Itaú BBA - DI futures tighten again on lower risks to quasi-fiscal reform

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DI futures tighten again on lower risks to quasi-fiscal reform

August 24, 2017

Brazilian yields narrowed further amid increased market expectations that the TLP will become the law of the land on time.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian yields narrowed further amid increased market expectations that the TLP will become the law of the land on time. The base text of the bill was approved in the Lower House floor (see Macro Backdrop). In DI futures, the Jan-18 fell 4bps to 7.93% and the Jan-21 narrowed 9bps to 9.29%. 
  • In LatAm FX, Andean pairs outperformed in high-beta space (COP: +0.72% to 2,961/USD; CLP: +0.37% to 638.42/USD). The BRL closed at 3.1482/USD (-0.18%) and the MXN is trading at 17.7262/USD (-0.23%). 
Macro Backdrop

BRAZIL

  • After soaring in June, new non-earmarked loans decline slightly in July. The Brazilian Central Bank released today the credit figures for July. The daily average of new non-earmarked loans receded 1.4% mom/sa in real terms (after soaring 8.2%), while new earmarked loans fell 5.9% mom/sa. Overall delinquency slid 0.1 p.p. to 3.8% (seasonally adjusted). Overall interest rates and average spreads increased. Full Report
  • The Lower House floor approved the base text of the TLP (new BNDES benchmark interest rate) bill. Lower House Speaker Maia said some amendments to the law will be voted next Tuesday (August 29). The provisional measure that creates the TLP expires on September 6. 
MEXICO
  • CPI inflation surprised to the upside in the first half of August, pressured by core goods (tradables) in spite of the MXN appreciation, the seasonality of education fees, non-core food and higher liquefied petroleum gas prices. Bi-weekly inflation came at 0.31%, above median market expectations (0.22%) and our forecast (0.25%). The main source of the pressure was core goods (tradables), which advanced 0.41% and accounted for almost half of the CPI inflation print. Additionally, we note the seasonal increase of education fees (1.03%, 20 bps above the five-year median), given the beginning of the school-year; a persistently high variation for agricultural prices (0.87%); and higher liquefied petroleum gas prices (2.18%), which were fully liberalized in January, also had meaningful contributions to the CPI. 
  • Given that disinflation for tradables is taking longer than we expected and non-core food inflation keeps rising, we have increased our inflation forecast for 2017 (to 5.7%, from 5.4%). Still, disinflation will likely materialize soon. The appreciation of the MXN observed so far this year (15% year-to-date, almost matching last year’s 19% depreciation) will be the leading driver for disinflation, with a benign impact on core tradable prices and energy prices (especially gasoline). Moreover, agricultural inflation (which is volatile and currently running at an abnormally high level, 14% year-over-year) will likely show a reversion in the coming months. Early next year, favorable base effects will lead to further disinflation. Full Report
  • Banxico published the minutes of July’s monetary policy meeting, in which the board decided to leave the reference rate unchanged (at 7%) after hiking for seven consecutive meetings; the decision was unanimous, although the minutes show that there are two board members more cautious (with one of them still mentioning the possibility of further interest rate hikes). The majority of board members, led by Governor Carstens, have a more optimistic view of the inflation outlook. July’s statement mentioned that some categories of the CPI - specifically, non-food core goods (tradables) and energy - are showing a “change of trend”; and that, excluding the price of tomatoes, annual inflation would have fallen to 6.17% in July (27bps below the actual print). Consistent with this, the minutes show the majority of board members think that many inflation measures have slowed down and some are falling. Tellingly, it is interesting to see that, according to the minutes, only the majority of board members believe that second round effects have not materialized.
  • Our base-case scenario is that Banxico will take a cautious approach in light of the Fed rate hikes and the uncertainty surrounding the presidential election next year, maintaining the reference rate at 7% until 2H18. Rate cuts to support the economy are unlikely to be implemented anytime soon. The heating-up of political campaigning by the end of the year, with the presidential elections coming closer (July 2018), will pose risks on the MXN (and inflation). Finally, we highlight that the authorities do not see the current level of policy rate as excessively tight (or tight at all) and the economy will likely perform well in 2018, supported by robust US growth coupled with lower protectionism risk, so there would be no urgency for reducing interest rates. In fact, in the minutes the majority of board members argued that the economy performed better-than-expected in 2Q17. Full Report

COLOMBIA

  • Industrial confidence stayed at low levels in July. According to think-tank Fedesarrollo, industrial confidence came in at -5.9% in (0 is neutral), below the +5.5% recorded one year earlier. Of the three components of industrial confidence, the volume of goods ordered continues to gradually deteriorate, inventories ticked up, while expectations for the next quarter became less optimistic. Once corrected for seasonal factors, industrial confidence remains in negative territory and fell 2 points from June (partly offsetting the 4 improvement in the previous month). All three components deteriorated at the margin. On the other hand, retail confidence remains in optimistic territory, but continues to edge down (to 14.7% from 24.2% one year ago and 14.9% in June). The decline over the last 12-months is mainly due to the worsening of the current performance, meanwhile, at the margin, falling expectations for the upcoming 6 months lead the gradually decline. Activity in Colombia has been weak and given the expectation of a mild recovery ahead, a significant improvement of confidence levels is unlikely.  We expect growth of 1.6% this year, down from 2.0% in 2016.
Market Developments 
  • GLOBAL MARKETS: Global markets were cautious ahead of Jackson Hole speeches (particularly Yellen’s). Volatility gauges widened at the margin and equity markets were mixed. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices (WTI: +1.56% to USD 47.86/USD) fell amid expectations of disruptions in the US oil industry, as Tropical Storm Harvey makes landfall. In LatAm FX, Andean pairs outperformed in high-beta space (COP: +0.72% to 2,961/USD; CLP: +0.37% to 638.42/USD). The BRL closed at 3.1482/USD (-0.18%) and the MXN is trading at 17.7262/USD (-0.23%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed in LatAm. In Colombia, CDS was stable at 128bps. In Mexico and Chile, spreads fell 1bp to 105bps and 61bps, respectively. In Brazil, country risk fell below the 200bps mark, to 197bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed further after the base text of the TLP bill was approved in the Lower House floor (see Macro Backdrop). In DI futures, the Jan-18 fell 4bps to 7.93% and the Jan-21 narrowed 9bps to 9.29%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened in tandem with US Treasuries. The 1-year TIIE swap increased 2bps to 7.33% and the 10-year went up 1bp to 7.12%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Long Chilean rates went up 1-2bps, tracking US yields. In Camara swaps, the 1-year widened 1bp to 2.37% and the 5-year increased 2bps to 3.36%. Chile Rates Tracker   In Colombia, long yields fell 1-3bps in the session. In IBR swaps, the 5-year narrowed 2bps to 5.55% and the 10-year went down 3bps to 6.29%. Colombia Rates Tracker

Friday Events

  • In Brazil, retail and consumer monthly surveys for August (FGV) will be released. Moreover, July’s tax collection will be released, for which we forecast BRL 108.3 billion.
  • In Mexico, INEGI will announce July’s unemployment rate. We expect the unemployment rate to post 3.4%. Shortly after, Banxico will publish 2Q’s current account balance. We expect the current account deficit to come in at USD 3,800 million.

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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