Itaú BBA - Colombian rates widen as Banrep signals easing is almost done

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Colombian rates widen as Banrep signals easing is almost done

July 17, 2017

IBR swaps widened after Finance Minister Cardenas’s remarks in an interview.

With information available until 6:30pm Brasilia time

Highlights

  • IBR swaps widened after Finance Minister Cardenas’s remarks in an interview. He clearly signaled that the majority of rate cuts are in the past (see below). In IBR swaps, the 1-year increased 2bps to 4.99% and the 5-year widened 4bps to 5.40%.  For the remainder of the year, the curve implies roughly 50bps in rate cuts. 
  • LatAm FX depreciated in the session. The MXN is trading 0.13% weaker to 17.5875/USD. The COP depreciated 0.09% to 3,031/USD and the CLP posted losses of 0.35% to 659.72/USD. The BRL closed at 3.1824/USD (-0.09%). 
  • Itaú Unibanco Handbook: Brazilian Sovereign Fixed Income and Foreign Exchange Markets. In this guide, we describe the federal debt and exchange rate markets in detail, providing a reference for understanding Brazilian markets’ idiosyncrasies. Handbook – First Edition

Macro Backdrop

BRAZIL
  • Inflation expectations continue trending down. According to Focus survey, IPCA inflation expectations for 2017 dropped again to 3.29% (-9bps), and to 4.20% (-4bps) by 2018YE. Year-end Selic expectations receded 25bps to 8.00% (from 8.25%) for 2017, and remained flat for 2018 (8.00%), while it has slightly declined to 8.13% (from 8.25%) for 2019. The BRL appreciated to 3.30/USD for 2017 (from BRL 3.35), and remained flat for 2018 at 3.45/USD and for 2019 at 3.50/USD. GDP growth expectations did not change for 2017 (0.34%), 2018 (2.00%), and 2019 (2.50%). See BCB Report
  • Job creation: better, but still negative. CAGED formal job creation came in at 9.8k in June, in between our estimate (-13.7k) and market expectations (+28.3k). Seasonally adjusted, 13.7k jobs were closed, with results remaining in negative territory. The 3-month moving average improved to -16k from -41k. Job closings have been moderating, but net creation still negative. We expect unemployment to continue rising even as GDP recovers moderately, because the recent recession has not yet had a full impact on the labor market. 
  • 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 18. 
Market Developments 
  • GLOBAL MARKETS: Chinese 2Q17 GDP and June activity data came in stronger than expected. GDP maintained the robust growth of 1Q17 (6.9% yoy, consensus: 6.8%). Following better-than-expected PMI, credit and trade data, industrial production growth advanced to 7.6% yoy in June (consensus: 6.5%). Retail sales also surprised to the upside (11% yoy, consensus: 10.6%). Looking ahead, we still expect a policy induced modest slowdown in 2H17, but it will not likely spill over to the global markets as it did in 2013 to 2016. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices fell (WTI: -1.16% to USD 46.00/bbl) and, after stronger than expected Chinese GDP growth, metals posted gains. Iron ore increased 4.13% and copper strengthened 1.34%. LatAm FX depreciated in the session. The MXN is trading 0.13% weaker to 17.5875/USD. The COP depreciated 0.09% to 3,031/USD and the CLP posted losses of 0.35% to 659.72/USD. The BRL closed at 3.1824/USD (-0.09%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads narrowed in the session. For the 5-year tenor, CDS in Chile stood flat at 66bps. In Colombia and Mexico, spreads inched down 1bp to 134bps and 108bps. In Brazil, CDS fell the most to 222bps (-2bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates fell amid lower inflation expectations and (see Macro Backdrop). In DI futures, the Jan-19 narrowed 4bps to 8.56% and the Jan-21 fell 7bps to 9.63%. Conversely, real rates fell as the Aug-22 went down 6bps to 5.25%. The curve implies roughly 100bps in rate cuts for the July meeting (25-26). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound in the session. In TIIE swaps, the 2-year stood flat at 7.00% and the 10-year inched up 1bp to 7.13%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 2-3bps upwards in the session. In Camara swaps, the 1-year increased 3bps to 2.40% and the 5-year went up 2bps to 3.39%. Chile Rates Tracker In Colombia, yields widened after Finance Minister Cardenas’s spoke in an interview. He clearly signaled that the majority of rate cuts are in the past. “Interest rates have already fallen by 2 percentage points from December to today. And, simply, I want markets to be very clear that they can’t expect an additional reduction of that magnitude. There could be an additional reduction, but it will be a reduction more at the margin, and we’ll have to see how inflation is going and the data over the next months” he said. In IBR swaps, the 1-year increased 2bps to 4.99% and the 5-year widened 4bps to 5.40%.  For the remainder of the year, the curve implies roughly 50bps in rate cuts. Colombia Rates Tracker

Upcoming Events

  • In Brazil, July’s IPCA-15 consumer inflation preview will be released (Thu). We forecast a 0.08% monthly fall, with year-over-year inflation slowing to 2.9% from 3.5%. With this result, inflation will have reached 1.5% from January to July, well below the 5.2% recorded during the same time window last year. Moreover, the Congress is set to enter recess until August 1. In the meantime, the vote on charges against President Temer in the Lower House floor will stay on hold until August 2. Then, FGV’s industrial business confidence preview for July will be released (Thu.). The results will be important to assess the impact of the more turbulent political scene. Still, June’s tax collection may be released sometime during the week. We forecast BRL 103.8 billion in tax collections, or a 2.6% increase in real terms. Moreover, the government will release its bimonthly revaluation report (Fri.), where it will update its forecasts for the 2017 primary result and may possibly announce a BRL 4 billion unfreeze on discretionary expenses. Onto the balance of payments report (Fri.), we expect a USD 1.3 billion current account surplus in June, topping last year’s deficit of USD 2.5 billion for the same month. We also expect direct investment in the country (DIC) to register inflows of USD 2.3 billion in June.
  • In Mexico, the Statistics Institute (INEGI) will announce June’s unemployment rate (Fri.). We expect the unemployment rate to post 3.5% (below the 3.9% level recorded in June 2016) indicating that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment has consistently grown above 4% year-over-year throughout the first six months of 2017. 
  • In Colombia, think-tank Fedesarrollo will release the June consumer confidence (Tue.). May’s confidence reading stayed in pessimistic territory (below 0) and worsened to -16.9% from -12.5% one year earlier indicating that a meaningful consumption recovery is unlikely in the short-term. Also, the trade balance for the month of May will be published (Wed.). We expect a trade deficit of USD 185 million, lower than the USD 0.7 billion deficits recorded one year ago. Ending the week, coincident activity indicator (ISE) for the month of May will be released (Fri.). The April indicator continued to reflect activity weakness as the seasonally adjusted series fell from the previous month for the fifth consecutive time. Annual year-to-date stands at 0.6% (2.7% in the 2016 equivalent period). 
  • In Argentina, the central bank will publish its quarterly monetary policy report (Tue.). We expect the report to shed light on the monetary policy stance given the challenges to meet the inflation target range in 2017. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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