Itaú BBA - Copom cuts Selic by 100bps

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Copom cuts Selic by 100bps

April 12, 2017

We expect the board to repeat the move in its next meeting, on May 30-31.

With information available until 6:30pm Brasilia time


  • The Copom delivered the widely expected outcome, a 100bps rate cut taking the Selic rate to 11.25% p.a., in an unanimous vote. The statement indicates that, for the moment, 100bps is the preferred pace of easing, and we expect the Copom to repeat the move in its next meeting, on May 30-31, and to take the Selic to 8.25% by the end of the year. We will have more information on the Copom´s thinking with the release of the meeting minutes on Thursday (April 20).
  • Long Brazilian yields widened on concerns over the fiscal impact of alternative transition rules of the Social Security Reform. In DI Futures, the Jan-19 increased 4bps to 9.42% and the Jan-21 went 4bps up to 9.87%. The House of Representatives announced in its website that rapporteur Maia will present his report on the Social Security reform next Tuesday (April 18), as previously scheduled.

Macro Backdrop


  • Core retail sales dropped 1.2% y/y, better than the median of market estimates (-7.0%) and our forecast (-7.8%). On a monthly basis, sales contracted 0.2% m/m. Census bureau IBGE implemented a new adjustment in the methodology applied to the monthly retail survey, leading to a strong increase in sales volumes in January and higher-than-expected readings in February as well. In January, core retail sales were revised upward by 6.2%. The revision led to a seasonally-adjusted increase of 5.5% for that month, followed by a slight decline of 0.2% in February. The January revision distorted the seasonally-adjusted monthly change, but the 0.2% m/m decline in February still supports improvement early in the year. 
  • Broad sales dropped 4.2% y/y in February, also better than the median of market expectations and our estimate (both at -7.0%). On a monthly basis, however, the index grew 1.4% m/m. Broad retail sales (which includes vehicles and construction material) in January were revised upward by 5.1%. The revision led to a seasonally-adjusted increase of 2.8% for the month, followed by another gain of 1.4% in February. Looking forward, we expect retail sales to continue showing some recover in next months, driven by the disinflation effect on consumer’s real income and by withdrawals allowed from inactive accounts held under employment protection program FGTS. In the second half, progress will depend on the stabilization of the labor market. Full Report
  • The minutes of the most recent monetary policy decision in Mexico revealed that the board unanimously voted to reduce the pace of interest rate hikes to 25bps. Most board members acknowledge that, in spite of the recent MXN appreciation, the main challenge for the central bank is to contain second-round effects. However, these same members highlighted that monetary policy has a lag effect on prices and that the 325-bp rate increase implemented since 2015 “has generated an appropriate stance to deal with the shocks.” In this context, some board members mentioned the increase in the interest rate differential with the U.S., with one of them suggesting that Mexico might not need to follow the Fed ahead. However, two members were more cautious, indicating that new interest rate hikes will probably be necessary, with one of them saying that Mexico should hike at least as much as the Fed does. We expect Mexico’s central bank to continue hiking with the Fed for now as we see two additional rate hikes this year, after each of the next two expected Fed hikes. Beyond that, depending on the evolution of inflation and the exchange rate, the central bank will likely end the cycle. Full Report
  • We publish our scenario review for the month of April. The uncertainties over trade relations with the U.S. remain, but they have diminished recently. We have 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. The MXN has strengthened substantially, and with that there is less upside risk for inflation this year. In this context, the central bank is finding room to reduce the pace of monetary policy tightening. At the same time, the twin deficits are narrowing, adding to the more positive sentiment. The central bank announced that it will remit a dividend of MXN 321.7 billion (1.5 p.p. of GDP) to the Treasury in April, making it very likely that the government will meet its fiscal targets in 2017. This reduces the odds of a sovereign downgrade. Full Report
  • We publish our scenario review for the month of April. Investment remained the main drag on activity in 2016, contracting for the third consecutive year. A major labor strike at the largest copper mine in February and March has dented activity further. The labor market continues to hint at less support for private consumption ahead; meanwhile, business confidence is still subdued. In this context, only a mild improvement in activity is expected this year, aided by higher copper prices, stronger global growth, falling interest rates and lower inflation. Furthermore, the central bank signaled that only one more 25-bp rate cut is on its way, in spite of the economic weakness and low inflation. We expect that, because economic data fails to show a notable recovery ahead and inflation remains low, the central bank will eventually cut rates some more. In all, we continue to see two additional rate cuts this year, one in 2Q17 and the final cut (to 2.5%) coming in 2H17. Full Report
  • The central bank’s April survey shows inflation expectations continue to fall as the impacts from the supply shocks fade. The latest inflation expectations bolster the likelihood that the central bank will cut the policy rate at the April 28 monetary policy meeting. The central bank cut the policy rate by 25bps to 7.0% at its March meeting, as concern over weak activity gains traction. Nevertheless, the central bank has adopted a gradual approach to the easing cycle given the price inertia still present in core prices that could slow the convergence to the 3% target. At the previous meeting, the central bank made explicit reference to the rate cut being consistent with meeting the 3% inflation target in 2018, showing the board is now focusing on a longer forecast horizon than before. Until recently, the central bank was emphasizing the goal of bringing inflation to below 4% this year. So, the decline in 2018 inflation expectations to 3.4% (previous: 3.5%), will enhance the continuation of the easing cycle. The yearend 2017 median inflation expectation also dipped to 4.3%, from 4.41% in the March edition. The core inflation expectation measure (excluding food prices) also registered declines at all measured horizons and is currently at 3.25% for yearend 2018. In March, the disinflation process advanced, with consumer price inflation dropping below 5% for the first time since August 2015.
  • In this context, analysts expect a rate cut this month and now see the policy rate ending this year at 5.75% (previously: 6.0%) with the implementation of consecutive 25-bp rate cuts until August. Thereafter, the policy rate is now expected to reach 5.5% in January 2018 and stay there until the conclusion of the survey’s forecast horizon (March 2018). We too see the need for a less contractionary policy rate to support weak activity. With inflation and inflation expectations retreating and activity remaining weak, we expect the board of the central bank to continue to lower the policy rate later this month (by 25-bp to 6.75%), and ending the year at 5.50%.
  • We publish our commodities review for April. Commodity prices fell in March, but this movement is related to specific factors and not a sign of a weak global economy. We lowered our price forecasts for soybeans (stronger crops in U.S. in 2017) and sugar (weaker demand from India). Furthermore, we expect our commodity index to fall by 4.0% from current levels in the course of 2017 due to a slowdown in China that will lead to lower metal prices. Note, however, that even with this drop the Itaú Commodity Index (ICI) will still be 9% above the average of the last couple of years. Full Report

Market Developments 

  • GLOBAL MARKETS: High beta currencies strengthened (EMFX: +0.38%) as geopolitical concerns ease and on comments made by President Trump. In an interview, he said the USD “is getting too strong”. Moreover, US equity markets were on the red and Treasuries tighten, as the 5-year decreased 3bps to 1.80%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB Futures Index: -0.33%) as oil and metals decreased. Oil prices fell (WTI: -1.07% to USD 52.83/bbl) as the weekly DOE report showed that the US production gain offsets the stockpile decline. In LatAm FX, all currencies under our coverage posted gains on a weak USD session (DXY: -0.58%). The COP appreciated 0.14% to 2,871.84/USD and the CLP strengthened 0.13% to 653.63/USD. The MXN outperformed its peers, trading 1.24% higher, to 18.55/USD. The BRL also appreciated, closing at 3.1238/USD (+0.44%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor increased again. CDS in Chile and Brazil increased 3bps to 76bps and 227bps, respectively. In Mexico, spreads increased a tad less, to 130bps (+2bps). Colombian country risk increased the most in the session, to 136bps (+4bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened on concerns over the transition rules of the Social Security Reform. In DI Futures, the Jan-19 increased 4bps to 9.42% and the Jan-21 went 4bps up to 9.87%. The House of Representatives announced in its website that rapporteur Maia will present his report on the Social Security reform next Tuesday (April 18), as previously scheduled. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican shifted 4-bps downwards, on average. In TIIE swaps, the 9-month fell 4bps to 7.10% and the 5-year went down 4bp to 7.23%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields narrowed after the central bank’s survey. BCCh’s latest Traders survey showed investors look for the policy rate in 6-month time at 2.50% (in the March 22 survey: 2.75%), and in 24-month time at 3.00% (previous: 3.25%). In Camara swaps, the 1-year fell 3bps to 2.65% and the 10-year went down 10bps to 3.91%. The curve implies 40-52bps in rate cuts by the end of the year. Chile Rates Tracker In Colombia, yields traded range bound. In IBR swaps, while short rates (before 1-year) traded slightly lower (9-month: -2bps to 5.88%), long yields increased as the 5-year went up 1bp to 5.55%, the 10-year widened 3bps to 6.14%. Colombia Rates Tracker

Thursday Events

  • In Brazil, the Service Sector Survey (PMS) will be released. Then, the government will submit the Budgetary Guidelines Law (LDO), which establishes spending targets for the federal government (deadline Thu.).
  • In Chile, the BCCh will hold its monthly monetary policy meeting. In spite of the weak activity and moderate inflation registered in the lead up to the meeting, we expect the central bank to leave the policy rate unchanged at 3.0%, as a cautious approach is adopted. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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