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CLP outperforms as Chinese PMI picks up in August

August 31, 2017

Most commodity-linked FX (+0.61%) strengthened as Chinese manufacturing PMI came in stronger than expected.

With information available until 6:30pm Brasilia time


  • Most commodity-linked FX (+0.61%) strengthened as Chinese manufacturing PMI came in stronger than expected. The CLP closed at 626.90/USD (+0.54%) and the BRL appreciated 0.33% to 3.1491/USD. The COP posted gains of 0.24% to 2,946/USD. Bucking the regional trend, the MXN (-0.87% to 17.8725/USD) was the laggard in EM space. 
  • The Brazilian curve bull flattened (Jan19x21: -9bps) as the BRL strengthened. In DI futures, while short rates were broadly stable (Jan18 at 7.81%), the Jan25 fell 9bps to 10.14%. Likewise, real rates fell substantially (Aug-22: -5bps to 4.62%). 
Macro Backdrop

  • Unemployment falls in July, driven by gains in informal jobs. The nation-wide unemployment rate reached 12.8% in July, below our estimate and the median of market expectations (both at 13.0%).The indicator increased 1.2 p.p. from 11.6% one year earlier. Applying our seasonal adjustment, the unemployment rate slipped to 12.7% from 12.9% in June, marking a fourth consecutive month of declines in the indicator. Employment advanced 0.5% mom/sa (0.2% yoy) in the first positive reading for the latter in 23 months. However, formal jobs in the private sector were stable at the margin, so that the gain in employment was driven by the other categories, particularly self-employment. Full Report
  • According to ABRAS, supermarket sales rose 0.2% mom/sa in July (using our calculation). Supermarket sales are showing an upward trend in 2017. Along with other indicators, it contributes to our vision of a gradual recovery in economic activity. IBGE will release its Monthly Survey of Commerce for July on September 12, and we forecast a 0.1% mom/sa increase in core retail sales (+3.3% yoy). Our preliminary forecast for the broad segment, which includes vehicle sales and construction material, is a 0.2% mom/sa decrease (+5.2% yoy).
  • In July, the public deficit narrowed further, providing the last picture of the fiscal accounts before the announcement of the 2018 budget bill. Resulting from exchange rate gains on international reserves during the previous year, the Central Bank’s dividend - which reached a historical high in 2017 (MXN 322 billion, 1.5% of GDP) - accounts for the bulk of the improvement in fiscal accounts seen recently. Nevertheless, as we have been pointing out, the fiscal deficit indicators are narrowing beyond this windfall revenue. In fact, even if 70% of the amount of the dividends received in past years is excluded, the 12-month rolling primary balance reached a MXN 52 billion surplus (0.2% of GDP) in July, from a MXN 40 billion surplus in June. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 452 billion (2.1% of GDP), from MXN 471 billion in June, and the public sector borrowing requirements narrowed to MXN 535 billion (2.5% of GDP), from MXN 577 billion previously.
  • We do not expect the 2018 budget to take the pace of fiscal consolidation up a notch, compared to what was already pre-announced in the “pre-criterios” (pre-budget) document published in April. As of now, the government is targeting public sector borrowing requirements of 2.5% of GDP in 2018, more ambitious than the target set for 2017 (2.9%; July: 1.5% of GDP). The fact that there are presidential elections next year (which is usually associated to higher government spending in Mexico) reduces the probability of extra fiscal efforts. Also, with the rating agencies - S&P and Fitch - recently removing the negative outlook for Mexico’s sovereign rating, policy makers are now under less pressure. In fact, the Finance Minister, José Antonio Meade, has stated that the 2018 budget is unlikely to show any surprises in terms of greater fiscal consolidation efforts. Full Report
  • The public sector, along with non-salaried employment, continues to prop up job growth. In the quarter ending in July, the unemployment rate reached 6.9%, down by 0.2 p.p. in 12 months. The print came in below the 7.1% market consensus, but closer to our 7.0% estimate. Employment growth picked up to 2.2% (2Q17: 1.9%), the fastest rate since 3Q15. However, once hours worked are considered, employment is growing at a low 0.8%, stable from 1Q17. Furthermore, private salaried employment remains weak.
  • The dynamics of the labor market mirror a lethargic economy with minimal private waged job creation. An increase in the unemployment rate has been contained by non-salaried and public sector job growth. We expect the unemployment rate to average 7.0% this year (2016: 6.5%), signaling still low consumption dynamics this year. Full Report
  • Key members of the economic team in President Bachelet’s cabinet – the Minister and Vice-Minister of Finance and the Minister of Economy – resigned from their posts. The move follows discrepancies in opinion over the rejection of an iron and copper mining project in the center-north region of Coquimbo on environmental concerns. Mr. Valdés will be replaced by Nicolás Eyzaguirre, until now the Minister Secretary of the Presidency. Meanwhile, Jorge Rodriguez Grossi, until now President of state-owned Banco Estado, will replace Felipe Céspedes at the Ministry of Economy. Finally, Mr. Eyzaguirre will be replaced by Gabriel De la Fuente as Minister Secretary of the Presidency, until now the undersecretary of the same Ministry.
  • Beyond reputational damage, we expect no material change in terms of policy. We see Mr. Eyzaguirre will maintaining a responsible management of public finances. Yet, we note that fluid relationship between Mr. Eyzaguirre and the President could smooth the discussion of key economic bills such as the upcoming budget, the pension reform bill and the educational reform (the latter two currently in congress).


  • Rural employment is keeping the total unemployment rate subdued, as the divergence between urban and rural labor dynamics widens. We see the frail urban labor market, which accounts for two thirds of private salaried employment nationwide, as a sign of weakness of the economy. Furthermore, the recovery of rural employment could be due to temporary factors (namely the recovery from last year’s El Niño weather phenomenon). The national unemployment rate came in at 9.7%, broadly stable from one year before (9.8%). Once adjusted for seasonal factors, the unemployment rate for the quarter ending in July came in at 9.2%, in line with 2Q17. In the same period, the urban unemployment rate rose to 10.8%, from 10.6% in 2Q17 and 10.5% in 1Q17. Meanwhile, the rural unemployment rate was stable from 2Q17 at 7.8% (but down from the 8.4% in 1Q17). 
  • We see the total unemployment rate averaging 9.0% this year (9.2% last year), brought down by the performance in the rural environment. The deterioration of the labor market dynamics in urban areas (where formal employment is more prevalent) will likely limit support for a consumption recovery ahead. Full Report
  • The last cut of the year? Banrep cut the policy rate in August by 25bps, to 5.25%, in line with our expectation and that of the vast majority of market analysts. However, the voting came in as a surprise. The decision was a three-way split, with two of the seven board members preferring a larger cut of 50bps, one member opted for no rate move, while the remaining four members were in the majority. The press release announcing the decision notes that the current real interest rate is compatible with inflation converging to the 3% target in the relevant policy horizon. Furthermore, it says that some indicators suggest that the real rate is close to its neutral level (contrasting with previous statements, in which the central bank labeled the level of interest rate as tight). Speaking to the press, general manager Juan José Echavarría indicated that this could be one of the final rate cuts of the year (after a 250bps easing cycle). 
  • We expect the central bank to stay on hold until the end of this year, but we anticipate further easing to resume in the first quarter of next year (bringing the policy rate to 4.5%). In our view, the level of policy rate is still tight. In fact, Echavarría recently mentioned he saw a real neutral rate at 1.4%, which means a nominal neutral rate around 4.5% once inflation expectations fall to the target. Hence, as the economy continues weak and inflationary pressure fade, further rate cuts are likely. However, depending on how inflation unfolds for the remainder of the year, there exists a risk that the expected rate cuts are brought forward. Full Report
  • Industrial activity rose by 5.9% yoy in July, marking the third consecutive increase after several months posting contraction. During the first seven months of the year, manufacturing grew 0.8% yoy against the same period one year ago. Indec, which started to produce annual rates of change last year, does not provide yet the original series and the seasonal adjusted figures. The increase was led by non-metallic minerals (15%) reflecting growth of construction materials. Basic metals rose by 11% yoy while plastic and rubber expanded 7.8% yoy. On the negative side, the textil sector dropped 3.0% yoy in July and 12.6% yoy between January and July.
  • Indec also reported that construction activity improved a solid 20.3% yoy in July relative to the same month one year ago. This is the fifth consecutive strong positive year-over-year development, leading to a 8.9% yoy growth during the seven months of the year. Employment in the sector rose 1.4% yoy, marking also the fifth consecutive gain.  According to the qualitative survey, 52% of the companies involved in public works expect activity to increase in the period August-October, compared to 36% in the case of companies involved in private works.
  • Market Conditions Index: more expansionary financial conditions. Financial conditions in the region as a whole receded slightly to 0.70 (from 0.77 in July). Thus, the three-month moving average reached 0.15 (from -0.07 in the previous month). The increase was widespread among the LatAm countries, with positive contributions from Brazil (with an increase in financial conditions), Colombia (currency appreciation), Peru (widespread improvement in its components, especially gold), and Chile (stock exchange improvement and currency appreciation). At the opposite end, Mexico contributed negatively in the month, influenced by drops in oil prices and the stock market. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the US labor report, the USD weakened after the Treasury Secretary Steven Mnuchin said that “having a weaker USD is somewhat better for US trade”. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green in the session. Iron ore prices climbed 3.66% as Chinese manufacturing PMI came in stronger than expected. Oil prices rebounded (WTI: +2.95% to USD 47.88/USD) on profit taking. In currencies, most commodity-linked FX (+0.61%) strengthened. The CLP closed at 626.90/USD (+0.54%) and the COP appreciated 0.24% to 2,946/USD. The BRL posted gains of 0.33% to 3.1491/USD. Bucking the regional trend, the MXN (-0.87% to 17.8725/USD) was the laggard in EM space. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor narrowed once again. In Chile spreads fell to renewed lows of 58bps (-1bps), the lowest level since May 2011. In Brazil and Colombia, CDS went down 2bps to 196bps and 123bps, respectively. Mexican country risk inched down 1bp to 102bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x21: -9bps) as the BRL strengthened. In DI futures, while short rates were broadly stable (Jan18 at 7.81%), the Jan25 fell 9bps to 10.14%. Likewise, real rates fell substantially (Aug-22: -5bps to 4.62%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened 2-3bps in the session. In TIIE swaps, the 10-year fell 2bps to 7.15%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields were mixed. In Camara swaps, the 9-month fell 1bp to 2.36% and the 18-month inched up 1bp to 2.47%. Chile Rates Tracker The Colombian curve shifted 2-3bps downwards in the session. In IBR swaps, the 1-year fell 3bps to 4.91%. Colombia Rates Tracker

Friday Events

  • In Brazil, the main highlight of economic activity will be the 2Q17 GDP. We expect it to be flat on quarter-over-quarter seasonally adjusted terms. On external accounts, we expect August’s trade balance to once again post a strong surplus (USD 4.3 billion). 
  • In Chile, the BCCh will publish the minutes of the August monetary policy meeting. The minutes will build the base for the upcoming Inflation Report, providing details on the central bank’s evaluation of inflation dynamics and the course for monetary policy. Also, the national statistics agency (INE) will publish the private consumption activity indicators for July. We expect the commercial activity index to have increased 3.5% from last year.
  • In Argentina, tax collection for August will see the light. We expect taxes to increase 30% yoy to ARS 215.5 billion in August. 

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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