 662.28/USD (+0.01%). The MXN outperformed its regional peers appreciating 0.99% to 19.08/USD – strongest level since the US elections. The BRL strengthened 0.89% to 3.0916/USD and the Brazil CDS decreased the most in LatAm, to 213bps (-4bps) – lowest level since January 2015. 
  • The noisy domestic news flow prompted some players to take profits in Brazilian rates. Despite this short-term volatility, we retain a constructive view on the country’s fundamentals and see potential for further compression in nominal rates. In our Monthly Strategy Report we argue that the Brazilian rates’ bull market is not over.

Macro Backdrop

BRAZIL
  • Confidence in the industrial sector rose in March, up for three months in a row. According to CNI, the confidence in the industrial sector reached 54.0 points in March, rising 2.9% m/m using our seasonal adjustment. The index now stands for two months above the peak seen in mid-2016, providing another signal of a more sustainable improvement. Coming out on March 23 (Thu.), we forecast a 2.5% m/m increase for FGV’s industrial confidence in March (preview).
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 20.
CHILE
  • As predicted, BCCh cut its policy rate by 25-bp to 3.0%, but this might not be the final cut in the cycle. The central bank initiated a 50-bp easing cycle with a quarter-point cut in January, thereafter strategically pausing last month. The communiqué announcing retained an easing bias, signaling that recent macroeconomic trends (low inflation and weak activity) could require additional monetary stimulus. We consider this the precursor to the central bank expanding its baseline scenario for the easing cycle. The board highlighted that inflation expectations for the relevant forecast horizon remain anchored, but are below the 3% target for the short-term. Meanwhile, the board notes activity is weak, while the labor market has shown a more significant deterioration in spite of a broadly stable unemployment rate. In spite of the seasonally strong inflation readings during 1Q17, the likelihood that inflation will languish near the floor of the 2%-4% tolerance range persists. This would occur amid a firm CLP and a widening output gap, supporting calls for additional rate cuts. By yearend, we see the policy rate at 2.5%, concluding a 100-bp easing cycle. Full Report
COLOMBIA
  • Colombia’s trade deficit continued its correction process at the start of this year. The trade deficit came in at USD 754 million in January, broadly in line with the market’s forecast (USD 796 million) and our estimate (USD 815 million), and near to half the size of the deficit one year ago. This is the most favorable January trade balance since 2014. As a result, the rolling 12-month trade deficit narrowed to USD 11.0 billion from USD 11.8 billion last year (2015: USD 15.9 billion). The recent narrowing is mostly due to an improvement in the energy balance. At the margin, the trade deficit was broadly stable from 4Q16, with the annualized trade deficit (using our seasonal adjustment) reaching USD 8.4 billion in the quarter ending in January (3Q16: USD 11.4 billion). We expect the higher average commodity prices this year and the weak internal demand to support a narrowing of the trade deficit. As a result, we see the current account deficit shrinking to 3.6% of GDP from the 4.4% of GDP in 2016. Full Report

Market Developments 

  • GLOBAL MARKETS: Equity markets posted gains and DM yields tightened in the session. Volatility gauges decreased and US Corporate Credit Spreads fell. Our index that aggregate several U.S. activity indicators (Current Activity Index), points to acceleration of the GDP ahead.  We expect U.S. GDP to accelerate to 3.0% 2Q17 from 2.0% in 1Q17. In yields, Treasuries decreased as the 5-year went to 2.02% (-3bps) and the 10-year to 2.50% (-4bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher, on average, and oil prices were broadly stable (Brent: -0.04% to USD 51.72/bbl). In LatAm FX, all the currencies under our coverage appreciated. The COP traded at 2,913.56/USD (+0.29%) and the CLP was stable at 662.28/USD (+0.01%). The BRL strengthened 0.89% to 3.0916/USD. The MXN outperformed its regional peers appreciating 0.99% to 19.08/USD – strongest level since the US elections. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor decreased across the curve. Chilean spreads inched down 1bp to 71bps, and Mexican fell 2bps to 130bps. Colombian country went down 3bps to 129bps. Brazil CDS decreased the most again, to 213bps (-4bps) – lowest level since January 2015. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields tighten in the session. In DI Futures, short rates traded range bound (Jan-18: flat at 10.01%) and long ones went down as the Jan-20 decreased 2bps to 9.75% and the Jan-25 fell 5bps to 10.30%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded lower, on average. In TIIE swaps, short yields traded range bound (9-month: +1bp to 7.08%) and long ones fell (3-year: -4bps to 7.29%; 10-year: -4bps to 7.67%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates at the front end narrowed as BCCh’s communique on Thursday retained an easing bias (see Macro Backdrop). In Camara swaps, the 1-year fell 4bps to 2.88% and the 5-year decreased 1bp to 3.70%.  The curve implies 65-75bps in rate cuts by yearend. Chile Rates Tracker In Colombia, IBR swaps further decreased. The 1-year fell 5bps to 5.90% and the 5-year narrowed 3bps to 5.64%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the IPCA-15 consumer inflation preview for March will be released (Wed.). We forecast a 0.15% m/m rise, with year-over-year inflation decelerating to 4.7% from 5.0%. Then, FGV’s industrial business confidence preview for March will be released (Thu.), for which we expect a 2.5% m/m rise in seasonally adjusted terms, consistent with the 2.9% rise in the CNI confidence release. Moreover, external accounts data will be published (Fri.). We expect a current account surplus of USD 400 million in February, above the USD 1.9 billion deficit in the same month last year. Also, we expect direct investment in the country (former FDI) to sum up to USD 4.5 billion in February. Finally, February’s tax collection may be released sometime during the week. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. 
  • In Mexico, the statistics institute (INEGI) will publish Q4’s aggregate supply (Tue.). We expect to grow at the pace of 2.0% y/y (3Q16: 1.6%). Then, INEGI will publish CPI inflation figures for the first half of March (Thu.). We expect bi-weekly inflation to advance 0.25%, driven by the lagged effects of the Mexican Peso’s depreciation and higher agricultural prices, partly offset by a decrease of gasoline prices. Assuming our forecast is correct, headline inflation would post 5.18% year-over-year in the first half of March (up from 5.02% in the second half of February). Ending the week, INEGI will announce the growth rate of January’s retail sales (Fri.), which we forecast at 7% y/y (December: 9%). 
  • In Chile, the central bank will publish the 4Q16 GDP alongside the 2013-rebased national accounts data which will include revisions to activity data for 2014-16 (Mon.). Our analysis of the sector data points toward an upward revision to 2015 GDP (on the back of higher mining, industrial and commercial activity) and a slightly negative bias for 2016. Moreover, the 4Q16 current account will be released (Mon.). We expect a USD 1.1 billion deficit, smaller than the USD 2.1 billion deficit in 4Q15, on the back of a larger trade balance surplus in the quarter (4Q16: USD 1.0 billion, 4Q15: USD 0.1 billion).
  • In Colombia, the highlight of the week will be central bank’s monthly monetary policy meeting (Fri.). We believe the conditions are conducive for the central bank to speed up the easing process by cutting the policy rate by 50 basis points to 6.75%. Then, Fedesarrollo will publish the February retail and industrial confidence levels (Thu.). We expect confidence levels to be strained ahead as economic activity remains at low levels. Moreover, the January activity coincident indicator (ISE) will be published (Fri.). As the economy adjusts to the terms of trade shock, growth decelerated in 2016 (December 2016: 1.0% y/y).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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