Itaú BBA - Higher DM yields pressure LatAm curves

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Higher DM yields pressure LatAm curves

September 13, 2017

The rise in core yields pressured local rates.

With information available until 6:30pm Brasilia time


  • The rise in core yields pressured local rates. In Mexico TIIE swaps in the 10-year sector increased 4bps to 7.05%. In Brazil, the DI futures curve steepened, with the front end tightening (Jan-19: -4bps to 7.64%) and the long end pressured a bit. Chilean yields shifted higher (5-year: +4bps to 3.39%), whereas IBR swaps bull-flattened (1s10s: -2bps) echoing the solid FX performance.
  • LatAm FX (-0.42%) tracked the broad commodity FX weakness (-0.57%). The BRL was the again the regional laggard (-0.75% to 3.1262/USD), followed by the MXN (-0.34% to 17.7340/USD). The CLP stood flat at 622.30/USD (0.07%), whereas the COP bucked the trend, strengthening 0.48% to 2,909/USD.

Macro Backdrop

  • Copom minutes: preparing the end. The minutes from the Copom September meeting confirmed the message, presented in the statement, that the base case for now is a 75bps cut in October, provided current economic conditions, namely stabilization of economic activity amidst wide slack, especially in the labor market, remain unchanged. Looking farther ahead, two messages seem to stand out from the text. First, that the committee on the whole envisages a gradual end to the easing cycle, suggesting a flight path that would take the base rate gradually to the 7.0% neighborhood – as indicated by the forecasts presented in the text. The second message is that policy needs to retain flexibility to address downward and upward risks to the inflation outlook. Thus, while 7.0% seems to be the most likely end-point of the cycle, shifts in the scenario may lead the Copom to stray a bit from this. Full Report
  • Core retail sales remained stable in a seasonally-adjusted monthly basis in July, printing slightly above the median of market estimates and our forecast (0.2% and 0.1%, respectively). Compared to July 2016, core sales expanded 3.1%, marking a fourth consecutive gain after 24 months in negative territory. Our preliminary estimate for core retail sales in August is a 0.3% drop.
  • Broad retail sales rose 0.2% mom/sa, also beating the median of market estimates (-1.0%) and our forecast (-0.2%), and sustaining the sharp increase seen in June (2.3%). Compared to July 2016, broad retail sales rose 5.7%. The breakdown shows expanding and contracting sectors in balance, in line with the headline. Going forward, we expect retail sales will continue to recover in the coming months, although at a slower pace as contributions from disinflation and FGTS withdrawals fade out. We forecast a 0.2% gain in broad retail sales in August. Full Report
  • Paper cardboard dispatches (ABPO) rose 1.0% mom/sa in August (our seasonal adjustment), up 8.1% yoy. It is one of the two most important coincident indicators for industrial production (the other is traffic of heavy vehicles). The result is better than other industrial production coincident indicators already released and sets our preliminary industrial production forecast at 0.2% mom/sa in August (5.7% yoy), up for five months in a row.
  • Our monthly GDP proxy climbed 0.5% mom/sa and 3.1% yoy in July. The seasonally-adjusted monthly increase was not widespread across the indicator's components. Preliminary figures for August suggest a slight drop in PIBIU after an added gain of 1.6% in the two previous months. Yet, economic activity in Brazil is rebounding gradually, with noticeable advances in the industrial and retail sectors and in the labor market. The recent evolution of monthly GDP figures is consistent with such gradual recovery. Full Report


  • National inflation decelerated by more than expected in August. Consumer prices gained 1.4% between July and August, below Bloomberg’s survey (1.5%) and down from 1.7% in the previous month. Prices have increased by 15.4% year-to-date, while last-three-month cumulative inflation fell to 19.6% (annualized) from 18.7%. In the greater metropolitan region of Buenos Aires, prices rose by 1.5% MoM in August (from 1.8% in July), bringing annual inflation to 23.1% (from 21.5% in July), mostly due to base effects. We note that the court ordered a reduction in gas prices in August 2016. National core inflation reached 1.4%, slightly below the 1.5% reading for the greater metropolitan region of Buenos Aires.
  • The adjustments in regulated prices scheduled for November and December continue to pose a challenge for inflation ahead. We see inflation at 22% by the end of this year (1.4% MoM average for the rest of the year), significantly surpassing the 17% upper bound of this year’s target range.
  • In this context, BCRA left the monetary policy rate unchanged at 26.25% for the tenth consecutive time. The decision was expected by both us and the market. The press release noted the central bank was opting to maintain a “contractive bias”, given that inflation expectations for December 2017 remain at 22% and expectations for 2018 have increased to 15.7% from 15.5% in the previous survey. The monetary authority highlighted once again that that the easing cycle in 2H16 led to higher inflation readings that forced it to reverse its monetary-policy stance in order to contain inflation. We think that even if there is a reduction of inflation expectations in the coming months, the central bank will likely stay put for a while, to minimize the risk of easing policy prematurely (again).
  • The central bank is targeting a sharp disinflation in the core reading. According to the high-frequency indicators tracked by the central bank, disinflation is on track to consolidation but core inflation remains at uncomfortable levels. The “anti-inflationary bias” (meaning a tight monetary policy) will be maintained to achieve the inflation target for 2018 (10% ± 2%). In addition, the monetary authority will continue draining liquidity through interventions in the secondary market for short-term sterilization bills (Lebacs). Our forecast for the policy rate at the end of this year stands at 25%, and we do not expect changes until the beginning of November. Full Report
Market Developments 
  • GLOBAL MARKETS: Another risk-on session in global markets as US treasuries widened further (5-year: +4bps to 1.75%) and equity markets were on the green. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices (WTI: +0.53% to USD 48.88/USD) posted some gains in the session. Corn (-1.68%), sugar (-1.89%) and soybean (-0.99%) posted losses after USDA’s monthly report. LatAm FX (-0.42%) tracked the broad commodity FX weakness (-0.57%). The BRL was the again the regional laggard (-0.75% to 3.1262/USD), followed by the MXN (-0.34% to 17.7340/USD). The CLP stood flat at 622.30/USD (0.07%), whereas the COP bucked the trend, strengthening 0.48% to 2,909/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor gave back recent gains. In Colombia, Mexico and Chile CDS inched up 1bp to 115bps, 99bps and 55bps, respectively. In Brazil, however, credit spreads widened 3bps to 184bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened in the session. In DI futures, the belly was under pressure as the Jul-18 fell 4bps to 7.37%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates widened, tracking US treasuries. In TIIE swaps, the 1-year went up 2bp to 7.28% and the 10-year increased 4bps to 7.05%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve bear steepened as US yields widened. In Camara swaps, the 6-month increased 2bps to 2.43% and the 5-year went up 4bps to 3.39%.Chile Rates Tracker In Colombia, the long end of the curve narrowed. In IBR swaps, while short rates traded range bound the 10-year fell 3bps. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Service Sector Survey (PMS) will be released (We.). We expect a 0.1% mom/sa increase in core retail, and a 0.2% decline in the broad segment. For July’s PMS we expect the headline to fall 0.8% year-over-year. Furthermore, BCB will release its monthly activity index (IBC-Br) for July (Thu.). Finally, paper cardboard dispatches (ABPO) for August may be released during the week.
  • In Chile, the BCCh will hold its September monetary policy meeting (Thu.). In the absence of data surprises, we expect the central bank to hold the policy rate stable at 2.5% and keep a neutral bias.
  • In Colombia, activity indicators for the month of July will be published (Fri.). We expect industrial production to rise 6.8% year over year. Meanwhile, retail sales likely saw growth of 2.2% in twelve months. Then, Banrep will release the minutes of the monetary policy meeting held in August (Fri.). The minutes may provide the context in which more easing this year would be likely.
  • In Argentina, the INDEC will release the unemployment rate for 2Q17 (Thu.). We expect a reduction in the unemployment rate to 9.0% from 9.3% in the same quarter one year ago. 

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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