Itaú BBA - Chilean yields narrow on increased expectations of another cut

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Chilean yields narrow on increased expectations of another cut

July 11, 2017

Chilean rates narrowed for the third consecutive session after inflation forecasts for 11 months ahead were revised to the downside.

With information available until 6:30pm Brasilia time


  • Chilean rates narrowed for the third consecutive session after inflation forecasts for 11 months ahead were revised to the downside (2.7% vs. 2.9%), according to BCCh’s July survey of economists. In Camara swaps, the very front fell 2bps on average (9-month: -2bps to 2.32%) and the belly went down 4bps (5-year: -4bps to 3.34%). 
  • In FX, the MXN is trading 0.24% stronger to 17.91/USD. The CLP closed at 666.44/USD (+0.02%) and the BRL appreciated 0.04% to 3.2545/USD. Bucking the regional trend, the COP was the laggard depreciating 0.38% to 3,073.79/USD. 

Macro Backdrop

  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 12. 
  • Supermarket & department store (ANTAD) same-store-sales were robust in 2Q17, only showing a moderate slowdown with respect to the growth observed in 2016. ANTAD sales expanded 5.4% year-over-year in June, closer to our forecast (5%) than to median market expectations (7%), underpinned by solid formal employment. Thus, the average growth rate of ANTAD sales in 2Q17 was 5.7% year-over-year (up from 3.6% in 1Q17). Nevertheless, we take this recent acceleration with a grain of salt because the soft performance of ANTAD sales in 1Q17 was partly attributable to negative calendar effects; these are, the leap year (February 2017 had one less day than February 2016) and the Easter holidays (which last year took place in March, and this year in April). The Easter holidays, curiously, are considered to have a positive effect on ANTAD sales. Moreover, we note that the current expansion pace of ANTAD sales is below that average annual growth rate recorded in 2016 (6.5%).  
  • In our view, ANTAD sales will weaken moderately in coming months. Real wages have been falling since the beginning of 2017, when inflation spiked. But the real wage bill has only slowed down moderately because robust formal employment (growing at an average pace of 4.3% year-over-year in the first six months of 2017) has prevented this from happening. However, we believe that the substantial fall of gross fixed investment (down by 7.2% qoq/saar in April) will eventually have negative implications on employment creation. Also, other fundamental determinants of private consumption have turned less supportive. Given a stronger MXN, remittances converted into pesos grew 8.1% year-over-year in May (significantly below the 29% average growth rate observed in 2016). Seasonally-adjusted consumer confidence fell 0.8% month-over-month in June (to 84.4), with its current level not far from the average of 2009 (80.5) when the Mexican economy was undergoing recession. Consumer credit, however, has only slowed down a bit (to 10.6% year-over-year in May, from 11.2% in April and an average growth rate of 12.3% in 2016), in spite of higher domestic interest rates. 
  • The central bank left the monetary rate unchanged at 26.25% as we expected. The monetary authority already warned that the June CPI reading was above the level sought by the monetary authority by this time of the year, in particular for the core reading.  Given these developments in consumer prices, rate cuts in July are unlikely. In fact, the central bank even increased (75bps) the yield paid on its short-term bills (Lebac’s) to 26.25%, by selling these securities in the secondary market. While a gradual easing cycle this year is still in our scenario, we rule out changes until having solid evidence of disinflation. So, we see upside risks to our current repo rate forecast by the end of this year (22%).
  • Consumer prices showed a small deceleration in June in the Greater Buenos Aires area and just a slightly better behavior at national level. Consumer prices at national level increased 1.2% between May and June. The geographical breakdown showed that prices gained 1.4% in the so-called Greater Buenos Aires, slightly higher than the May inflation (1.3%). Annual inflation in Buenos Aires fell to 21.9% from 24% previously. 
  • We expect adjustments in fuel and health prices to keep pressure on consumer prices in July. Inflation expectation for 2017 and 2018 at national level increased to 21.5% and 14.9% from 21.4% and 14.5% respectively. Our inflation forecast for 2017 stands at 22%. The rapid weakening of the ARS in the late days of June was also bad news for disinflation. 
Market Developments 
  • GLOBAL MARKETS: The front end of the US treasuries curve narrowed 1bp after Fed’s Brainard speech. The Governor reiterated that she wants to “monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target”. Brainard also added that she believes rates may need to top out near 2%, which would give the Fed little room to raise them further. The Fed funds futures implied probability of another hike this year fell below 50%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities strengthened on the back of oil and metals. Oil prices strengthened (WTI: +3.00% to USD 45.73/bbl) after the EIA cut its crude output forecast for next year. Also, metals posted gains as the copper increased 1.04% and iron ore +2.21%. In FX, LatAm pairs were broadly flat. The MXN is trading 0.24% stronger to 17.91/USD. The CLP closed at 666.44/USD (+0.02%) and the BRL appreciated 0.04% to 3.2545/USD. Bucking the regional trend, the COP was the laggard depreciating 0.38% to 3,073.79/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm country risk traded range bound in the session. For the 5-year tenor, Chilean and Colombian spreads stood flat at 66bps and 141bps, respectively. In Mexico, CDS inched up 1bp to 113bps and in Brazil they went down 2bps to 236bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed 2-4bps in the session. In DI futures, the Jan-18 fell 2bps to 8.59% and the Jan-25 went down 3bps to 10.67%. Conversely, real rates narrowed as the May-21 fell 4bps to 5.37%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound in the session. While short rates were broadly flat (9-month at 7.37%), long ones inched down 1bp (5-year: -1bp to 6.78%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed 3-5bps after inflation forecasts for 11 months ahead fell to the lowest in more than two years in July, according to a monthly survey of economists by the central bank. In Camara swaps, the 1-year fell 3bps to 2.32% and the 5-year went down 4bps to 3.34%. Chile Rates Tracker In Colombia, long rates widened in the session. In IBR swaps, the 1-year inched up 1bp to 5.03% and the 5-year went up 6bps to 5.53%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the case against President Temer is being debated on the Lower House. Speaker Maia suggested the issue could be voted in the Constitutional Committee (CCJ) on July 13-14. On the macro agenda, the key releases for the week will be May’s retail sales (Wed.) and the Service Sector Survey (PMS) (Thu.). We forecast a 0.1% decline in core retail (month-over-month, seasonally adjusted), and a 0.9% drop in the broad segment, which includes vehicle sales and construction material. May’s PMS is also relevant for 2Q17 GDP estimates - we expect the headline to fall 2.3% year-over-year. Furthermore, the BCB will release its monthly activity index (IBC-Br) for May (Fri.).
  • In Mexico, the statistics institute (INEGI) will publish May’s industrial production (Wed.). We expect industrial production growth to pick up to 0.1% year-over-year (from a 4.4% contraction in March), led by stronger manufacturing output. In fact, several coincident indicators of the manufacturing sector – mainly, manufacturing exports, vehicle production, PMI – strengthened in May. Conversely, we expect a contraction of construction output, considering the sharp fall of public investment in May (physical capital investment down by 23.9% year-over-year in real terms). Also, we already know that oil output continued contracting. 
  • In Chile, the central bank will hold its July monetary policy meeting (Thu.). In spite of weak activity and surprisingly low inflation in the month, we believe the board will once again stay on hold this month as it opts to evaluate how the economy unfolds given the monetary stimulus already implemented (100bps in cuts since January).
  • In Colombia, activity indicators for the month of May will be published (Fri.). We expect industrial production to increase 2.0% year over year (-6.8% in April). Meanwhile, retail sales likely saw growth of 1.4% in twelve months (-2.0% previously), boosted by car sales. Heavy rains and a port strike could have hampered activity in the month. Also, the central bank of Colombia will release the minutes of the monetary policy meeting held in June (Fri.). At the meeting, another split board decided to cut the policy rate by 50bps to 5.75%, more aggressive than the 25bp cut in the previous month. It will be of interest to see if the minutes reiterate recent comments from the central bank’s general manager, as well as the finance minister, who have both indicated that room for further easing is narrowing.

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For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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