Itaú BBA - Colombian yields narrow in a late reaction to the CPI surprise

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Colombian yields narrow in a late reaction to the CPI surprise

November 7, 2017

Back from the holiday, the front end of the Colombian curve went down on the back of the below-than-expected CPI figure.

With information available until 6:30pm Brasilia time


  • Back from the holiday, the front end of the Colombian curve went down on the back of the below-than-expected CPI figure (see Macro Backdrop). In IBR swaps, the 9-month fell 5bps to 4.49%. 
  • On a strong USD day, most currencies under our coverage depreciated (-0.57%). The MXN was the laggard in the region (-0.77% to 19.1662/USD). The BRL closed at 3.2729/USD (-0.64%) and the CLP posted losses of 0.18% to 634.45/USD. Bucking the global trend, the COP slightly appreciated (+0.08% to 3,038/USD). 

Macro Backdrop

  • We published our Scenario Review for the month of November. We increased our 2017 inflation forecast to 3.3% due to greater pressure from regulated prices. Our estimate for 2018 remains at 3.8%. Also, we anticipate GDP growth of 0.8% in 2017 and 3.0% in 2018, but we do see risks. We revised downward our forecast for unemployment at year-end 2018 to 11.8% from 12.0%, incorporating better than expected job creation in the informal sector in 3Q17. Full Report
  • The minutes of the October monetary policy meeting show that a united board voted to leave the policy rate at 2.5%. The relevant options presented by the technical staff were to hold the rate and retain a neutral stance or to cut it by 25bps while including an easing bias. In the end, a cautious board opted for a mix, by staying on hold but adding an easing bias as the recent behavior of inflation requires further evaluation. 
  • Our baseline scenario is for the central bank to leave the policy rate unchanged at 2.5% for the rest of this year and most of 2018. However, considering the supporting performance of the CLP and inertia, risks for our inflation forecast (2.8% in 2018) are tilted to the downside, so we cannot rule out the possibility of additional easing. Incoming inflation data, such as the October inflation print, will be a key input into whether risks to the inflation outlook are intensifying. We expect a 0.3% gain from September (compared with 0.2% one year before). Full Report
  • Strong export growth continues to limit Chile’s external vulnerabilities. The trade balance recorded a USD 583 million surplus in October, above market expectation and our call (both at USD 450 million). A widespread improvement in exports, led by the mining component, is behind the improving trade balance in Chile. The accumulated 12-month trade surplus is USD 6.1 billion (USD 5.3 billion in 2016), the highest since June 2015. Our seasonally adjusted series shows that, at the margin, the trade balance surplus picked up to USD 13.7 billion (annualized) in the quarter ending in October, largely due a widespread improvement in exports, from the USD 12.1 billion annualized surplus recorded in 3Q17 (USD 2.7 billion in 1Q17). 
  • With copper prices expected to stay elevated and internal demand still weak, Chile’s current-account deficit will likely remain at low levels. We see a current-account deficit of 1.4% of GDP this year, in line with the deficit recorded in 2016. Next year, we expect the deficit to narrow to 1.2% of GDP. Full Report
  • In September, real wage growth remained broadly stable at 2.4%. Nominal wages increased 4.1% year-over-year in September (according to the historically merged series), versus 4.2% in August and 4.2% in 3Q17 (4.4% in 2Q17). As inflation dipped to 1.5% in the month, real wage growth ticked up to 2.4% year-over-year (2.3% in August) and 2.5% in the quarter (2.0% in 2Q17). The real wage bill growth was broadly stable at 4.8% in the quarter (3.9% in 2Q17) when total employment growth is considered. Meanwhile, when only salaried employment is included, growth of the real wage bill in the third quarter dropped to 3.2% year over year (3.5% in 2Q17). Real wage growth will likely stay elevated ahead as inflationary pressures remain contained, however, the fragile composition of the labor market means that support for private consumption is contained. 


  • Inflation once again surprised to the downside in October. Prices gained 0.02% in the month, below the market consensus and our forecast (both at +0.10%). Due to unfavorable base effects, the resulting 12-month inflation picked up to 4.05% (3.97% in September), the first print above the central bank’s 4.0% upper bound since May this year. In spite of non-tradable inflation – which is the component of consumer prices more linked to domestic factors – remaining sticky, the lower-than-expected headline reading risks further rate cuts in the short-term. Looking ahead, we now expect yearend inflation of 3.9% (4.2% previously), partly due to downside surprises to inflation in the last two months, which have totaled 0.22 p.p.. 
  • The recent improvement in the inflation outlook has led the central bank to recommence the easing cycle earlier than expected. Last month, the central bank surprised the market by cutting the policy rate by 25bps to 5.0%, while the market expected the bank to remain on hold until early 2018. As the inflation outlook continues to improve, we cannot rule out additional cuts before the end of this year. Full Report


  • Argentina’s central bank raised the monetary policy rate by 100bps, to 28.75%, following a 150-bp hike two weeks ago. The decision was surprising given the size of the previous hike. In the press release announcing the decision, the central bank noted that inflation expectations continued to rise after the September inflation reading was published.  According to the latest Central Bank Survey of Expectations, analysts expect 23% inflation in 2017, surpassing the 12%-17% target range for this year. Participants revised their 2018 inflation forecasts upward for a fifth consecutive time, to 16.0% (from 15.8% previously). For the next 12 months, the market expects inflation of 17.3% (surpassing the 16.9% posted in September). Both readings exceed the upper bound of the 10% (±2%) target range for next year.  
  • The central bank expects the latest hike to consolidate the declining trend in core inflation, but the options remain open and additional hikes are possible. The central bank will conduct a new auction of short-term sterilization instruments (Lebacs) next week. The outcome may shed light on the central bank’s next steps. Full Report
Market Developments
  • GLOBAL MARKETS: The EUR weakened after the German industrial production came at -1.6% mom in September, below market consensus (-0.9% mom). Volatility gauges widened and US corporate credit spreads widened. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were dragged by metals and oil. Oil benchmarks posted losses in the session (WTI: -0.14% to USD 57.49/bbl) after Monday’s rally. Furthermore, iron ore fell 2.19% and copper weakened 2.11%. On a strong USD day, most currencies under our coverage depreciated (-0.57%). The MXN was the laggard in the region (-0.77% to 19.1662/USD). The BRL closed at 3.2729/USD (-0.64%) and the CLP posted losses of 0.18% to 634.45/USD. Bucking the global trend, the COP slightly appreciated (+0.08% to 3,038/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) widened all across LatAm. In Brazil, CDS widened the most in the region to 176bps (+5bps). Colombian and Mexican country risk went up 3bps to 119bps and 109bps, respectively. In Chile, spreads inched up 1bp to 52bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The long end of the Brazilian curve widened up to 8bps. In DI futures, while the front end was broadly stable (Jul-18 at 6.98%), long rates went up (Jan-21: +6bps to 9.34%). The breakevens curve went north as well, as the 5-year increased 5bps to 4.94%. Brazil Rates Tracker
  • LOCAL RATES – Mexico: Short Mexican yields widened 4bps pressured by the weaker MXN. In TIIE swaps, the 9-month went 4bps up to 7.50% and the 5-year increased 1bp to 7.22%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded range bound in the session. In Camara swaps, the 1-year went up 1bp to 2.41% and the 7-year was stable at 3.79%. In Colombia, markets reopened after Monday’s national holiday. Chile Rates Tracker In a late reaction to the downward CPI surprise (see Macro Backdrop), the front end of the Colombian curve went down. In IBR swaps, the 9-month fell 5bps to 4.49%. 

Colombia Rates Tracker

Upcoming Events

  • In Brazil, October’s IPCA consumer inflation will be released (Fri.). We forecast a 0.50% monthly increase, with year-over-year inflation rising to 2.78% from 2.54%. On economic activity, the key releases will be coincident indicators for October: Anfavea’s auto production (Wed.), traffic of heavy vehicles and paper cardboard dispatches (ABCR and ABPO, respectively).
  • In Mexico, the statistics institute (INEGI) will announce October’s CPI inflation (Thu.). We expect a 0.60% month-over-month variation, driven by the energy and regulated prices. Still, Banxico will hold its monetary policy meeting (Thu.). We expect the board to keep the reference rate at 7%. Finally, INEGI will publish September’s industrial production (Fri.). We estimate that industrial production fell by 2.2% year-over-year.
  • In Chile, inflation for the month of October will be released (Wed.). We expect consumer prices to have gained 0.3% from September.
  • In Colombia, Banrep will publish the minutes of the surprise decision to cut the policy rate by 25-bp (to 5.0%) at the October monthly meeting (Fri.). We expect the minutes to show that further cuts will be data dependent.

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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