Itaú BBA - DI futures back to recent lows on a thin-liquidity day

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DI futures back to recent lows on a thin-liquidity day

May 29, 2017

Liquidity was thin in LatAm markets due to holidays in the US, UK and China.

With information available until 6:30pm Brasilia time

Highlights

  • Liquidity was thin in LatAm markets due to holidays in the US, UK and China. 
  • The Brazilian curve bull flattened in the session. In DI futures, the Jan-18 fell 7bps to 9.27%, close to mid-May levels. On the other hand, the Jan-21 went down 14bps to 10.35% - level last seen in early February. For the Copom meeting this week, the curve still implies almost 100bps in cuts. 
  • In FX, currencies under our coverage were mixed. On one hand, the CLP depreciated 0.39% to 674.70/USD. However, the MXN is trading 0.22% higher to 18.47/USD. The BRL appreciated at the margin, closing at 3.2569/USD (+0.10%). 
  • Colombian markets were closed due to the Ascension holiday.

Macro Backdrop

BRAZIL
  • Inflation expectations slightly increased. According to BCB’s Focus survey, inflation expectations for 2017 inched up to 3.95% (+3bps), and 2018 expectations rose to 4.40% (+6bps). Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. Markets now see the BRL at 3.25/USD by YE17 (previous: 3.23/USD) and at 337/USD by YE18 (previous: 3.36/USD). At last, GDP growth expectations were more or less stable: to 0.49% for 2017 (previous: 0.50%) and to 2.48% for 2018 (from 2.50%). See BCB Report
  • According to FGV’s latest industry survey, business confidence in the industrial sector (FGV) rose 1.2% mom s.a. in May, slightly below the preview (1.3%). The final results adds forms filled between May 18 and May 24 to the preview (May 2 – May 17). At first, the confidence does not show a material decline in confidence following the increase in political uncertainty. However, a stable index, despite a 9.5% increase in current demand, suggests it might have gone up further without the episode. Additional takeaways from the industry survey are: current industrial demand rose 9.5% and expected demand rose 4.9%; the confidence breakdown shows improvement in both the current situation index (+0.8%) and expectations (1.4%); capacity utilization was stable at 74.7%; inventories (% excessive minus insufficient) rose slightly to 7.0% from 6.7% in the previous month; and eight out of twenty activities showed an increase (diffusion: 40%), consistent with a weaker aggregate result for confidence. Business Confidence Heatmap
  • President Temer nominated Professor Torquato Jardim as the new Defense Minister. The previous minister, Osmar Serraglio, will now head the Transparency Ministry.
  • In the roll over auction, the BCB placed the full offering of 8,000 FX swaps. After closing, the central bank called for a roll over auction of up to 8,700 contracts (USD 435 million) on May 30. 
Market Developments 
  • GLOBAL MARKETS: Very low liquidity due to holidays in the US, UK and China. In rates, EONIA narrowed (10-year: -3bps to 0.56%) after ECB’s Draghi speech at the European Parliament. As expected, he acknowledged that downside risks to the EU economy have diminished but added the Eurozone still needs “an extraordinary amount of monetary support”. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices went up at the margin (Brent: +0.27% to USD 52.29/bbl). In LatAm FX, currencies under our coverage were mixed. On one hand, the CLP depreciated 0.39% to 674.70/USD. However, the MXN is trading 0.22% higher to 18.47/USD. The BRL appreciated at the margin, closing at 3.2569/USD (+0.10%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. Chilean and Mexican spreads stood flat at 71bps and 116bps, respectively. CDS in Colombia narrowed 1bp to 124bps. In Brazil, county risk went down 1bp to 238bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened in the session. In DI futures, the Jan-18 fell 7bps to 9.27% and the Jan-21 went down 14bps to 10.35%. For the Copom meeting this week, the still curve implies almost 100bps in cuts as of Friday (May 26). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields were mixed in the session. In TIIE swaps, the 1-year fell 2bps to 7.51% and the 5-year widened 3bps to 7.44%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded range bound. In Camara swaps, most rates stood flat (1-year: at 2.52%, 5-year: at 3.55%). Chile Rates Tracker In Colombia, markets were closed due to the Ascension holiday. 

Upcoming Events

  • In Brazil, all eyes will be on the Copom meeting (Wed.). We expect the central bank to deliver a 100-bp cut, thus maintaining the pace of the previous meeting, compared to previous expectations of a sharper cut. Moving forward, the voting of the labor reform in the economic affairs commission of the Senate is scheduled to take place on Tuesday. Then, this year’s first-quarter GDP figure will be the main highlight on economic activity (Thu.). We expect a 1.1% quarter-over-quarter seasonally adjusted increase, the first positive figure since 4Q14. In addition, April’s industrial production will be released (Fri.), for which we expect a flat figure, seasonally adjusted. Moreover, the nationwide unemployment rate for April will come out (Wed.). We expect a 0.1 p.p. increase to 13.3% (according to our seasonal adjustment). Also to be released are ABRAS supermarket sales for April (Tue.) and FEBABRAVE’s vehicle sales for May (Thu.). On external accounts, we expect May’s trade balance (due Thu.) to once again post a strong surplus (USD 7.0 billion) in May, topping the surplus of USD 6.4 billion in May last year. 
  • In Mexico, the Ministry of Finance (Hacienda) will announce April’s fiscal balance (Mon.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway and oil revenues improve. Then, Banxico will publish the second Quarterly Inflation Report of the year (Wed.). We expect the central bank to increase its official GDP growth forecast for 2017 – currently 1.3%-2.3%. We also expect a more hawkish tone on inflation, in line with May’s monetary policy statement. Moreover, Banxico will publish the minutes of May’s monetary policy meeting (Thu.). We believe the minutes are likely to show more hawkish views on inflation, at least from some board members. Also, the Central Bank will publish May’s Economist Survey (Thu.). We expect an increase in both GDP growth and inflation expectations for 2017, given the upward surprises in the latest data. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of April (Tue.). We expect manufacturing production to have contracted 2.5% from last year (+1.9% in March). Then, INE will publish the national unemployment rate for the quarter ending in April (Wed.). We expect the labor market to continue loosening, with the unemployment rate ticking up to 6.8% (6.4% one year ago). Moreover, the central bank will publish the minutes from the May monetary policy meeting (Fri.). Given the weak economy and low inflation, we expect the minutes to shed some light on the circumstances that could lead the central bank to reopen the doors for rate cuts.  Finally, the national statistics agency (INE) will publish the private consumption activity indicators for April (Fri.). We expect the commercial activity index to have increased 1.0% from last year (+4.9% previously).
  • In Colombia, the national unemployment rate for the month of April will be released (Wed.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. Going forward, DANE will publish export data for April (Fri.). We expect exports to come in at USD 2.6 billion, representing annual growth of 7.9%, lifted by oil exports.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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