Itaú BBA - DI futures curve steepen on Copom guidance

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DI futures curve steepen on Copom guidance

October 31, 2017

The belly of the Brazilian curve narrowed after the Copom minutes as the market reassessed the odds of the easing cycle extending into the new year.

With information available until 6:30pm Brasilia time

Highlights

  • The belly of the Brazilian curve narrowed after the Copom minutes (see Macro Backdrop) as the market reassessed the odds of the easing cycle extending into the new year. In DI futures, the Jan-19 fell 6bps to 7.27% and the Jan-25 went up 3bps to 10.18%. 
  • In FX, the CLP outperformed in the region (+0.55% to 635.34/USD). The MXN is at 19.1579/USD (-0.61%) and the BRL appreciated 0.28% to 3.2713/USD. The COP bucked the regional trend, closing at 3,042/USD (-0.60%). 

Macro Backdrop

BRAZIL
  • Copom minutes: is the end coming? The Committee states that, considering the basic scenario and balance of risks, a 75bps rate cut is consistent with inflation convergence to the target in the relevant policy horizon. In paragraph 29, the committee notes again that the economic juncture warrants sub-structural (or neutral) interest rates. Looking forward, in paragraph 31 the Copom indicates that, under the basic scenario, a moderate reduction of the pace in the next policy meeting (to 50bps) seems, at the moment, adequate. 
  • The minutes outline a flight path for the Selic on its way to 7.0% by year-end. The February decision is purposefully left wide open. This suggests that the authorities may consider, given the magnitude of estimated economic slack and the balance of risks around the basic scenario, that a little more stimulus than currently priced in may be appropriate. We thus keep, for now, our call that the end will only come in February, with a final 50bps rate cut, taking the Selic to 6.5%. Full Report
  • Labor market still driven by growth in informal jobs in 3Q17. The nation-wide unemployment rate reached 12.4% in September, in line with expectations (median of market estimates: 12.4%; our call: 12.5%). The indicator increased 0.6 p.p. from 11.8% one year earlier. Applying our seasonal adjustment, the unemployment rate was stable at 12.6%. The labor force grew 0.2% at margin and 2.4% yoy. The participation rate (ratio of the labor force to the working-age population) remained stable at 61.8%, above its historical average (61.3%). Employment advanced 0.4% mom/sa and 1.6% yoy. This trend is still influenced mainly by informal jobs. Full Report
  • According to FGV’s latest industry survey, business confidence in the industrial sector rose 2.8% mom/sa in October to 95.5. The final reading came in 0.8 p.p. above the preview. The confidence breakdown (expectations x current situation) shows a deep improvement in the current situation index (5.4%), and small gains in expectations (0.3%). Expected demand rose 3.3%, extending strong gains shown in the previous survey. Actual demand rose 8.4% and continues to trend upward. Capacity utilization rose 0.4 p.p. to 74.3, barely above recent lows. Inventories (% excessive minus insufficient) fell to 7.2% from 8.1%, fully offsetting the increase in the previous survey. Eleven out of twenty activities showed an increase (diffusion: 55%), worse than the aggregate result. Business Confidence Heatmap
  • FGV also released its monthly services survey: confidence in the services sector rose 2.6% in October to 87.8, up for the 4th month in a row. The improvement was driven by both the current situation index (2.8%) and expectations (2.3%). 

MEXICO

  • GDP growth weakened in 3Q17, both in year-over-year and sequential terms, dragged by two large earthquakes, which disrupted economic activity in September. The flash estimate of GDP growth came in at 1.6% year-over-year, in line with our forecast and median market expectations (both at 1.6%). This growth rate implies that the monthly GDP proxy (IGAE) expanded somewhere in between 1.3% and 1.6% in September. According to calendar and seasonally-adjusted data reported by the statistics institute (INEGI), the flash estimate of GDP growth was 1.7% year-over-year and marked a significant slowdown with respect to 2Q17 (3% year-over-year). At the margin, GDP fell 0.2% from the previous quarter, after posting robust sequential expansions 0.6% and 0.7% in 2Q17 and 1Q17. Lastly, the volatile primary sectors (mostly agriculture) provided some cushion, posting a sequential expansion of 0.5% (after falling by 1.9% in 2Q17).
  • Overall, the 3Q17 flash GDP data poses a negative risk to our 2.3% growth forecast for 2017. Nevertheless, GDP will likely rebound in 4Q17 and we see significant buffers for activity in coming quarters. Manufacturing output will likely be boosted by the strength of the US industry, as the US ISM manufacturing index reached 60.8 in September (the highest level in thirteen years). Furthermore, we believe falling inflation coupled with robust employment (growing consistently above 4% year-over-year in the first nine months of 2017) will sustain consumption growth (service sectors were performing strongly until August). On the negative side, the poor performance of oil output and construction activity – reflecting the government’s fiscal consolidation (which has slashed public investment) – will likely persist. Also, the uncertainties associated to Nafta and the presidential elections pose the risk of a more pronounced deterioration of investment, with negative implications for many sectors of the economy. Full Report
CHILE
  • The unemployment rate remained low in the third quarter of the year, but job composition continues to point at a fragile labor market. The unemployment rate reached 6.7% in the quarter, down by 0.1 percentage points in 12 months. The print came in above the 6.5% Bloomberg market consensus, and our 6.6% estimate. We expect the unemployment rate to average 6.7% this year, up from the 6.5% recorded last year. The unfavorable composition of job growth will likely keep the private consumption recovery limited. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the FOMC meeting, volatility gauges receded and US Treasury yields inched up (5-year: +1bp to 2.01%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities, oil prices once again (WTI: +0.51% to USD 54.65/bbl). In agriculture, wheat dropped 1.47% and corn fell 0.86%. Metals, on the other hand, posted gains as iron ore increased 1.50%. In FX, the CLP outperformed in the region (+0.55% to 635.34/USD). The MXN is at 19.1579/USD (-0.61%) and the BRL appreciated 0.28% to 3.2713/USD. The COP bucked the regional trend, closing at 3,042/USD (-0.60%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) went down all across LatAm. In Brazil, Mexico and Colombia, CDS inched down 1bp to 172bps, 107bps and 110bps, respectively. Meanwhile, Chilean spreads stood at 51bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened after the Copom minutes (see Macro Backdrop) as the market reassessed the odds of the easing cycle extending into the new year. In DI futures, the Jan-19 fell 6bps to 7.27% and the Jan-25 went up 3bps to 10.18%. Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican rates narrowed as the MXN strengthened. In TIIE swaps, the 5-year decreased 3bps to 7.23%. Breakevens also went south as the 5-year fell 4bps to 3.84%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields narrowed as the unemployment rate came in worse than expected (see Macro Backdrop). In Camara swaps, the front went down 3bps (1-year: -3bps to 2.39%). Chile Rates Tracker In Colombia, yields had a quiet session as the IBR swaps curve was broadly stable (1-year at 4.59%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, September’s industrial production will be released (Wed.). We expect a 0.7% mom/sa increase. Also, Fenabrave’s vehicle sales for October will come through (Wed.). On external accounts, we expect October’s trade balance (due Wed.) to once again post a strong surplus (USD 5.0 billion).
  • In Chile, INE will publish the private consumption activity indicators for September (Fri.). We expect the commercial activity index to have increased 3.2% from last year.
  • In Colombia, DANE will publish exports for the month of September (Wed.). We expect exports to come in at USD 3.3 billion, boosted by a recovery of coal exports.
  • In Argentina, tax collection for October will see the light (Wed.). We expect taxes to increase 35.6% yoy (to ARS 227.2 billion) in October. Moreover, the central bank will release its monthly expectations survey (Thu.). At last, the car-makers association (ADEFA) will release October’s data on production, exports and domestic sales to car dealers (Fri.).

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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