Itaú BBA - DI futures price in a deeper cut after batch of weak activity data

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DI futures price in a deeper cut after batch of weak activity data

May 11, 2017

The DI futures curve implies roughly 117bps in rate cuts for the Copom meeting in May.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian yields narrowed further after March retail sales joined a string of recent weak activity data (see Macro Backdrop). The DI futures curve implies roughly 117bps in rate cuts for the Copom meeting in May. The Jan-18 fell 9bps to 9.19%. For the remainder of the year, the curve implies 261bps in rate cuts. 
  • In FX, LatAm currencies outperformed in the session (LatAm FX: +0.78%). The CLP posted mild gains to 671.99/USD (+0.02%). The COP strengthened 0.53% to 2,928.46/USD. The MXN topped the majors, trading 0.94% higher to 18.84/USD. The BRL appreciated 0.85% to 3.1406/USD after the Lower House speaker Maia said “next week I’ll announce the social security reform voting date”. 

Macro Backdrop

BRAZIL
  • Supermarkets drive retail sales to decline in March. Core retail sales fell 1.9% mom/sa in March, significantly below the median of market estimates (-0.5%) and our forecast (-0.6%). Compared to March 2016, core sales receded 4.0%. Broad retail sales tanked 2.0% mom/sa, also disappointing the median of market estimates (-0.1%) and our call (-0.8%). Compared to March 2016, broad retail sales dropped 2.7%. Despite the March decline, the quarterly change in 1Q17 remains positive, consistent with our call of 1.4% qoq/sa GDP growth in the quarter. 
  • The slide in supermarket sales in March offsets strong gains in the past two months, forming a scenario of sharp volatility. The disappointing March result was explained by the performance of the supermarket sector, which receded 6.2% mom/sa, contributing approximately -2.8 p.p. to the core retail reading and -1.9 p.p. to the broad retail indicator. The recent dynamic of the “supermarket” segment shown in the report contrasts with other metrics for the same sector. For instance, the national sales index compiled by Brazilian supermarket association ABRAS shows an increase throughout 2017 and in March as well. The methodology change applied to the monthly retail survey in January 2017 may have contributed to such volatility. The behavior of other categories is consistent with stagnation. Five out of ten surveyed sectors recorded higher sales. Hence, diffusion suggests a better situation than the aggregate reading, given the excessive negative contribution from supermarkets. We expect some recovery in retail sales in the coming months, influenced by the impact of disinflation on consumers’ real income and withdrawals from inactive accounts held under the FGTS employment protection program. In 2H17, the evolution will depend on labor market stabilization. Full Report
  • In March, our monthly GDP proxy fell 2% mom/sa, erasing some of the past four consecutive increases. However, compared to the same month of the previous year, monthly GDP gained 0.3%, marking the first positive reading under that metric since March 2015. In 1Q17, the indicator went up 2.2% qoq/sa, reinforcing the outlook for GDP growth during the period. Overall, PIBIU evolution is consistent with our positive expectation for 1Q17 GDP (our seasonally-adjusted forecast stands at 1.4%). The seasonally-adjusted monthly slide was widespread, reaching nine out of ten indexes that form our monthly GDP indicator (10% diffusion). Taxes registered the sharpest drop (-2%), while transportation was the only item that posted slight growth (0.6%). For April, we anticipate seasonally-adjusted declines in industrial production and retail sales. These figures will likely contribute to a slight retreat in PIBIU during the month. Full Report
MEXICO
  • We published our scenario review for the month of May. Headline inflation continues to increase. While this is mainly due to the lagged effects of last year’s MXN depreciation, core services inflation has increased (even if items directly affected by the currency are excluded) and diffusion indexes show more broad-based inflationary pressures. Although the most recent appreciation of the Peso will likely bring relief to consumer prices, we have revised our inflation forecast for 2017 to 5.4% (from 5%). In this context, it will be hard for the central bank to pause the tightening cycle. So we now believe that the next 25-bp hike will come in May (rather than waiting for the Fed’s move, which we expect to come in June). Due to this extra hike in May 2017, we have revised our monetary-policy rate forecasts for 2017 (to 7.25%, from 7%) and 2018 (to 6.75%, from 6.5%). Full Report
CHILE
  • We published our scenario review for the month of May. The mining strike in 1Q17 led to the weakest activity performance since the global financial crisis. Although we expect mining to recover in the remaining quarters of the year, consumption will likely continue to be weak. We see downside risk to our 1.8% growth forecast for this year (1.6% in 2016). Also, the central bank implemented the additional 25-bp rate cut that it had signaled in its recent Inflation Report, but it added that some further easing is possible. The recent deterioration of the labor market was likely the trigger behind this stance. We continue to expect a further cut, to 2.5%, before the end of 2Q17. Full Report
GLOBAL
  • We published our commodities review for May. Commodity prices fell sharply in April, driven by metal and energy prices. The former plummeted 12% led by a 22% drop in iron ore price. Meanwhile the latter declined 6% with a correction in oil prices. However, we believe the declines in both groups are a correction from previous excess and not the start of a new downward trend in commodities prices. Also, the extension of OPEC’s deal and the decline in U.S. inventories (although from high levels) should provide support to oil prices. We estimate that the market has reached a small deficit in 1Q17. Even with the extension of OPEC’s deal, we believe the deficit will continue during the year. Full Report
Market Developments 
  • GLOBAL MARKETS: US equity markets were on the red amid ongoing political concerns in the country. Treasuries narrowed as the 5-year decreased 1bp to 1.92%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher again as oil (WTI: +1.06 to USD 47.83/bbl), copper (+0.52%) and gold (+0.48%) increase.  In FX, LatAm currencies outperformed in the session (LatAm FX: +0.78%). The CLP posted mild gains to 671.99/USD (+0.02%). The COP strengthened 0.53% to 2,928.46/USD. The MXN topped the majors, trading 0.94% higher to 18.84/USD. The BRL appreciated 0.85% to 3.1406/USD after the Lower House speaker Maia said “next week I’ll announce the social security reform voting date”. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed were mixed in LatAm. CDS in Mexico went up 1bp to 117bps. Meanwhile, Colombian and Chilean spreads stood flat at 130bps and 73bps, respectively. On the other hand, country risk in Brazil narrowed further to 205bps (-3bps) – a 29-month low. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed further after March retail sales joined a string of recent weak activity data (see Macro Backdrop). The DI futures curve implies roughly 117bps in rate cuts for the Copom meeting in May. The Jan-18 fell 9bps to 9.19%. For the remainder of the year, the curve implies 261bps in rate cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates narrowed 1-2bps tracking US Treasuries. In addition, Banxico Governor Carstens said he also expects a "much clearer" downward inflation trend toward the end of this year. In TIIE swaps, the 6-month inched down 1bp to 7.20%, and the 4-year decreased 2bps to 7.26%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields widened in the session. In Camara swaps, the 1-year went up 3bps to 2.59% and the 5-year increased 5bps to 3.54%. Chile Rates Tracker In Colombia, rates traded range bound. In IBR Swaps, while some rates stood flat (9-month: 5.38%), others inched up (5-year: +1bp to 5.42%). Colombia Rates Tracker

Friday Events

  • In Brazil, the economic activity indicator Service Sector Survey (PMS) will be released.
  • In Mexico, the statistics institute (INEGI) will publish March’s industrial production. We expect a 1% year-over-year expansion (up from a 1.7% contraction recorded in February), helped by a positive calendar effect (from the Easter holidays, which last year took place in March).
  • In Colombia, the monetary policy meeting minutes from April will be published. At the meeting, the central bank once again surprised the market by implementing a larger than expected 50-bp rate cut, to 6.5%. The minutes will provide more indication on the thought process behind the more aggressive rate cut and what conditions will determine the pace of future rate cuts. Then, activity indicators for the month of March will be published. In the month of February, activity indicators came in notably frail, consolidating activity’s weak footing at the start of the year. We expect industrial production to increase 2.2% year over year (-3.2% in February). Meanwhile, retail sales are likely to rise 2.0% in twelve months (-7.2% previously), as car sales improved.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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