Itaú BBA - Colombian yields narrow on weak confidence and Banrep communication

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Colombian yields narrow on weak confidence and Banrep communication

April 20, 2017

The front end and the belly narrowed 1-3bps as consumer confidence slipped further into pessimistic territory and also after Co-director Maiguashca interview.

With information available until 6:30pm Brasilia time

Highlights

  • In Colombia, the front end and the belly narrowed 1-3bps as consumer confidence slipped further into pessimistic territory (see Macro Backdrop) and also after Banrep’s Maiguashca interview. In IBR Swaps, the 9-month narrowed 2bps to 5.66% and the 5-year decreased to 2bps to 5.29%. 
  • In Brazil, short DI futures curve adjusted ahead of the national holiday. The very front end narrowed 1-2bps after mid-month inflation surprised to the downside (see Macro Backdrop). In contrast, the far back end widened 3bps on concerns over the Social Security reform and the French elections. 
  • In LatAm FX, currencies under our coverage appreciated. The MXN is trading at 18.79/USD (+0.25%) and the COP posted gains of 0.62% to 2,851.90/USD. The BRL registered gains of 0.18% closing at 3.1473/USD. The CLP slightly appreciated to 649.60/USD (+0.09%).

Macro Backdrop

BRAZIL
  • IPCA-15 climbed 0.21% in April, below the most optimistic forecast. The IPCA-15 result in April (0.21%) was below with our estimate (0.28%) and the median of market expectations (0.27%). The index had climbed 0.15% in the previous month and 0.51% in April 2016. Hence, the IPCA-15 is up by 1.22% year-to-date (3.32% in the year-earlier period), while the year-over-year change decelerated to 4.41% from 4.73% in March. Breaking down by product groups, the largest upward contributions came from healthcare and personal care (0.10 p.p.), food and beverages (0.08 p.p.), and housing (0.06 p.p.). On the other hand, transportation (-0.08 p.p.) and household items (-0.02 p.p.) posted negative rates.
  • We adjusted slightly our forecast for the headline IPCA in April to 0.15% from 0.13%, with the year-over-year change slowing down to 4.1% (March: 4.57%). We expect the largest upward contributions to come from food and beverages (driven by fresh fruits and vegetables) and healthcare and personal care (driven by medication and health insurance premiums). On the opposite direction, housing will likely give a contribution of -0.15 p.p., due to lower electricity bills. The result will reflect the impact of the devolution of undue charges related to a nuclear power plant, which will more than offset the effect caused by the activation of the red mode in the tariff flag system in the beginning of the month, as well as other adjustments in tariffs and fees.  Full Report
  • March job creation disappoints. CAGED formal job creation came in at -64k in March, worse than our estimate (+19k) and market expectations (+4k). Seasonally adjusted, the result was -74k jobs closed. The 3-month moving average also worsened, to -55k from -36k.  Job closings have been moderating, but March’s result is a reminder that the labor market remains weak and unemployment is likely to continue rising. We recently revised our unemployment forecast to 13.8% (from 13.4%) by the end of 2017.
  • The government was able to approve the plea of urgency to accelerate the labor reform vote with 287 votes in favor and 144. As such, the bill could be voted more quickly in the Lower House Special Committee.
  • The Social Security reform’s report is likely to be voted in the Lower House’s Special Committee only in the first week of May, but negotiations surrounding the details of the proposal still appear to be happening, and special attention will be paid to these developments. According to our calculations, the contents expressed in the report so far are consistent with a fiscal impact of 57% of the original proposal sent by the government, equivalent to 1.1 p.p. of GDP in 2025 in savings compared to the scenario in which no reform is approved. Importantly, if the reform passes as it is and the minimum wage rule also changes to readjust only in line with inflation, social security expenditure will likely stabilize as a percentage of GDP over the next 10 years, following a continuous rising trend since the 90s.
  • BCB placed the full offering of 16,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 16,000 contracts on April 24. 
COLOMBIA
  • The external imbalance correction process continued in February. The trade deficit came in at USD 817 million in February (February 2016: USD 1.0 billion), broadly in line with our forecast (USD 824 million) and slightly larger than market consensus (USD 723 million). As a result, the rolling 12-month trade deficit narrowed to USD 10.8 billion from USD 11.8 billion in 2016 (USD 15.9 billion in 2015). At the margin, the trade deficit is also declining gradually. The annualized trade deficit dropped to USD 7.7 billion in the quarter ending in February, from the USD 8.1 billion deficit estimated for 4Q16. Imports increased 5.4% y/y in February (previous: +0.2%), resulting in a 0.7% rise in the quarter ending in February (4Q16: -8.4%). This is the first moving-quarter annual increase since February 2015. In the month, the pick-up in oil prices from one year ago offset the decline in export volumes. The same trend can be seen for coal and coffee exports. Total exports increased 15.8% y/y in February (previous: 42.8%) leading to a 30.1% rise in the quarter ending in February (4Q16: +14.4%; 3Q16: -8.8%). Overall, as oil prices stabilize at a higher level than in previous years and domestic demand remains fragile, further narrowing of the trade deficit is likely. As a result, we see the current account deficit shrinking to 3.6% of GDP from the 4.4% of GDP last year. Full Report
  • Consumer confidence ended the first quarter of the year in negative territory, adding five consecutive quarters in pessimistic terrain. Think-tank Fedesarrollo’s consumer sentiment index came in at in at -21.1 points in March (0 is neutral), lower than the -20.1 points one year before (February: -24.3). The fall in sentiment came by hand of a deterioration in the expectations component, to -18.3 from -13.9 on year prior (February: -19.9), while current economic conditions showed some improvement from one year ago to -25.4 after recording -29.4 in March 2016. The fall in the expectations component comes from fewer individuals expending their own household or the country will be in a better situation one year from now. Meanwhile, within current economic conditions, fewer individuals felt pessimistic about purchasing household appliances (-28.8 versus -42.4 one year before), while a larger fraction felt their household was worse-off than one year ago (-22.1, from -16.5 in March last year). This data, alongside disappointing sectorial indicators published earlier in the week, will likely reinforce the central bank’s concern with an excessive deceleration of the economy, leading to the monetary easing cycle continuing this month. Additionally, we acknowledge low private sentiment puts a downside risks to our expected activity growth of 2.3% (2016: 2.0%).
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the green as volatility gauges decreased. Treasuries widened as US officials reinforced their commitment to the governments’ pro-growth agenda. Treasury Secretary Mnuchin stated in an interview that the department is “close to bringing forward a major tax reform”. For the 5-year, yields widened 3bps to 1.77% and the 10-year went up 2bps to 2.24%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices slightly fell (WTI: -0.28% to USD 50.71/bbl) and metals posted gains (iron ore: +1.50%, copper: +0.45%) as China announced further measures to reduce the corporate tax burden. In LatAm FX, currencies under our coverage appreciated. The MXN is trading at 18.79/USD (+0.25%) and the COP posted gains of 0.62% to 2,851.90/USD. The BRL registered gains of 0.18% closing at 3.1473/USD. The CLP slightly appreciated to 649.60/USD (+0.09%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded lower at the margin. CDS in Chile stood flat at 79bps. Meanwhile, Brazilian, Mexican and Colombian spreads inched down 1bp to 227bps, 131bps and 136bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: In DI Futures, the very front end narrowed 1-2bps after mid-month inflation surprised to the downside (see Macro Backdrop). In contrast, the far back end widened 3bps on noisy news flow on the Social Security reform. Also, investors remained cautious ahead of the national holiday Friday (April 21) and the French presidential elections Sunday (April 23). For the Jan-25, yields went up 3bps to 10.35%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded higher in the session, tracking US Treasuries. In TIIE swaps, the 1-year increased 5bps to 7.19% and the 5-year went 3bps up to 7.23%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve bear-steepened. In Camara swaps, the 1-year inched up 1bp to 2.54% and the5-year increased 5bps to 3.37%. Chile Rates Tracker In Colombia, the front end and the belly narrowed 1-2bps as consumer confidence slipped further into pessimistic territory (see Macro Backdrop) and also after Banrep’s Maiguashca interview. She views the recent downside surprise in activity data (retail and industrial production) as a “huge concern”, adding it is key to monitor the effects of the demand weakness over core inflation. In IBR Swaps, the 9-month narrowed 2bps to 5.66% and the 5-year decreased to 2bps to 5.29%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, FGV’s industrial business confidence preview for April will be released (Mon.). We expect another moderate increase in seasonally adjusted terms. The final industrial business confidence reading by FGV will also be released (Fri.). Then, the nationwide unemployment rate will also hit the wires (Fri.). We expect the rate to reach 13.5% in the quarter ended in March, standing still at 13.1% in seasonally adjusted terms. On fiscal accounts, March’s tax collection will be released throughout the week. We forecast BRL 99.5 billion in tax collections. Moreover, the consolidated primary budget balance for March will come through (Fri.). We expect a BRL 11.8 billion deficit, with the central government result (due Thur.) posting a BRL 8.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.0 billion deficit (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Onto the balance of payments report (Tue.), we expect a current account surplus of USD 50 million in March, topping last year’s deficit of USD 863 million for the same month. Over twelve months, the current account deficit should sum to USD 21.9 billion (-1.2% of GDP). We expect direct investment in the country (DIC) to register inflows of USD 7.0 billion in March - if confirmed, DIC will amount to USD 86 billion over 12 months. Finally, the Lower House may also vote the labor reform during the week. 
  • In Mexico, the statistics institute (INEGI) will publish CPI inflation figures for the first half of April (Mon.). The CPI posted a 0.61% m/m variation in March largely explained by tradable prices (core goods), which increased 0.78%. Along with the inflation data, INEGI will also publish February´s monthly GDP proxy (IGAE) (Mon.). Activity seems more resilient to the shocks than we expected, creating a favorable carry-over for this year. Then, INEGI will announce the growth rate of February´s retail sales (Wed.). In January, retail sales fell 1.1% from December, posting two consecutive declines, bringing quarter-over-quarter annualized growth down to 2.2% (December: 7.0% q/q). Moreover, INEGI will publish trade balance for March (Thu.). We expect the trade deficit to continue narrowing on the back of higher U.S. growth, a competitive real exchange rate and a deceleration of internal demand. Still, INEGI will release the GDP figures for 1Q17 (Fri.). We have recently revised our GDP growth forecast for 2017 to 1.8% (from: 1.6%). Still, higher inflation, tighter macro policies and remaining uncertainties over trade relations with the U.S. are consistent with a slowdown from 2016. Finally, the Ministry of Finance will announce the fiscal balance for March (Fri.). We expect that a whopping dividend from the central bank will likely allow the government to surpass the fiscal targets set for 2017, reducing the odds of a sovereign rating downgrade.
  • In Chile, INE will publish the national unemployment rate for 1Q17 (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.6%, from 6.3% in the equivalent period last year, and decelerating job creation. Recent data has shown that employment growth is exclusively sustained by low quality jobs as salaried jobs are being shed, a reflection of an even weaker labor market. Then, the national statistics agency (INE) will publish the industrial activity indicators for the month of March (Fri.). We expect manufacturing production to contract 1.5% from last year (February: -1.0%), negatively affected by metal related manufacturing.
  • In Colombia, the highlight of the week in Colombia will be central bank’s monthly monetary policy meeting (Fri.). We expect another 25-bp rate cut this month, taking the policy rate to 6.75%, as the central bank remains cautious. Looking ahead, we cannot rule out the possibility of more aggressive moves. Then, Fedesarrollo will publish the March retail and industrial confidence levels (Thu.). With the economy continuing to show signs of weakness, we expect confidence levels to remain at low levels. Moreover, the national unemployment rate for the month of March will be released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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