Itaú BBA - DI futures price in a lower terminal Selic

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DI futures price in a lower terminal Selic

May 16, 2017

The Brazilian curve bull flattened (Jan18x21: -5bps) as markets reassessed the terminal Selic rate.

With information available until 6:30pm Brasilia time


  • The Brazilian curve bull flattened (Jan18x21: -5bps) as markets reassessed the terminal Selic rate. The Jan-18 fell 4bps to 8.97% and the Jan-25 went down 13bps to 10.03% - a level last seen in mid-2013.
  • In FX, the DXY index fell 0.81%, testing pre-US election levels. Hence, all currencies under our coverage appreciated. The COP strengthened 0.41% to 2,881.62/USD. The MXN is trading 0.33% higher to 18.64/USD. The CLP gained 0.22% to 666.77/USD. At last, the BRL appreciated 0.41% closing at 3.0968/USD on constructive news flow regarding the pension reform.

Macro Backdrop

  • Job creation came in better than expected, but still negative. CAGED formal job creation came in at +60k in April, better than our estimate (+37k) and market expectations (+40k). Seasonally adjusted, 34k jobs were closed, with results remaining in negative territory. The 3-month moving average improved to -56k from -62k. Job closings have been moderating, but net creation still negative. We forecast unemployment peaking at 14% by mid-2018, after which the economic recovery should begin impacting the labor market positively, driving the unemployment rate down.
  • Macro Vision: could the Brazilian economy grow with high unemployment? The strong decline in employment in the recent recession naturally leads to the following question: is a rebound in economic activity possible without a recovery in employment? Could we experience, as in other countries, a jobless recovery? Our analysis based on past recessions in Brazil shows that a rebound of economic growth does not necessarily depend on a significant decline in the unemployment rate or a strong recovery in consumption. We believe that the high level of unemployment is consistent with the continuity of disinflation, a process that will likely continue throughout 2018. Full Report
  • The BCB placed the full offering of 8,000 FX swaps. After closing, the central bank called a roll over auction of up to 8,000 contracts on May 17.
  • April’s consumer confidence remains in pessimistic territory, at a similar level to one year ago. Confidence has completed 16 months below the neutral level of zero, but it posted its third consecutive monthly improvement from the historical low reached in January. Think-tank Fedesarrollo’s consumer sentiment index came in at in at -12.8 points, similar to the -13.0 points one year before (March: -21.1). All components of the index showed a pickup from the previous month as the initial impact from higher sales taxes wears off, inflation continues to decline and interest rates drop. Meanwhile, compared to April 2016, the stability was due to the recovery in current conditions offsetting the deterioration of consumer expectations. The expectations component dropped to -10.9 points from -6.3 one year ago, while current economic conditions rose from -23.1 points one year ago, to -15.7. The former was pulled down by deteriorating 12-month expectations, while the latter was buoyed by fewer individuals opposed to purchasing durable household goods (to -14.1 points; from -30.3 in April 2016). 
  • Overall, consumer confidence at low levels, alongside disappointing private consumption related activity, will not ease central bank concerns that an excessive economic slowdown materializes. In this context, we expect the monetary easing cycle to continue in the months ahead. Falling inflation and lower interest rates will likely aid some confidence recovery ahead. We expect weak growth this year, dropping to 1.8% this year from 2% in 2016. 
Market Developments 
  • GLOBAL MARKETS: Treasuries edged lower (1-year: -1bp to 1.10%) even after data showed that US industrial production rose by 1.0% in April (consensus: 0.4%), due to a gain in manufacturing output. Gold prices went up (0.54%) lifted by the weaker dollar (DXY: -0.71%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed in the session. Oil prices fell (WTI: -1.27% to USD 48.23/bbl) after API’s report signaled US crude stockpiles rose 882k bbl last week. Meanwhile, metals posted gains (copper: +0.43%; iron ore: +2.92%). In LatAm FX, all currencies under our coverage appreciated. The COP strengthened 0.41% to 2,881.62/USD. The MXN is trading 0.33% higher to 18.64/USD. The CLP gained 0.22% to 666.77/USD. At last, the BRL appreciated 0.41% closing at 3.0968/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Once again, credit spreads for the 5-year tenor narrowed all across LatAm. Chilean spreads ticked down to 71bps (-1bp). CDS in Mexico and Colombia both went down 2bps to 114bps and 126bps, respectively. Country risk in Brazil decreased further to 197bps (-2bps) – lowest since late 2014. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan18x21: -5bps) on the back of a stronger BRL and on positive headlines regarding the social security reform. In an event, Brazilian mayors publicly expressed support for the pension reform. The Jan-18 fell 4bps to 8.97% and the Jan-25 went down 13bps to 10.03%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates narrowed 2-3bps again. In TIIE swaps, the 1-year decreased 2bps to 7.24% and the 5-year went down 3bps to 7.17%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, most yields fell 1-2bps. In Camara swaps, the 1-year went down 1bp to 2.55% while the 5-year stood flat at 3.52%. Chile Rates Tracker In Colombia, rates also narrowed. In IBR Swaps, the 18-month went down 3bps to 5.26% and the 5-year also fell 3bps to 5.44%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, coincident indicators are on the spotlight. Industry Employment Data for the State of São Paulo (FIESP) will be released (Wed.). Then, industrial business confidence (CNI) for May will come through (Wed.) - we expect the current upward trend to continue.
  • In Mexico, the Central Bank’s board will meet to decide on the reference rate (Thu.). It will be hard for Banxico’s board to pause the hikes given the latest inflation data. Therefore, we expect Banxico to deliver a 25-bps rate hike (to 6.75%), in contrast with market expectations of no action.
  • In Chile, the central bank will publish the 1Q17 GDP (Thu.). The monthly GDP proxy recorded growth of 0.2% in the quarter, down from 0.5% in in 4Q16. The central bank will also publish the 1Q17 current account (Thu.). We expect a USD 700 million deficit, down from the USD 363 million surplus in 1Q16, mainly on the back of a smaller trade balance surplus in the quarter (USD 1.2 billion in 4Q16, after USD 2.2 billion in 1Q16). Finally, the central bank of Chile will hold its May monetary policy meeting (Thu.). We believe that sticky core service inflation and a favorable activity surprise gives leeway for a pause at this month’s meeting, so leaving the policy rate at 2.75%.
  • In Colombia, the trade balance for the month of March will be published (Thu.). We expect a trade deficit of USD 780 million, smaller than the USD 1.1 billion deficit recorded one year ago. As a result, the trade deficit in 1Q17 would come in at USD 2.3 billion, narrowing from USD 3.6 billion in 1Q16. Going forward, the national statistics authority will publish the supply-side breakdown of GDP growth for 1Q17 (Fri.). Based on activity indicators for the quarter, we estimate activity fell 0.1% from the previous quarter, resulting in annual growth of 1.4%, down from the 1.6% in 4Q16. Finally, the March activity coincident indicator (ISE) will be published (Fri.). Recent indicators reaffirmed that the economy was weak in the first quarter of the year. In the previous month, ISE grew a mild 0.3% year over year. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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