Itaú BBA - DI futures narrow as inflation expectations decline

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DI futures narrow as inflation expectations decline

June 12, 2017

Brazilian rates fell as IPCA expectations for 2017 considerably fell.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian rates narrowed as IPCA expectations for 2017 considerably fell (see Macro Backdrop). In DI futures, the Jan-18 fell 1bp to 9.15% and the Jan-19 went down 3bps to 9.18%. For the next Copom meeting (July 25-26), the curve now implies roughly 79bps in cuts from 77bps as of Friday. 
  • In FX, currencies under our coverage were mixed. The MXN is trading at 18.13/USD (+0.21%). The CLP posted gains of 0.34% to 661.22/USD. On the other hand, the COP weakened 0.51% to 2,932.10/USD and the BRL depreciated 0.67% to 3.3189/USD. 

Macro Backdrop

BRAZIL
  • Inflation expectations for 2017 recede again. According to BCB’s Focus survey, inflation expectations for 2017 dropped to 3.71% (-19bps), and to 4.37% (-3bps) for 2018. Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. Moreover, GDP growth expectations inched down to 0.41% for 2017 (previous: 0.50%) and deteriorated to 2.30% for 2018 (previous: 2.40%). See BCB Report
  • We published our scenario review for the month of June. A more challenging political scene tends to delay reforms in Congress, making fiscal rebalancing more difficult and, consequently, affecting confidence levels and asset prices. We now anticipate a weaker BRL, at 3.50/USD in 2017 and 3.60/USD in 2018. We revised our forecast for the IPCA consumer price index downward for 2017 to 3.7% from 3.9%, but raised our call for 2018 to 4.1%, from 3.8%, due to exchange-rate depreciation. A complex scenario, more uncertainties surrounding reforms and a milder decline in interest rates will likely weigh on economic activity. We thus reduced our estimates for GDP growth to 0.3% this year and 2.7% in 2018. Full Report
  • The BCB placed the full offering of 8,200 FX swaps. After closing, the central bank called for a roll over auction of up to 8,200 contracts on June 13. 

GLOBAL

  • Supermarket & department store (ANTAD) same-store sales surprised to the upside in May, but we note a decelerating trend in private consumption. ANTAD sales grew 5.7% y/y in May – above market expectations (4%) and our own forecast (3.5%) – with the 3-month moving average growth rate picking up to 5.2% y/y (up from 4.2% in April). Nevertheless, the strength of ANTAD sales in May is largely attributable to Mother’s Day promotions in department stores (whose same store sales grew 16.1% y/y). In contrast, supermarkets (3.7% y/y) and specialized stores showed more modest growth rates. Looking at the broader picture of private consumption, we actually see signs of a slowdown at the margin. Retail sales posted a quarter-over-quarter annualized contraction in 1Q17 (-2.2% qoq/saar, down from a 6.7% expansion in 4Q16) and the monthly proxy for private consumption (better correlated with private consumption in the national accounts, not announced yet) also slowed down during the same period (2.3% qoq/saar, from 3.9% in 4Q16).
  • In our view, private consumption will weaken more visibly in coming quarters because of weaker labor market conditions. In spite of inflation surpassing 6% y/y in May, the real wage bill has only slowed down moderately because of robust formal employment (growing at an average pace of 4.3% y/y in the first five months of 2017). However, formal employment creation seems bound to deteriorate as investment slows down (gross fixed investment contracted 2% y/y in 1Q17, according to calendar-adjusted data reported by INEGI). Real wages are failing, as inflation outstrips the growth of nominal wages. Moreover, other fundamentals of private consumption (credit, remittances expressed in pesos, and consumer confidence) have turned less supportive since last year.
GLOBAL
  • We published our commodities review for June. Commodities continued to decline in May, led by metal and energy prices. OPEC’s deal and the decline in U.S. inventories are expected to support oil prices, but only in the short term. We maintained our Brent forecast for YE17 at USD 54/bbl, but lowered our forecast for YE18 to USD 51/bbl due to the decline in the marginal cost of U.S. shale oil producers. Full Report
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the red ahead of important central bank meetings this week (Fed, BoE and BoJ). Moreover, France first round of Parliamentary elections suggest a strong majority for Macron’s coalition. The President’s victory is likely to translate into more than 400 seats (nearly 70%) in the National Assembly after the second round of voting on June 18. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB futues: -0.47%) on the back of copper (-1.30%), soybean (-1.09%) and gold (-0.21%). However, oil prices edged up (WTI: +0.31% to 45.97/USD) following its drop last week after Saudi Arabia and Russia said crude markets will rebalance. According to Bloomberg, Saudi Energy Minister Khalid al-Falih said inventories are declining and reductions will accelerate in the next three to four months. In FX, currencies under our coverage were mixed. The MXN is trading at 18.13/USD (+0.21%). The CLP posted gains of 0.34% to 661.22/USD. On the other hand, the COP weakened 0.51% to 2,932.10/USD and the BRL depreciated 0.67% to 3.3189/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor were mixed. Chilean spreads stood flat at 69bps. In Colombia, country risk narrowed 1bp to 126bps. On the other hand, CDS in Brazil and Mexico inched up 1bp to 238bps and 110bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed as short inflation expectations fell considerably (see Macro Backdrop). In DI futures, the Jan-18 fell 1bp to 9.15% and the Jan-19 went down 3bps to 9.18%. For the next Copom meeting (July 25-26), the curve now implies roughly 79bps in cuts from 77bps as of Friday. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates were mixed in the session. In TIIE swaps, the 1-year inched down 1bp to 7.42% and the 5-year increased 1bp to 7.16%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed 1bp in the session. In Camara swaps, the 1-year stood flat ar 2.49%, whereas past 2-year, they fell 1bp (5-year: -1bp to 3.42%). Chile Rates Tracker In Colombia, short rates narrowed. In IBR swaps, the 1-year inched down 3bps to 5.10% and the 5-year fell 1bp to 5.19%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the key releases for the week will be April’s retail sales numbers (Tue.) and the Service Sector Survey (PMS) (Wed.). We forecast a 1.6% decline in core retail (month-over-month, seasonally adjusted), and a 0.2% drop in the broad segment, which includes vehicle sales and construction material. April’s PMS may have a relevant impact on GDP estimates for 2Q17 - we expect the headline to fall 5.8% year-over-year. Furthermore, the BCB will release during the week its monthly activity index (IBC-Br) for April. Then, the reading of the labor reform report in the Senate’s Social Affairs Committee may occur during the week. The proposal has already been approved by the Senate’s Economic Affairs Committee. 
  • In Chile, the central bank will hold its June monetary policy meeting (Thu.). The central bank has implemented four 25-bp rate cuts in the first five months of the year, taking the policy rate to 2.5%. We expect BCCh to stay on hold this month. The minutes from the previous meeting alongside the 2Q inflation report released after the May meeting reveal a board that appears content to wait and observe how the economy unfolds given the monetary stimulus already implemented. 
  • In Colombia, activity indicators for the month of April will be published (Thu.). We expect industrial production to decrease 5.0% year over year (+4.8% in March). Meanwhile, retail sales likely saw a 0% growth rate (+1.9% previously). Then, think-tank Fedesarrollo will release the May consumer confidence (Thu.). Falling inflation, lower interest rates, and a firmer currency will likely aid some confidence recovery ahead. During the week, the central bank is expected to publish the current account balance for 1Q17. We expect a USD 2.4 billion deficit, smaller than the USD 3.6 billion deficit in 1Q16, as the trade balance of goods improved from one year ago on the back of recovering commodity prices and a weakening domestic demand.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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