Itaú BBA - Colombian rates narrow on Banrep communication

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Colombian rates narrow on Banrep communication

October 3, 2017

In Colombia, yields past the 2-year narrowed after Echevarria’s speech to lawmakers.

With information available until 6:30pm Brasilia time

Highlights

  • In Colombia, yields past the 2-year narrowed after Echevarria’s speech to lawmakers. The Banrep Governor said that the board doesn’t see space in the “very short term” to reduce rates. In IBR swaps, while the 9-month widened 2bps to 4.85%, the 5-year fell 5bps to 5.36%. 

  • LatAm FX appreciated, except for the COP. The CLP outperformed in high-beta space (+0.85% to 633.38/USD). The BRL strengthened 0.34% to 3.1438/USD and the MXN is appreciating 0.07% to 18.2167/USD. Bucking the regional trend, the COP depreciated 0.12% to 2,954/USD. 

Macro Backdrop

BRAZIL
  • Industrial production declines 0.8% in August; breakdown outlines a better picture. Industrial production receded 0.8% mom/sa in August, disappointing the median of market estimates (0%) and in line with our call (-0.7%). Compared to August 2016, industrial output climbed 4.0%. The raw figure for July was revised upward by 0.4 p.p.. The breakdown by economic category shows a more favorable situation, thanks to higher production of durable consumer goods (4.1% mom/sa) and capital goods (0.5% mom/sa), offset by small production declines for intermediate goods (-1.0% mom/sa) and other consumer goods (-0.6% mom/sa). In terms of economic activity, extraction and mining shrank 1.1%, while manufacturing output remained stable. On a more detailed breakdown, 16 out of 24 activities posted monthly gains. Full Report

  • According to Fenabrave, vehicle sales reached 199k in September, rising 3.7% mom/sa. The breakdown shows a 3.9% increase in “passenger cars + light vehicles” and a 2.4% decline in “trucks + buses” (our seasonal adjustment), the second consecutive decline in this category. Nonetheless, this result is small compared to the 21% ytd/sa gain in trucks and buses (albeit from a low base). Our forecast for auto production (Anfavea) is 233k in August (up 4.9% mom/sa). 

CHILE
  • The commercial activity index - which aggregates retail activity, wholesale and vehicle sales- grew a firm 4.9% over twelve months in the month of August (3.4% previously), still lifted by durable sales (in particular vehicle sales). The print came in above our 4.1% forecast, with wholesale trade surprising us to the upside. The better than expected August commercial activity performance, alongside strengthening industrial production indicators, leads us to forecast the GDP proxy Imacec to grow 2.4% year over year in August (2.8% in July).

  • As activity shows signs of firming during 3Q17, the expectation of a recovery in the latter part of the year becomes more likely. Activity picking up from the 0.5% recorded in 1H17 will be favored by higher copper prices and stronger global growth, apart from the monetary stimulus applied by the central bank and the boost to real wages coming from low inflation. Full Report

  • The minutes of the September monetary policy meeting reveal a united board voted to hold the policy rate at 2.5%. The unanimous decision differs from the previous two meetings at which Pablo Garcia opted for a 25-bp cut. Overall, the minutes are in line with the baseline scenario outlined in the 3Q Inflation Report (IPoM). The base case sees rates on hold for a prolonged period, with inflation in the short-term staying low but not hampering the convergence to the 3% target in the 2-year forecast horizon (as output gap is set to gradually narrow). In providing the board with policy options, the technical staff included a 25-bp rate cut option, in line with the IPoM’s stance of not entirely closing the door to more easing if downside risks to inflation materialize and impact the target convergence trajectory. The rate cut option is deemed a risk-management approach.

  • The unwillingness of the board to deliver more stimulus likely signals the end of the easing cycle. The central bank implemented a 100-bp easing cycle (to 2.5%) in the first five months of the year as the economy weakened, while inflation remained under control. The decision by Mr. Garcia to abandon his call for a cut, the little conviction shown by other members of the board for the need to ease further and recent activity recovery lead us to believe that the likelihood of more easing has significantly diminished. In this context, we no longer expect the board to the lower policy rate from the current 2.5%. Regardless of our new expectation for monetary policy, there remains a possibility that inflation disappoints and the trajectory of inflation to the 3% target is altered, reopening the discussion for additional stimulus. Full Report

ALL LATAM

  • Itaú Activity Surprise Index: Declining, but still positive. Our Itaú Activity Surprise Index moderated to 0.10 in September, coming from 0.14 in July. Despite another solid industrial production clip, Brazil's component edged down in September, as labor market releases came in line with analysts’ prospects. The Mexican index fell back to negative territory, as activity lost further momentum. In contrast, Chile’s component surged to 12-month highs, as mining production stopped being a drag. Full Report

  • Itaú Inflationary Surprise Index: Better price dynamics in Mexico, more positive surprises in Brazil. Our Itaú Inflationary Surprise Index edged up to -0.22 in September, coming from -0.26 in August. The highlight was the moderation of the Mexican index, as the inflation releases hinted at more benign price dynamics. The Chilean sub-index fell deeper into negative territory, while the official Brazilian inflation releases surprised to the downside. In contrast, the Peruvian surprise index skyrocketed on the back of the “lemonade effect”. Full Report

Market Developments 
  • GLOBAL MARKETS: Equity markets were on the red and US treasuries widened (5-year: +2bps to 1.85%). Global Markets Tracker

  • CURRENCIES & COMMODITIES: Commodities were mixed in the session. In energy, oil prices weakened again (WTI: -0.81% to 50.49/USD). Similarly, agriculture commodities posted losses (soybean: -0.21%; sugar: -1.89%). On the other hand, metals strengthened in the session (iron ore: +0.45%). Once again, LatAm FX appreciated, except for the COP. The CLP outperformed in high-beta space (+0.85% to 633.38/USD). The BRL strengthened 0.34% to 3.1438/USD and the MXN is appreciating 0.07% to 18.2167/USD. Bucking the regional trend, the COP depreciated 0.12% to 2,954/USD. FX & Commodities Tracker

  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) narrowed further all across LatAm. In Brazil and Mexico, CDS fell 5bps to 188bps and 102bps, respectively. Colombian spreads fell 4bps to 114bps. In Chile, country risk went down 2bps to 56bps. Also, according to a note in its website, the Brazilian National Treasury issued USD 3.0 billion of a Global Bond maturing in 2028. The new 2028s will play the role of the 10-year benchmark. External Bonds and CDS Tracker

  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, while very short rates inched down (Jan-18: -1bp to 7.48%), long yields widened (Jan-21: +8bps to 8.85%). Real rates also went up as the Aug-22 increased 4bps to 4.42%. Brazil Rates Tracker

  • LOCAL RATES - Mexico: Mexican yields past the 9-month widened 2-3bps. In TIIE swaps, the 6-month fell 1bp to 7.34% whereas the 5-year increased 2bps to 6.84%. Mexico Rates Tracker

  • LOCAL RATES – Chile and Colombia: Long Chilean rates narrowed 1-2bps. In Camara swaps, while the belly widened (1-year: +3bps to 2.57%), the 8-year decreased 2bps to 4.01%. Chile Rates Tracker In Colombia, short yields inched up after Echevarria’s speech to lawmakers. The Banrep Governor said that the board doesn’t see space in the “very short term” to reduce rates. In IBR swaps, the 9-month widened 2bps to 4.85% while yields past the 2-year narrowed (5-year: -5bps to 5.36%). Colombia Rates Tracker

Upcoming Events
  • In Brazil, inflation and activity releases are the highlights. We project September’s IPCA consumer inflation (Fri.) to register a 0.10% monthly increase, with year-over-year inflation stable at 2.5%. In addition, Anfavea’s auto production will be released (Thu.).
  • In Chile, the BCCh will publish the GDP proxy (Imacec) for the month of August (Thu.). We expect the GDP proxy IMACEC to grow 0.5% sa from July, leading annual growth of 2.1% (2.8% in June). Later, INE will publish nominal wage growth for August (Thu.). INE will also publish inflation for the month of September (Fri.). In August, consumer prices expanded 0.2% month over month, so annual inflation came in at 1.9%, below the 2- 4% tolerance range. We expect consumer prices to have gained and atypically low 0.2% from August, leading to an annual inflation of 1.9% in the month.
  • In Colombia, the National Institute of Statistics will release the September inflation print (Thu.). We expect consumer prices to gain 0.18% from August, taking annual inflation above the target range to 4.12%.
  • In Mexico, the statistics institute (INEGI) will publish July’s gross fixed investment (Wed.). We estimate that gross fixed investment contracted 0.9% year-over-year.
  • In Argentina, the car-makers association (ADEFA) will release September data on production, exports and domestic sales to car dealers (Wed.).

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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