Itaú BBA - DI futures rally as markets see a lower terminal Selic

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DI futures rally as markets see a lower terminal Selic

July 27, 2017

The Brazilian curve bull steepened (Jan19x25: +14bps) after the BCB’s new guidance.

With information available until 6:30pm Brasilia time


  • The Brazilian curve bull steepened (Jan19x25: +14bps) after the BCB’s new guidance (see Macro Backdrop). In DI futures, the Jan-19 fell substantially to 8.13% (-26bps) and the Jan-21 went down 16bps to 9.34%. For the next Copom meeting (September 5-6), the curve is pricing 88bps in rate cuts, from 64bps as of Wednesday (July 26). Likewise, linkers rallied as well (2022s: -22bps to 4.89%). 
  • LatAm FX (-0.38%) rebounded from Wednesday’s rally. By the time of writing, the MXN is trading 0.83% weaker to 17.7374/USD. The BRL depreciated 0.39% to 3.1507/USD and the CLP closed at 649.33/USD. Bucking the regional trend, the COP slightly appreciated to 3,013/USD (+0.16%). 

Macro Backdrop

  • Copom: no surprise for now, slower easing later? In the statement, the Committee assesses that data released since last meeting are consistent with a stabilization of the economy in the short run, followed by a gradual recovery. The Copom reckons that the recent increase in uncertainty on reforms and (fiscal) adjustment affected confidence indices, but that this, in turn, has had as yet limited impacts on activity. Importantly, the text notes that continuation of the current “economic conditions”, despite increased uncertainty on the pace of implementation of reform and adjustment, allowed the committee to keep the pace of easing in this meeting – leaving the door open for a change in pace in the future. For the next policy meeting, keeping this pace (100bps) will depend on the continuation of the current economic conditions and on estimates on the extent of the cycle. We still see the case for slowing down the pace of easing, given increased uncertainty about very important fiscal and institutional reforms, as well as the stage of the cycle, so for the moment our call remains that the next move will be of 75bps (which would already be pretty fast easing). However, we may revisit this call in line with further Copom signs, such as those that may be embedded in the meeting minutes, out next Tuesday, August 1. Full Report
  • New loans expand and delinquency declines in June. The BCB released today the credit figures for June. The daily average of new non-earmarked loans climbed 7.6% mom/sa in real terms, while new earmarked loans increased 3.4%. Overall delinquency slid 0.1 p.p. to 3.8%. Likewise, overall interest rates and average spreads receded. Interest rates charged on non-earmarked loans dropped to 46.1% from 47.3%, declining for non-financial corporations and households alike. Average spreads in these transactions also narrowed for both segments. Meanwhile, average interest rates charged on earmarked loans slipped to 10.2% from 10.3%, climbing for non-financial corporations and declining for households. Average spreads in these transactions widened for non-financial corporations and decreased for households. Full Report
  • According to FGV’s latest industry survey, business confidence in the industrial sector rose 1.5% mom s.a. in July. The figure came in line with the preview (+1.4%) and partially offsetting a 3.0% decline in the previous month. The recovery contrasts with commerce and consumer confidences that extended declines over the same period. Also, the confidence breakdown shows improvement in both the current situation index (1.6%) and expectations (1.4%). Current industrial demand rose 2.1% and remains unaffected by the increase in political uncertainty. Capacity utilization rose 0.5 p.p. to 74.7, fully offsetting a decline in the previous month.  Inventories (% excessive minus insufficient) rose slightly to 8.8% from 8.1% in the previous month. Twelve out of twenty activities showed an increase (diffusion: 60%), consistent with the aggregate result for confidence. Business Confidence Heatmap
  • According to ABRAS, supermarket sales rose 1.1% mom/sa in June (using our calculation). This result contributes to our vision that political uncertainty has not affected significantly economic activity in June. IBGE will release its Monthly Survey of Commerce for June on August 15, and we forecast a 0.4% mom/sa increase in core retail sales (+2.0 % yoy). Our preliminary forecast for the broad segment, which includes vehicle sales and construction material, is a 1.6% mom/sa growth (+2.8% yoy).
  • Macro Vision: unemployment approaching a peak in Brazil? The stability of the unemployment rate since January was partly a function of an increase in the labor force in the informal sector, which is expected to lose strength ahead. Still, recent developments reinforce the assessment that some types of occupation are less strongly correlated with economic activity. Using models that take into account the sensitivities of different types of occupation to economic activity, we have revised the trajectory of the unemployment rate in our scenario. The new trajectory anticipates peak unemployment (from 3Q18 to 1Q18) and lowers the upper limit of the unemployment rate (from 14.3% to 13.4%, in seasonally adjusted data). Full Report
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced a smaller auction of up to 7,500 contracts (USD 375 million) on July 28 to complete the roll over.
  • In spite of a deteriorating energy deficit, the trade balance continued improving in 2Q17 on the back of strong manufacturing exports. The trade balance posted a USD 61.5 million surplus in June, surprising market expectations. As a result, the 12-month rolling trade deficit narrowed to USD 9 billion by the end of 2Q17 (from USD 11.9 billion in March), with a wider energy deficit (USD 15.6 billion, USD 14.6 billion in March) more than offset by a larger non-energy surplus (USD 6.6 billion, USD 2.7 billion in March). In fact, the 12-month non-energy balance, which posted a deficit in 2016, is now standing at an all-time high. The seasonally-adjusted and annualized deficit narrowed to USD 5.8 billion in 2Q17 (from USD 10.3 billion in 1Q17). 
  • We expect the 12-month trade deficit to narrow further (to USD 7 billion by the end of 2017, from USD 9 billion as of 1H17), driven by solid export growth (due to a dynamic US economy) and weaker domestic demand. However, it is worth pointing out that the cost advantage benefitting Mexican manufacturers has narrowed substantially in 2017 (15% MXN appreciation so far this year, almost wiping out the 19% depreciation observed in 2016). Another risk to our forecast is PEMEX’s falling oil output, which will continue pressuring the energy deficit. Full Report


  • The labor market continues to show diverging trends between rural and urban areas. The national unemployment rate for June came in at 8.7%, below our 9% forecast and the 8.9% recorded one year prior. On the other hand, the urban unemployment rate increased 0.6 p.p. over the last 12-months to 10.8%. Once adjusted for seasonal factors, the national unemployment rate for the month of June was 9.0% (previous: 9.5%) and 9.2% in 2Q17 (1Q17: 9.0%). Meanwhile, the urban unemployment rate has been stable at 10.5% for the last five months, notably higher than the 10.0% recorded in 2H16. Total national employment picked up 2% year over year in 2Q17 (0.9% in 1Q17). Job creation was concentrated in rural areas (383 thousand, 1.73 p.p. of the total job growth), while urban employment creation (+52 thousand, 0.23 p.p. contribution) remains at the lowest level since the international financial crisis. We see the unbalanced behavior of employment as further indication of a weak labor market.
  • We expect the labor market to remain weak in coming months, thus providing limited support to consumption. Mostly on the back of robust rural employment, we see the total unemployment rate averaging 9.0% this year (9.2% last year). The deterioration of the labor market dynamics will be an argument in favor of additional monetary easing. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the 2Q17 US GDP advance, Treasuries widened (5-year: +2bps to 1.84%). The Durables Goods Report suggests continued rebound in the core capital goods orders and shipments. Hence, we revised up our 2Q17 GDP tracking to 2.9% qoq/saar from 2.7% (consensus: 2.5%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains on the back of energy and agriculture. Oil prices increased further (WTI: +0.92% to USD 49.30/bbl). Also, sugar prices rose 1.41% and soybean went up 0.61%. LatAm FX (-0.38%) rebounded from Wednesday’s rally. By the time of writing, the MXN is trading 0.83% weaker to 17.7374/USD. The BRL depreciated 0.39% to 3.1507/USD and the CLP closed at 649.33/USD. Bucking the regional trend, the COP slightly appreciated to 3,013/USD (+0.16%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor traded range bound in LatAm. In Chile, Colombia and Mexico, spreads were stable at 67bps, 131bps and 105bps, respectively. CDS in Brazil, on the other hand, inched up 1bp to 215bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull steepened (Jan19x25: +14bps) after the BCB delivered a 100-bp cut (see Macro Backdrop). In DI futures, the Jan-19 fell substantially to 8.13% (-26bps) and the Jan-21 went down 16bps to 9.34%. For the next Copom meeting (September 5-6), the curve is pricing 88bps in rate cuts, from 64bps as of Wednesday (July 26). Likewise, linkers rallied as well (2022s: -22bps to 4.89%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened, tracking US treasuries. In TIIE swaps, the 1-year inched up 1bp to 7.31% and the 10-year went up 2bps to 7.15%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 2-3bps downwards in the session. In Camara swaps, the 1-year fell 2bps to 2.42% and the 9-year went down 3bps to 4.02%. Chile Rates Tracker In Colombia, the curve flattened. In IBR swaps, while short rates widened (1-year: +3bps to 5.11%), longer ones went down (10-year: -8bps to 6.37%). Colombia Rates Tracker

Friday Events

  • In Brazil, the nationwide unemployment rate for June will come out. We expect a 10bps increase to 13.2% (according to our seasonal adjustment). Also, the FGV economic uncertainty indicator for July will be released. On fiscal accounts, the consolidated primary budget balance for June will come through. We expect a BRL 21.8 billion deficit. 
  • In Mexico, the Ministry of Finance (Hacienda) will announce June’s fiscal balance. We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. Oil revenues, however, will likely weaken, given the drop of international oil prices observed in June. 
  • In Chile, the central bank of Chile will publish the minutes of the July monetary policy meeting. We expect the minutes to reveal additional details on the central bank’s evaluation of inflation dynamics. Additionally, we will be looking at whether other options (beyond staying on hold) were discussed and if the decision had the full backing of the board. Also, the national statistics agency (INE) will publish industrial activity indicators for the month of June. We expect manufacturing production to expand 0.7% from last year (+1.9% in May), resulting in growth of -1.6% in 2Q17 (-0.4% in 1Q17). 

Latam Macro Calendar

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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