Itaú BBA - Geopolitical impact over LatAm FX proved to be short-lived

Latam FI Strategy Daily

< Back

Geopolitical impact over LatAm FX proved to be short-lived

August 29, 2017

The BRL (+0.07% to 3.1646/USD) and the MXN (+0.16% to 17.8423/USD) erased intraday losses.

With information available until 6:30pm Brasilia time

Highlights

  • The BRL (+0.07% to 3.1646/USD) and the MXN (+0.16% to 17.8423/USD) erased intraday losses. The COP appreciated 0.40% to 2,936/USD and the CLP (+0.49% to 625.22/USD) outperformed high-beta peers as copper prices strengthened once again (+0.44%). 
  • The Brazilian curve steepened (Jan19x25: +7bps) in the session. In DI futures, the Jan-19 fell 5bps to 7.78%. For next week’s Copom meeting, the curve implies 101bps in rate cuts and for the October meeting, it implies 62bps in cuts. 
Macro Backdrop

BRAZIL
  • The central government posted a BRL 20.2 billion deficit in July, slightly worse than market expectations (BRL -18.7 billion) and our call (BRL -19.3 billion). Revenues came at BRL 3.0 billion and expenditures BRL 2 billion lower than we anticipated. The surprise in revenues reflected the absence of revenues related to airport concessions that should be accounted only in next month’s result and higher transfers to states and municipalities, while the surprise in expenditures was due to a lower reading in the discretionary line. The result repeats the same rhetoric of the past years for fiscal accounts’ deterioration: large budget cuts continue to be insufficient to offset the rise in mandatory spending and the decline in revenues.
  • We believe that the central government is likely to meet the 2017 BRL 159 billion revised deficit target, although there are still some risks around extraordinary revenues. The recurring primary result this year is around BRL 226 billion and the difference of BRL 67 billion to comply with the target should be covered half with net-extraordinary revenues and half with discretionary budget cuts. While the revision in the target already dealt with some frustration in extraordinary revenues, especially in the Refis program, there are still some risks to this agenda, notably with the hydroelectric plants auction that is currently scheduled to happen in September. Full Report Below
  • According to FGV’s latest industry survey, business confidence in the industrial sector (FGV) rose 1.5% mom/sa in August, in line with the preview (+1.7%). Combined with the increase in July, the index has fully offset the decline in June due to a more turbulent political scenario. The recovery contrasts with commerce and consumer confidences that extended declines over the same period. Additionally, the confidence breakdown shows improvement in both the current situation index (1.8%) and expectations (1.1%). While current industrial demand rose 0.3% and remains unaffected by the increase in political uncertainty, expected demand fell considerably for the second month in a row. Capacity utilization fell 0.6 p.p. to 74.1, the lowest reading since December 2016. Moreover, inventories (% excessive minus insufficient) fell to 7.2% from 8.8% in the previous month. Finally, eleven out of twenty activities showed an increase (diffusion: 55%), consistent with the aggregate result for confidence. Business Confidence Heatmap

ARGENTINA

  • The monetary authority will persist with the current contractive bias of the monetary policy if price evolution does not converge to the 2018 inflation target (10% ± 2%). Sturzenegger noted, in a public speech, that the central bank has tightened systematically the monetary policy after March, hiking the reference rate (to 26.25% from 24.75% in April 11) and raising the yield of the CB’s short term instruments (Lebacs) through continuous intervention in its secondary market. As a result, headline inflation averaged 1.4% in the last 3 months (18% annualized) while core inflation was 1.6% (20.9% annualized). Sturzenegger added that inflation expectations for the rest of the year stands at 1.3-1.4% according to the latest CB’s survey.  While this pace exceeds the upper band of the target for this year (12-17%), the focus of the disinflation program is now to reduce the monthly inflation to levels consistent with the 2018 target.
  • In our view, the central bank will keep the reference rate at 26.25% for a while even with evidence of lower inflation readings and lower inflation expectations. We do not expect changes in the reference rate before November and we cannot fully rule out a new hike if disinflation does not materialize. We expect then a gradual easing of the monetary policy taking the reference rate to 25% by end-December. 
  • Macro Vision: time for fiscal consolidation. Argentina’s fiscal deficit is wide and the government targets a gradual fiscal consolidation. While the government is on track to meet the deficit target for this year, we do not expect the 2018 target to be met without meaningful fiscal reform. Sticky payroll and pension expenditures work against a fiscal deficit reduction. Full Report
Market Developments 
  • GLOBAL MARKETS: Stock markets posted losses and volatility gauges widened amid geopolitical concerns in the Pacific region. The 5-year US treasury fell 4bps to 1.71%, testing year-to-date lows. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil benchmarks recovered daily losses (WTI: -0.06% to USD 46.93/USD) after API is said to report US crude stocks fell last week. LatAm currencies posted gains in the session. The BRL (+0.07% to 3.1646/USD) and the MXN (+0.16% to 17.8423/USD) erased intraday losses. The COP appreciated 0.40% to 2,936/USD and the CLP (+0.49% to 625.22/USD) outperformed high-beta peers as copper prices strengthened once again (+0.44%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor traded range bound in the session. In Chile, Mexico and Colombia, spreads were stable at 61bps, 106bps and 128bps, respectively. In Brazil, CDS widened 1bp to 201bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened (Jan19x25: +7bps) in the session. In DI futures, the Jan-19 fell 5bps to 7.78%. For next week’s Copom meeting, the curve implies 101bps in rate cuts and for the October meeting, it implies 62bps in cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound. In TIIE swaps, the 1-year (7.35%) and the 5-year (6.91%) were stable. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 2-3bps downwards as the CLP strengthened once again. In Camara swaps, the 1-year fell 3bps to 2.32%. Chile Rates Tracker In Colombia, most rates trader lower (5-year IBR swap: -2bps to 5.54%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the main highlight of economic activity will be the 2Q17 GDP (Fri.). We expect it to be flat on quarter-over-quarter seasonally adjusted terms. In addition, the nationwide unemployment rate for July will come out (Thu.), for which we expect a flat figure at 12.9% (according to our seasonal adjustment). Then, FGV’s monthly survey for August on services will be released through the week. The economic uncertainty indicator for August, also from FGV, will come out (Wed.). On fiscal accounts, the consolidated primary budget balance for July will come through (Wed.). We expect a BRL 14.8 billion deficit. On external accounts, we expect August’s trade balance (due Fri.) to once again post a strong surplus (USD 4.3 billion). At last, after the approval of the TLP (new Long Term Interest Rate) base text in the Lower House Floor last week, some remaining amendments could be voted during the week. The voting of this matter may start on the Senate as well. The provisional measure that creates the TLP expires on September 6. 
  • In Mexico, Banxico will publish the quarterly inflation report (3Q17) (Wed.). We expect the central bank to reaffirm that rate moves are unlikely in the near term. Still, the Ministry of Finance (Hacienda) will announce July’s fiscal balance (Wed.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of July (Wed.). We expect manufacturing production to expand 2.7% from last year. Moreover, INE will publish the national unemployment rate for the quarter ending in July (Thu.). As we expect job growth dynamics to endure, we see the unemployment rate reaching 7.0%. Then, the BCCh will publish the minutes of the August monetary policy meeting (Fri.). The minutes will build the base for the upcoming Inflation Report, providing details on the central bank’s evaluation of inflation dynamics and the course for monetary policy. Going forward, the national statistics agency (INE) will publish the private consumption activity indicators for July (Fri.). We expect the commercial activity index to have increased 3.5% from last year.
  • In Colombia, the unemployment rate for the month of July will be released (Thu.). We expect the urban unemployment rate to rise to 10.7% in July. Then, Banrep hosts its monthly monetary policy meeting (Thu.). We expect a 25-bp cut to 5.25%, the last expected move for the year as the board will likely wait for inflation to revert to a downward trend early next year before engaging in further policy rate cuts. 
  • In Argentina, the INDEC will publish the manufacturing and construction data for July (Thu.). Then, tax collection for August will see the light (Fri.). We expect taxes to increase 30% yoy to ARS 215.5 billion in August. 

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


Macro Reports

Brazil - July central government primary deficit slightly worse than expected

The central government posted a BRL 20.2 billion deficit in July, slightly worse than market expectations (BRL -18.7 bn) and our call (BRL -19.3 bn). Revenues came 3.0 BRL bln and expenditures 2 BRL bln lower than we anticipated (see table below). The surprise in revenues reflected the absence of revenues related to airport concessions that should be accounted only in next month’s result and higher transfers to states and municipalities, while the surprise in expenditures was due to a lower reading in the discretionary line. The result repeats the same rhetoric of the past years for fiscal accounts’ deterioration: large budget cuts continue to be insufficient to offset the rise in mandatory spending and the decline in revenues.

We believe that the central government is likely to meet the 2017 BRL 159 bln revised deficit target, although there are still some risks around extraordinary revenues. The recurring primary result this year is around 226 BRL bln and the difference of 67 BRL bln to comply with the target should be covered half with net-extraordinary revenues and half with discretionary budget cuts. While the revision in the target already dealt with some frustration in extraordinary revenues, especially in the Refis program, there are still some risks to this agenda, notably with the hydroelectric plants auction that is currently scheduled to happen in September. 

The consolidated primary result for July (including regional governments and state-owned companies) will come through tomorrow. We expect a BRL 14.8 billion deficit with regional governments (BRL 0.5 billion deficit) and state-owned companies’ (BRL 0.7 billion deficit) also with red inked results. Note that July presents a bigger discrepancy between the consolidated and the central government result. This reflects differences on the subsides accounting: the treasury accounts semiannualy (January to July), while the central bank accounts in a monthly basis.

Pedro Schneider



< Back