Itaú BBA - DI futures sell-off takes a breather after labor reform voting

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DI futures sell-off takes a breather after labor reform voting

April 27, 2017

Long Brazilian yields oscillated up 1-2bps as pension reform concerns lose some steam after the labor reform cleared the Lower House.

With information available until 6:30pm Brasilia time

Highlights

  • Long Brazilian yields oscillated up 1-2bps as pension reform concerns lose some steam after the labor reform cleared the Lower House (see Macro Backdrop). In DI futures, the Jan-19 went up 1bp to 9.42% and the Jan-25 increased 2bps to 10.55%. 
  • In LatAm FX, currencies under our coverage were mixed. The BRL posted losses of 0.32% to closing at 3.1846/USD. The COP also depreciated, to 2,937.51/USD (-0.23%). On the other hand, the CLP appreciated 0.18% to 663.90/USD. Finally, the MXN (+0.86% to 19.03/USD) recovered after the White House dismissed Wednesday market talks of the US leaving Nafta, stating its intent to pursue the “renegotiation of the Nafta deal to the benefit of all three countries”. The official statement quoted the President as saying “I believe that the end result will make all three countries stronger and better”.

Macro Backdrop

BRAZIL
  • The central government posted a BRL 11.1 billion deficit in March, worse than market estimates and our call (both at BRL -8.7 billion). Revenues came 0.5 BRL billion lower while expenditures came 2 BRL billion higher than our forecast. The surprise in expenditure reflected mostly higher payments with unemployment insurance and annual bonus and social security benefits. The negative surprise doesn’t change the prospects of the central government achieving its target of a BRL 139 billion deficit in 2017. As announced by the government, extraordinary revenues, the reversion of tax exemptions and discretionary spending cuts will likely help the start of a very gradual positive reversal in fiscal accounts. The consolidated primary result for March (including regional governments and state-owned companies) will come through Friday (April 28). We now expect a BRL13.5 billion deficit with a 0.5 BRL billion deficit in regional governments and a 0.2 BRL billion deficit in state-owned companies.
  • Retail business confidence (FGV) increased 4.1% in April, influenced in large by the current situation component (8.9%), while the expectations component marginally improved (0.2%).
  • The Lower House approved the labor reform’s bill by 296 votes in favor and 177 against. The bill will now be forwarded to the Senate. The reform changes the labor legislation, aiming to make the job market more flexible with positive impacts on the Brazilian business environment. Some of the main points: allowing negotiations between employers and employees to prevail over what is written in law on aspects such as working hours, participation in bonus and profits, shifts, work breaks, career plans, entry into employment insurance, home office, among others. The bill sets more rigorous lawsuit procedures, limiting the power of courts to interpret the law. Also, a labor union contribution fee would no longer be compulsory, and workers would no longer need to be represented exclusively by unions.
  • The BCB placed the full offering of 15,785 FX swaps. 
MEXICO
  • The trade deficit in Mexico deteriorated in 1Q17, but remained at moderate levels. Mexico’s trade balance deficit came in at USD 183 billion in March, bringing the 12-month rolling result to USD 11.9 billion in 1Q17, down from USD 13.1 billion in 2016 - with a record-high non-energy trade balance and a record-low energy balance (a deeper deficit now). However, at the margin the trade deficit widened between 4Q16 (USD 7.1 billion, seasonally-adjusted and annualized) and 1Q17 (USD 11.3 billion), with both the energy balance and the non-energy balance deteriorating. Even so, the 1Q17 deficit was far lower than the USD 20.5 billion seasonally-adjusted deficit reached one year before.
  • External demand remains solid, but the recent appreciation of the MXN benefited imports of consumer goods. Manufacturing exports increased by 9.2% y/y in 1Q17 and by 8.0% q/q, the fourth consecutive quarterly expansion. Both the auto and non-auto components performed well. Meanwhile, non-oil imports also improved (1Q17: 6.7% y/y and 9.1% q/q), largely due to intermediate goods (likely inputs for Mexico’s exports). However, non-oil imports of consumption goods also improved at the margin (17.0% q/q), likely a reaction of the strengthening of the currency. Capital goods performed poorly (-4.5% q/q), consistent with poor investment readings. Looking ahead, we expect a narrower current account deficit this year (2.3% of GDP) relatively to 2016 (2.7% of GDP), due to lags of exchange-rate depreciation and an internal demand slowdown.
Market Developments 
  • GLOBAL MARKETS: EONIA rates fell (5-year: -3bps to -0.03%) as the ECB still sees risks to the outlook “tilted to the downside”. In the press conference, president Draghi stated the GC is not sufficiently confident that inflation is on track. We think the ECB, in the June meeting, will likely upgrade the growth risk assessment to “balanced” and remove the easing bias (i.e. drop the possibility of lower rates). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower as oil fell again (Brent: -0.35% to USD 51.64/bbl). In LatAm FX, currencies under our coverage were mixed. The BRL posted losses of 0.32% to closing at 3.1846/USD. The COP also depreciated, to 2,937.51/USD (-0.23%). On the other hand, the CLP appreciated 0.18% to 663.90/USD. Finally, the MXN (+0.86% to 19.03/USD) recovered after the White House dismissed Wednesday market talks of the US leaving Nafta, stating its intent to pursue the “renegotiation of the Nafta deal to the benefit of all three countries”. The official statement quoted the President as saying “I believe that the end result will make all three countries stronger and better”. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened all across LatAm. CDS in Chile and Colombia inched down 1bp to 73bps and 129bps, respectively. Brazilian spreads went to 220bps (-2bps). Mexican country risk fell the most, to 122bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened 1-2bps as pension reform concerns lose some steam after the labor reform clears the Lower House (see Macro Backdrop). In DI futures, the Jan-19 went up 1bp to 9.42% and the Jan-25 increased 2bps to 10.55%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields narrowed in the session. In TIIE swaps, the 1-year decreased 4bps to 7.27% and the 5-year went down 5bps to 7.32%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed in the session. In Camara swaps, the 1-year decreased 3bps to 2.48% and the 10-year went down 3bps to 4.01%. Chile Rates Tracker In Colombia, yields also traded lower. In IBR Swaps, the 9-month fell 4bps to 5.65% and the 5-year narrowed 5bps to 5.21%. Colombia Rates Tracker

Friday Events

  • In Brazil, FGV’s industrial business final industrial business confidence reading by FGV will be released. Then, the nationwide unemployment rate will also hit the wires. We expect the rate to reach 13.5% in the quarter ended in March, standing still at 13.1% in seasonally adjusted terms. Moreover, the consolidated primary budget balance for March will come through. We expect a BRL 13.5 billion deficit, with a BRL 0.5 billion deficit in regional governments and a BRL 0.2 billion deficit in state-owned companies.
  • In Mexico, the statistics institute (INEGI) will release the GDP figures for 1Q17. We have recently revised our GDP growth forecast for 2017 to 1.8% (from: 1.6%). Still, higher inflation, tighter macro policies and remaining uncertainties over trade relations with the U.S. are consistent with a slowdown from 2016. Finally, the Ministry of Finance will announce the fiscal balance for March. We expect that a whopping dividend from the central bank will likely allow the government to surpass the fiscal targets set for 2017, reducing the odds of a sovereign rating downgrade.
  • In Chile, INE will publish the national unemployment rate for 1Q17. We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.6%, from 6.3% in the equivalent period last year, and decelerating job creation. Recent data has shown that employment growth is exclusively sustained by low quality jobs as salaried jobs are being shed, a reflection of an even weaker labor market. Then, the national statistics agency (INE) will publish the industrial activity indicators for the month of March. We expect manufacturing production to contract 1.5% from last year (February: -1.0%), negatively affected by metal related manufacturing.
  • In Colombia, the highlight will be the central bank’s monthly monetary policy meeting. We expect another 25-bp rate cut this month, taking the policy rate to 6.75%, as the central bank remains cautious. Looking ahead, we cannot rule out the possibility of more aggressive moves. Moreover, the national unemployment rate for the month of March will be released. We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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