Itaú BBA - Chilean yields narrow on weak outlook for activity

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Chilean yields narrow on weak outlook for activity

April 3, 2017

Chilean rates edged lower as February’s retail sales unexpectedly contracted and BCCh lowered its growth forecast range for 2017.

With information available until 6:30pm Brasilia time


  • In Chile, rates edged lower as February’s retail sales unexpectedly contracted and BCCh lowered its growth forecast range for 2017 for 1.0-2.0% from 1.5-2.5% in the previous IPoM (see Macro Backdrop). In Camara swaps, the 1-year fell 1bp to 2.71% and the 8-year went to 3.94% (-3bps). In Brazil, the curve shifted 3bps downwards, on average, as 2019 inflation expectations recede again. In DI Futures, the Jan-19 fell 2bps to 9.48% and the Jan-21 decreased 4bps to 9.84%. 
  • In LatAm FX, currencies under our coverage appreciated. The CLP posted gains of 0.24% to 658.58/USD and the COP strengthened 0.16% to 2,869.28/USD. The MXN outperformed its peers trading at 18.67/USD (+0.28%). The BRL posted gains of 0.24% to 3.1146/USD (+0.24%).

Macro Backdrop

  • Market sees further Selic cuts this year. According to BCB’s Focus survey, median inflation expectations for 2017 declined to 4.10% (-2bps), and 2019 expectations fell to 4.28% (-7bps), going further south of target in 2019. Year-end Selic expectations fell to 8.75% (from: 9.0%) for YE17. Also, the market sees a slightly more appreciated BRL, at 3.25/USD by YE17 (from: 3.28/USD), and a tad more depreciated at 3.50/USD by YE19 (from: 3.49/USD). GDP growth expectations remained idle. See BCB Report
  • According to Fenabrave, vehicle sales reached 189k in March (+2.3% m/m), above our forecasts of a flat figure. The increase follows an 8.4% growth in the previous month. Auto sales show a material improvement over 4Q16, reinforcing our view of positive GDP growth in 1Q17, yet remain stable at low levels if compared to 2011-2015 levels. The breakdown shows a 2.1% increase in “passenger cars + light vehicles” and a steep increase in production of “trucks + buses” (+9.4% m/m). Our forecast for auto production (Anfavea) is 250k in March (-1.6% m/m) - to be released Thursday (April 6).
  • All-time high trade surplus in 1Q17. The trade surplus reached USD 7.1 billion in March, way above our expectation (USD 6.3 billion) and market consensus (USD 6.8 billion). Exports totaled USD 20.1 billion, falling 2.8% m/m, while imports totaled USD 12.9 billion (-2.3% m/m). Compared to March 2016, exports climbed 20.1% and imports rose 7.1%. Over 12 months, the trade surplus increased again to USD 53.7 billion. The seasonally-adjusted annualized three month average also expended, to USD 80 billion. The first quarter surplus marked an all-time high in the historical series started in 1992. Although imports have been showing some signs of recovery, growth has not been consistent. Along with higher prices for the key commodities exported by Brazil, this situation has ensured all-time high trade surpluses in 1Q17. We maintain our assessment of large trade surpluses this year (as in 2016) but the robust reading for 1Q17 represent some upside to our forecast, due to higher prices and to the increase in the exported quantity of some basic items. Nevertheless, the combination of slightly stronger exchange rate (in real terms), a rebound in domestic demand and commodity prices below current levels will lead to weaker results in the coming months. Full Report
  • Our Itaú Activity Surprise Index inched down to -0.06 in March from -0.05 in February. Brazil takes another downturn, but methodology changes in some key indicators advise caution in interpreting a deterioration of results. In fact, excluding these modified series, the aggregate index would have jumped to positive. Mexico stood aloft in the positives, while the Andean economies are in the negatives, although Chile and Peru improved from February. Results reaffirm the context of a sluggish pickup in activity. Full Report
  • The Central Bank of Mexico (Banxico) published March’s expectations survey, with expectations of a stronger peso as the main highlight. The median expected exchange rate for 2017 and 2018 decreased to 20.2/USD and 19.8/USD, respectively (from: 21.1/USD and 20.6/USD). Notably, the more conciliatory tone of US policymakers (boding well for NAFTA renegotiation), the positive development on the fiscal front (reducing the chances of a sovereign downgrade), and the FX interventions from the Central Bank have supported the valuation of the MXN, which has appreciated 15% from January’s weakest level. On the inflation front, inflation expectations continued moving up. The median forecast for 2017 inflation increased to 5.6% (from: 5.4%), in spite of the stronger MXN, probably because of the recent positive inflation surprises. Inflation expectations for 2018 and longer-term measures (such as next 5-8 years), however, were stable. Importantly, the sharp and consistent reduction of GDP growth expectations, observed since 4Q16, seems to have bottomed out over the past months. Less pessimistic views on the escalation of trade protectionism in the U.S. have been important. 
  • In the 1Q17 Monetary Policy Report (IPoM), the baseline scenario considers that the easing cycle of 50-bp announced at the end of last year – and already implemented – will likely be extended by a further 25-bp. The central bank’s inflation outlook is unchanged. Inflation is still expected to end the year at 2.9%, while yearend core inflation stays at 2.3%, well below the center of the central bank’s 2%-4% tolerance range. The low inflation is led by the prices of goods that have faced downward pressure following the appreciation of the nominal exchange rate over the last year. In spite of no forecast adjustments, the report includes studies on the behavior of indexed prices and the evolution of nominal wages, reflecting concern on the drivers of core inflation. The current inflation projections consider a stabilization of the real exchange rate, while the negative output gap will start narrowing towards yearend. With the risks to the inflation outlook deemed to be balanced, the central bank sees inflation at its 3% target by yearend 2018. Meanwhile, the central bank lowered its growth forecast range for this year to 1.0%-2.0%, from 1.5%-2.5% in the previous report. Given the direct impact from the mining strike is quantified at 0.2 p.p. for the full year’s growth, the weakening is perceived to go beyond just this shock. The adjustment considers a more mild recovery of investment (to: 0.2%; from: 0.7%), following the 0.8% contraction last year.
  • We believe conditions would have justified a baseline scenario that included more than one additional rate cut. Growth continues to disappoint, external imbalances are limited and inflation will likely remain below the 3% target for the remainder of the year. The central bank’s inflation and growth forecast are similar to our own (2017 GDP growth: 1.8%; 2017 yearend inflation: 2.8%). However, the board adopted a cautious approach to future monetary policy action and this, in the absence of surprises, puts an upwards bias to our 2.5% call for the policy rate by yearend. Full Report
  • Private consumption related activity came in weak in February, in line with our baseline scenario for 1Q17 to register the worst activity performance since the global financial crisis. The commercial activity index - aggregating vehicle, retail and wholesale activity - contracted 1.7% y/y (previous: +3.9%). This came in below our forecast of a mild 1% increase and the upwardly revised 3.9% expansion in January. In conjunction with the frail industrial production indicators released last week, negatively affected by the extensive mining strike, we expect the GDP proxy for February to contract 1.5%, down from the +1.4% in January. Activity in the month was unfavorably affected by the leap-year effect.
  • The continued loosening of the labor market will likely result in reduced support for private consumption ahead. However, some benefit will be derived from the low levels of inflation and the expectation of falling interest rates. We expect GDP growth of 1.8% this year, broadly stable from the 1.6% increase in 2016. Full Report
  • According to Adimark’s March public opinion survey, Sebastián Piñera and Alejandro Guillier still top the presidential poll but both shed support. In the previous month, former president Piñera reached 29%, a peak he also managed at the end of 2016, opening a four percentage point lead over Guillier. In March, Piñera retained the same lead, however, both candidates’ support fell two percentage points. Piñera launched his candidacy last month and is most likely to be the candidate for the center-right coalition. Meanwhile, just over half of the surveyed respondents expect him to succeed Michelle Bachelet. On the left of the political spectrum, Guillier, the independent senator and former journalist who entered the political fray in 2013, remains the leading candidate. Important to note is the rise of the undecided voters from 25% to 29%, meaning that regardless of the slight gap Piñera currently has over Guiller, there is still a significant part of the public that needs convincing. Hence, this group of voters will remain a key player in the outcome of the presidential race at the end of the year.
  • Natural resource-related exports continued to perform favorably in February. In the month, the pick-up in oil prices from one year ago offset the decline in export volumes. The same trend can be seen for coal and coffee export. Total exports increased 15.8% y/y in February (previous: 42.8%) leading to a 30.1% rise in the quarter ending in February (4Q16: +14.4%; 3Q16: -8.8%). This is the highest moving quarter annual increase since the quarter ending in February of 2012, as the commodity prices recover. Oil exports rose 46.3% in the quarter (4Q16: 2.7%), while both coal and coffee exports increased by more than 50% in the quarter from one year ago. Meanwhile, exports excluding oil, coal, coffee, and ferronickel (Colombia’s traditional exports) continue to grow but at a slower rate (6.5% vs. 12.1% in 4Q16). We estimate that at the margin total exports increased at an annualized quarter over quarter rate of 69% (4Q16: 73%; 3Q16: 4%), lifted by coffee and coal exports. Going forward, 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 last year. 

Market Developments 

  • GLOBAL MARKETS: Equity markets are trading side-ways and volatility gauges increased ahead of a busy week, which includes a meeting between Xi Jinping and Donald Trump, March FOMC minutes and the monthly US jobs report ending the week. Treasuries traded lower as US auto-sales came in weaker-than-expected. For the 5-year, yields went down 5bps to 1.87% and for the 10-year they dropped to 5-week lows, to 2.34% (-4bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB Futures Index: -0.73%) and oil prices posted losses (Brent: -0.73% to USD 53.14/bbl). Iron ore prices fell 3.84% as Chinese steel industry PMI’s finished goods inventories rose to 53 (from: 47.7). In LatAm FX, currencies under our coverage appreciated. The CLP posted gains of 0.24% to 658.58/USD and the COP strengthened 0.16% to 2,869.28/USD. The MXN outperformed its peers trading at 18.67/USD (+0.28%). The BRL posted gains of 0.24% to 3.1146/USD (+0.24%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound in the session. Both Mexican and Chilean country risk inched up 1bp, to 131bps and 73bps, respectively. Colombian spreads stood flat at 134bps. On the other hand, CDS in Brazil fell 1bp to 225bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve shifted 3bps downwards, on average, as inflation expectations recede again. In DI Futures, the Jan-19 fell 2bps to 9.48% and the Jan-21 decreased 4bps to 9.84%. Accordingly, breakevens tightened as the 5-year fell 2bps to 4.50%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve slightly bear steepened in the session. In TIIE swaps, the 6-month increased 2bps to 7.04% and the 10-year inched up 5bps to 7.48%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates edged lower as February’s retail sales unexpectedly contracted and BCCh lowered its growth forecast range for 2017 for 1.0-2.0% from 1.5-2.5% in the previous IPoM (see Macro Backdrop). In Camara swaps, the 1-year fell 1bp to 2.71% and the 8-year went to 3.94% (-3bps). Chile Rates Tracker In Colombia, rates had a quiet session. In IBR swaps, while short yields fell at the margin (1-year: 1-bp to 5.79%), most long yields (past 1-year) stood flat (5-year: flat at 5.50%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Supreme Electoral Court (TSE) is scheduled to take the case against the Rousseff-Temer 2014 presidential ticket to trial (starting Tue.). The case is ruled over by simple majority, which sums to four out of seven votes. Then, the key activity release of the week will be February’s industrial production figures (Tue.). We expect a 0.2% m/m increase. Additionally, Anfavea (Thu.) will release data from the automobile sector in March, providing relevant coincident indicators for both industrial production and broad retail sales. Moreover, March’s IPCA consumer inflation will be released (Fri.). 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 publish January’s gross fixed investment (Wed.). We forecast that gross fixed investment grew 0.3% y/y (December: +0.9%). Finally, INEGI will announce March’s CPI inflation (Fri.). 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 central bank will publish the GDP proxy (Imacec) for the month of February (Wed.). We expect the GDP proxy to contract 0.7% from January (previous: +0.4%), resulting in an annual growth rate of -1.7% (previous: +1.4%) as activity in the quarter continues to disappoint. The National Institute of Statistics (INE) will publish nominal wage growth for February (Thu.). In the previous month, nominal wage growth moderated to 4.4% y/y (previous: 4.7%), as low inflation and the loosening labor market ease wage pressure. Still, INE will publish inflation data for March (Fri.). We expect prices to gain 0.5% from February (previous: +0.2%). Consumer prices are expected to be pulled up by seasonal increases to lemon and tomato prices. As a result, annual inflation would remain at 2.8%, hovering below the center of the central bank’s 2%-4% tolerance range. Finally, the central bank will publish the trade balance for March (Fri.). 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, inflation for March will be released (Wed.). We expect consumer prices to gain 0.44% from February with food price gains continuing to moderate. As a result, annual inflation will decline to 4.66%. Then, the monetary policy meeting minutes from March will be published (Fri.). At the meeting, the central bank cut the policy rate by 25-bp to 7.0%. The decision was by a three-way split. 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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