Itaú BBA - DI Futures narrow as markets see the bulk of easing coming before yearend

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DI Futures narrow as markets see the bulk of easing coming before yearend

April 10, 2017

For the next two meetings (April and May), the curve implies roughly 197bps in rate cuts.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian yields decreased substantially as the market revised downwards Selic expectations for YE17 and YE19. Also, after staying for 36 weeks at 4.50%, IPCA expectations for YE18 fell to 4.46% (see Macro Backdrop). In a note, the government clarified that the National Monetary Committee (CMN) will evaluate in June the possibility of changing the inflation target for the year 2019. In Futures, the Jan-18 decreased 10bps to 9.67% and the Jan-21 fell 12bps to 9.81%. For the next two meetings (April and May), the curve implies roughly 197bps in rate cuts.
  • LatAm currencies were mixed in the session. The COP depreciated slightly to 2,865.18/USD (-0.09%) and the MXN is trading 0.08% lower to 18.68/USD. On the other hand, the CLP appreciated to 652.98/USD (+0.41%). Finally, the BRL (+0.47% to 3.1316/USD) started the week on a high note owing to the market’s positive take on senior government officials interviews over the weekend.

Macro Backdrop

BRAZIL
  • Inflation expectations continues heading south in 2019. According to BCB’s Focus survey, median inflation expectations for 2017 slightly declined to 4.09% (-1bp), and 2019 expectations fell to 4.25% (-3bps). The market revised year-end Selic expectations to 8.50% (from: 8.75%) for YE17 and YE19. Also, the market sees a slightly more appreciated BRL, at 3.23/USD by YE17 (from: 3.25/USD), and at 3.47/USD by YE19 (from: 3.50/USD). GDP growth expectations for 2017 fell 6bps to 0.41%. See BCB Report
  • Coincident indicators (ABPO, ABCR) consistent with 0.6% m/m industrial production decline in March. Paper cardboard dispatches (ABPO) fell 0.3% m/m in March, up 7.1% y/y. Traffic of heavy vehicles (ABCR) fell 2.9% m/m in the same month, offsetting a 2.6% increase in February. The index is down 0.7% y/y. Both results are consistent with other coincident indicators released so far, causing only a 0.1 p.p. gain in our industrial production forecast (to: -0.6% m/m; from: -0.7%). It is worth mentioning that the expected decline in March’s industrial production does not change our view of positive GDP growth in 1Q17, as strong agricultural production and a favorable carry-over of industrial production outweigh weak/stagnant results in other indicators. 
  • The Serasa Experian Index for Retail Activity rose 0.6% m/m in March, following a 1.9% gain in the previous month. March’s increase was driven by “supermarket, food and drinks” and “fuel and lubricants”, while other components (durables and construction material) fell over the same period. Combining with other indicators, our preliminary forecasts for March core and broad retail sales stand at -0.4% and -1.6% m/m, respectively. The divergence is explained by other indicators pointing a weaker picture, and also by differences in weights and price indexes between Serasa’s index and official data. Our final forecasts will be out after the release of the official February retail sales (to be released Apr 12 – we forecast core rising 0.1% m/m and broad retail sales up 2.2% m/m) and March’s supermarket sales (ABRAS, to be released after mid-April).
  • Macro Vision: Social Security reform. If approved as originally proposed by the government, the Social Security reform will have an impact in 2025 of 2.0 p.p. of GDP in higher revenues and lower expenditure, compared with the scenario in which no reform is approved. In this report, our macro team estimated that the transition rule to a minimum retirement age of 65 is the proposal with the biggest fiscal impact (1.4% of GDP or 70% of the total impact). However, Arthur Maia (PPS-BA), the reform’s rapporteur in the Lower House, has signaled that the transition rule is one of several issues likely to be amended by Congress. In this report, we estimate the impact from alternative transition rules and asses the fiscal cost of any possible changes. Importantly, the more flexible is the transition, the greater the likelihood the government will be unable to comply with the spending cap by 2025, increasing the need to supplement the reform by either raising taxes or curbing expenditure elsewhere in order to achieve its fiscal rebalancing and ensure public debt trend become sustainable. Full Report
  • Copom Cockpit: Moderate acceleration to 100bps. The Central Bank’s Monetary Policy Committee meets again this week. Recent data confirms inflation’s steady decline and reveals that activity remains weak, despite some improvement on the margin. The Copom's inflation forecasts will likely not change vis-à-vis the 1Q17 Inflation Report. Given this backdrop, we assess that the Committee will carry out a 100-bp interest rate cut, bringing the Selic rate to 11.25%. Regarding the communiqué, we expect the Committee to signal that the extension of the easing cycle will depend on forecasts and inflation expectations for 2019, but also on estimates of the structural interest rate of the Brazilian economy. In addition, the Copom may add that “adjustments” to the pace of monetary easing will depend on estimates of the cycle’s length, forecasts and inflation expectations, and risk factors associated with the scenario - thus reintroducing certain symmetry around expectations of the evolution of monetary policy. Full Report
CHILE
  • Ahead of the primary elections to take place in July, Ricardo Lagos (Chile’s president from 2000 to 2006, Partido Por la Democracia, Concertación) announced today he will not run for president. Mr. Lagos' decision follows the Socialist Party's convention this past weekend where independent senator Alejandro Guillier (the leading candidate on the center-left coalition, according to several polls) was endorsed as the party's candidate for the July 2 primary process. Former president Lagos did not appear as a popular contender among voters according to polls, which never placed him with more than 5% of the voting intent (which compares to the 20-30% range for the leading candidates). Mr. Lagos' decision opens the way for Mr. Guillier to become the governing coalition's presidential candidate for the November election. The implications of the decision by this historical figure of the Concertación/Nueva Mayoría coalition (center-left) will likely go beyond boosting Mr. Guillier’s chances of becoming the coalition’s candidate for the November 19 general election. In fact, the move also increases the possibility the most moderate party within the coalition, the Christian Democrats, take their own candidate (Senator Carolina Goic) to the general election (instead of the coalition’s primary). This would likely put in jeopardy the future of the Nueva Mayoría coalition – which assembled around Michelle Bachelet’s presidential bid.
  • Consumer confidence in March edged up from one year ago, but still remains at low levels. According to Adimark, consumer confidence in the came in at 37.3 points, from 35.5 points one year ago (February 2017: 37.0). As a result, total confidence completed 34 months in pessimistic territory (50 is neutral). Compared to March, only the 5-year economic expectation deteriorated. All short-term economic views improved with the expectation for current purchases of household goods (47.2 points vs. 42.2 one year ago) approaching a neutral level. Additionally, the outlook for the economy over the next 12-months picked up to 44.2 points (March 2016: 39 points). Going forward, business and consumer confidence will likely show improvement as uncertainty over the electoral outcome decreases. Low inflation and interest rates will also be welcomed. Nevertheless, the loosening of the labor will likely limit the improvement to confidence. Low private sentiment has played a key part behind the extended economic slowdown in Chile. We expect GDP growth of 1.8% this year, broadly stable from the 1.6% recorded for 2016.

Market Developments 

  • GLOBAL MARKETS: Volatility gauges increased as US equity markets posted gains and Treasuries narrow. For the 5-year, US yields went down 2bps to 1.90% and for the 10-year they also decreased 2bps to 2.36%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices increase (Brent: +1.43% to USD 56.03/bbl) amid worries over supply disruption in Lybia and metals posted losses (iron ore: -2.63%; copper: -1.57%). Libya’s biggest oil field stopped producing just one week after it reopened, forcing the OPEC member to declare force majeure at a key export terminal, the latest disruptions to the country’s output and shipments of crude. In LatAm FX, currencies under our coverage were mixed. The COP depreciated slightly to 2,865.18/USD (-0.09%) and the MXN is trading 0.08% lower to 18.68/USD. On the other hand, the CLP appreciated to 652.98/USD (+0.41%). Finally, the BRL (+0.47% to 3.1316/USD) started the week on a high note following the weekend interviews with president Temer, Finance Minister Meirelles and the Social Security reform rapporteur Maia. The markets had a good reading of the interviews as they signal the ongoing negotiations between the government and Congress aim at finding common ground for the revised constitutional amendment. Representative Maia indicated the will to present his report on April 18. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded lower across the board. CDS in Mexico and Colombia fell 2bps to 127bps and 131bps, respectively. In Chile, spreads inched down 1bp to 72bps. Brazilian country risk decreased the most, to 222bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields decreased substantially as the market revised YE17 and YE19 Selic expectations to 8.50% from 8.75% (see Macro Backdrop). Also, according to the Focus survey, after staying for 36 weeks at the 4.50% target, IPCA expectations for YE18 fell to 4.46%. In a note, the government clarified that the National Monetary Committee (CMN) will evaluate in June the possibility of changing the inflation target for the year 2019. In DI Futures, the Jan-18 decreased 10bps to 9.67% and the Jan-21 fell 12bps to 9.81%. For the next two meetings (April and May), the curve implies roughly 197bps in rate cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded 3bps higher, on average. In TIIE swaps, the 1-year went up 2bps to 7.20% and the 5-year increased 3bps to 7.28%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields narrowed 4-5bps past the 1-year. In Camara swaps, while the 1-year fell 3bps to 2.68%, the 5-year went down to 3.40% (-4bps). Chile Rates Tracker In Colombia, yields traded lower at the margin. In IBR swaps, while the 1-year went down 2bps to 5.74%, the 5-year decreased 1bp to 5.53%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Monetary Policy Committee (Copom) meets again (Tue. /Wed.). We assess that the Committee will carry out a 100-bp interest rate cut, bringing the Selic rate to 11.25%. Regarding the communiqué, we expect the Committee to signal that the extension of the easing cycle will depend on forecasts and inflation expectations, but also on estimates of the structural interest rate of the Brazilian economy. Then, the key releases on economic activity will be February’s retail sales numbers (Wed.) and the Service Sector Survey (PMS) (Thu.). We forecast a 0.1% m/m increase in core retail, whereas the broad segment, which includes vehicle sales and construction material, will probably grow 2.2% m/m on stronger vehicle sales. Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Tue.). Given recent crop upgrades for several agriculture analysts, the new survey may further increase the contribution of agricultural production to 1Q17 GDP. Finally, the government will submit the Budgetary Guidelines Law (LDO), which establishes spending targets for the federal government (deadline Thur.).
  • In Mexico, the statistics institute (INEGI) will publish February’s industrial production (Tue.). We expect a 1.5% y/y contraction (January: -0.1%) based on coincident indicators. Then, the National Association of Department Stores and Supermarkets (ANTAD) will announce March’s same-store-sales (Tue.). We expect ANTAD sales to grow 3.8% y/y (February: 2.7%). Moreover, the Central Bank will publish the minutes of March’s monetary policy meeting (Wed.). The minutes will be interesting because they will shed more light about the arguments of the board to opt for more gradual tightening.
  • In Chile, the BCCh will hold its monthly monetary policy meeting (Thu.). 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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