Itaú BBA - CLP rallies on still-high Chinese PMI

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CLP rallies on still-high Chinese PMI

July 31, 2017

The CLP (+0.40% to 651.34/USD) and the BRL (+0.23% to 3.1245/USD) appreciated on the back of stronger metallic commodity prices.

With information available until 6:30pm Brasilia time


  • The CLP (+0.40% to 651.34/USD) and the BRL (+0.23% to 3.1245/USD) appreciated on the back of stronger metallic commodity prices (Itaú Unibanco Commodity Index – Metals: +2.17%). Iron ore rose 5.79% and copper gained 0.59% as the Chinese steel industry PMI increased to 54.9 from 54.1, with new orders rising to 63.1 from 58.4. 
  • Elsewhere in LatAm FX, the COP closed at 2,986/USD (+0.49%). Bucking the regional trend, the MXN is trading 0.16% weaker to 17.8052/USD - after testing the 17.8/USD handle during the intraday highs. 

Macro Backdrop

  • According to FGV’s services survey, confidence in the services sector rose 1.2% in July to 82.9. The improvement partially offsets the decline in the previous month (-3.3%) and was driven by both expectations (1.0%) and the current situation assessment (1.4%). The expected employment component rose slightly to 97.9 from 97.2, consistent with positive seasonally adjusted job creation in the services sector.
  • Markets see a lower Selic rate in 2018. According to Focus survey, IPCA inflation expectations went up 7bps to 3.40% for 2017, while it has remained flat for 2018 at 4.20% and 2019 at 4.25%. Year-end Selic expectations remained flat at 8.00% for 2017, while it has declined 25 bps for 2018 (to 7.75%) and increased 25 bps for 2019 (to 8.25%). The BRL did not change for 2017 (at 3.30/USD), for 2018 (at 3.43/USD) and for 2019 (at 3.50/USD). Finally, GDP growth expectations also did not change for 2017 (0.34%), 2018 (2.00%), and 2019 (2.50%). See BCB Report
  • Considering the change in electric tariffs to red flag mode and other available information, we revised our IPCA forecast in July to 0.15% (from 0.12%) and in August to 0.60% (from 0.57%). 
  • The flash estimate of GDP showed a robust sequential expansion in 2Q17, indicating that growth is slowing down at a more-gradual-than-expected pace. Growth for 2Q17 came in at 1.8% year-over-year, above our forecast (1.6%) and in line with market expectations. According to calendar-adjusted data, GDP growth was 3% year-over-year in 2Q17 (above the 2.6% print recorded in 1Q17). At the margin, the GDP expanded 0.6% from the previous quarter, only a bit less than in 1Q17 (0.7%). Looking at the breakdown, services sectors expanded 0.8% quarter-over-quarter (down from 1% in 1Q17), although indicators for private consumption would be consistent with weaker activity readings. Industrial growth, in contrast, stood at a soft 0.1% quarter-over-quarter (same as in 1Q17). 
  • Overall, the 2Q17 flash GDP data poses an upside risk to our 2% growth forecast for 2017. Moreover, the real wage bill is already recovering at the margin and the US manufacturing PMI is hovering at strong levels, supporting Mexico’s manufacturing exports. Fading uncertainty over NAFTA will also help to curb investment slowdown. Full Report
  • Fiscal accounts improved in 2Q17, even after netting out the windfall effects of Banxico’s dividend. Resulting from exchange rate gains on international reserves during the previous year, the Central Bank’s dividend reached a historical high in 2017 (MXN 322 billion, 1.5% of GDP) which is providing a lot of fiscal oxygen to the government in its efforts to strengthen public finances (considered a critical aspect of the country’s credit rating outlook, by the three main rating agencies). However, even if 70% of the amount of the dividends received in past years is excluded (as the 30% rest is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary balance reached a MXN 41 billion surplus (0.2% of GDP) by the end of 2Q17, from a MXN 25 billion deficit in 1Q17. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 471 billion (2.3% of GDP), from MXN 526 billion in 1Q17, and the public sector borrowing requirements (broadest deficit indicator) narrowed to MXN 576 billion (2.8% of GDP), from MXN 620 billion previously. The public-debt-to-GDP ratio stood at a significantly lower level in 2H17 than at the end of 2016 - for both gross and net measures - which means it is highly likely that 2017 will mark the first decrease of this ratio in ten years. We note that the gross and net debt of the public sector has decreased to MXN 9,701 billion (from MXN 9,934 billion) and MXN 9,300 billion (from MXN 9,693 billion) between 2Q17 and the end of 2016, respectively. This decrease is explained by the MXN appreciation (14% year-to-date), which has reduced the peso-value of foreign currency debt and a narrower fiscal deficit. 
  • Amid evidence of a narrower fiscal deficit and a falling public-debt-to-GDP ratio, the rhetoric of the rating agencies toward Mexico is now turning more benign. In July, S&P revised the country’s credit rating outlook (to stable, from negative) and Moody’s stated that the recent oil discoveries (by firms that were awarded exploration contracts in the energy reform) are “credit-positive”. Of course, the better-than-expected performance of the economy, coupled with an improving growth outlook (mainly because the risk of US protectionist policies has diminished), are also important for Mexico’s sovereign rating. But fiscal accounts are critical. Between 2012 and 2016, the first four years of the Peña Nieto administration, net debt rose by 15.3 p.p. of GDP, leading the three main rating agencies to change their outlook (to negative) singling out the upward trend of debt as a red flag. Now that the tide is starting to turn, we believe the government will have to remain strongly committed to fiscal consolidation, to rule out a future sovereign rating downgrade. In this context, next year will be particularly challenging, as the government will have to meet more ambitious fiscal targets (mainly a PSBR of 2.5% of GDP, compared to 2.9% of GDP in 2017) but without the windfall of a dividend from the Central Bank and, perhaps more importantly, in the midst of an electoral year which might bring spending pressures. Looking at the past four electoral years, we note that expenditures always increased in these periods (by 0.5p.p. of GDP, on average). Full Report
  • The labor market continues to gradually loosen. In the second quarter of the year, the unemployment rate reached 7.0%, inching up by 0.1 percentage points in 12 months. The print came in below the 7.1% Bloomberg market consensus and our 7.2% expectation as public and non-salaried employment continue to prop up job growth. Even so, once hours worked are considered, employment is contracting. Total job growth came in at 1.9%, rising from the 1.4% in 1Q17, while the labor force also picked up to 2.0% year over year, from 1.8% in 1Q17. Private salaried employment growth contributed only 0.2 percentage points to total employment growth. Meanwhile, public sector growth remains high (at just over 40% of total job growth) but is likely to be temporary as fiscal consolidation intensifies. Weakness in the labor market is more clearly reflected in falling working hours (39.8 per week in 2Q17 vs. 41.7 in 1Q17). Hence, effective labor (employment times hours worked) shrunk 1.6% year over year in 2Q17 (+0.8% in 1Q17). 
  • In all, we expect the unemployment rate to average 7.0% this year (from 6.5% in 2016), providing less support for consumption growth. Full Report


  • Industrial activity rose by 6.6% yoy in June, marking the second consecutive increase after several months posting contraction. During the first half of the year, manufacturing remained flat 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 (18%) due to the growth of construction materials. The automotive industry rose 15.9% yoy in June, followed by the plastic and rubber sector (9.5% yoy) and the food and beverage industry (+3.2% yoy). On the negative side, the textile sector was the most affected, dropping 4.0% yoy in June and 14.6% yoy in 1H17.
  • Indec also reported that construction activity improved a solid 17.0% yoy in June. This is the fourth consecutive strong positive year-over-year development, leading to a 7.1% yoy growth during 1H17. Employment in the sector rose 8.1% yoy, marking also the fourth consecutive gain.  According to the qualitative survey, 60% of the companies involved in public works expect activity to increase in the period July-September, compared to 36% in the case of companies involved in private works. 

Market Developments 

  • GLOBAL MARKETS: The Chinese steel industry PMI increased to 54.9 from 54.1, with new orders rising to 63.1 from 58.4. Hence, metals posted gains (Itaú Unibanco Commodity Index - Metals: +2.17%) and the USD weakened across the board (DXY: -0.48%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices rose (WTI: +0.92% to 50.27/USD). On the back of solid Chinese data, metals outperformed in the commodity realm. On a weak dollar day, currencies under our coverage posted gains. The CLP appreciated 0.40% to 651.34/USD amid stronger copper prices (+0.59%). The COP closed at 2,986/USD (+0.49%) and the BRL posted gains of 0.23% to 3.1245/USD. Bucking the LatAm trend, the MXN is trading 0.16% weaker to 17.8052/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor posted gains in the session. CDS in Chile fell 1bp to 65bps. In Mexico, country risk fell 2bps to 102bps. In Colombia and Brazil, spreads went down 4bs to125bps and 210bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian nominals narrowed in the session. In DI futures, while the front end and the belly stood broadly stable (Jan-18: at 8.27%), long yields went down (Jan-21: -4bps to 9.28%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound. In TIIE swaps, the 1-year inched up 1bp to 7.31% and the 10-year was flat at 7.14%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields narrowed 2-3bps on the back of a stronger CLP. In Camara swaps, the 1-year fell 2bps to 2.34% and the 5-year went down 2bps to 3.37%. Chile Rates Tracker In Colombia, yields were broadly stable. In IBR swaps, the 6-month stood at 5.18% and the 5-year at 5.55%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will focus on the Copom minutes (Tue.). We still see the case for slowing down the pace of easing, given increased uncertainty about very important fiscal and institutional reforms, as well as the stage of the cycle, so for the moment our call remains that the next move will be of 75bps (which would already be pretty fast easing). However, we may revisit this call in line with further Copom signs, such as those that may be embedded in the meeting minutes. Moreover, the Lower House may possibly vote on charges against President Michel Temer (Wed.). A quorum of 342 lawmakers is required for the vote, same number needed for the charges to be accepted and passed to the Supreme Court. On economic activity, June’s industrial production will be released (Tue.), for which we expect a 0.2% seasonally adjusted monthly decrease. In addition, July’s coincident indicators will be released: Fenabrave’s vehicle sales (Tue.) and Anfavea’s auto production (Fri.). On external accounts, we expect July’s trade balance (due Tue.) to once again post a strong surplus (USD 6.0 billion), topping the surplus of USD 4.6 billion in the same month last year. 
  • In Mexico, all eyes on activity releases. The statistics institute (INEGI) will publish May’s gross fixed investment (Fri.). We forecast 1.5% year-over-year growth (up from a sharp 8.6% contraction in April). 
  • Activity data is on the market’s radar in Chile. The national statistics agency (INE) will publish the private consumption activity indicators for June (Wed.). We expect the commercial activity index to have increased 4.8% from last year (5.8% previously), resulting in growth of 3.3% in 2Q17 (2.6% in 1Q17). 
  • In Colombia, export data for the month of June (Wed.) will come through. We expect exports to come in at USD 2.8 billion, representing annual growth of 1.3%.
  • In Argentina, fiscal data is on the limelight. We expect tax collection for July (Tue.) to increase 28% yoy to ARS 230.5 billion. Also noteworthy, the car-makers association (ADEFA) will release July data on production, exports and domestic sales to car dealers (Thu.). Finally, the central bank will release its monthly survey of economists (Wed.). It will be important to monitor the behavior of inflation expectations as guidance for future monetary policy decisions.

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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