Itaú BBA - Higher-than-expected inflation pressures Chilean yields

Latam FI Strategy Daily

< Back

Higher-than-expected inflation pressures Chilean yields

November 8, 2017

The Chilean curve bear flattened as the CPI came in above the ceiling of market forecasts.

With information available until 6:30pm Brasilia time

Highlights

  • The Chilean curve bear flattened as the CPI came in above the ceiling of market forecasts (see Macro Backdrop). In Camara swaps, the 9-month went down 6bps to 2.45% and the 10-year fell 3bps to 4.17%. 
  • In LatAm FX (+0.51%), the BRL outperformed, closing at 3.2505/USD (+0.69%). The COP appreciated 0.63% to 3,019/USD (+0.63%) and the CLP posted gains of 0.31% to 632.51/USD (+0.31%). At last, the MXN is trading at 19.0968/USD (+0.28%).

Macro Backdrop

BRAZIL
  • According to Anfavea, auto production reached 250k in October, slightly below our forecasts (255k) and down 5.8% mom/sa (our estimates). In spite of this negative result, auto production maintains its upward trend: the 3mmavg/sa increased 2.3% in October, and is up to 19.3% year-to-date. Additionally, the production breakdown shows the decline was driven by light vehicles (-6.1% mom/sa), while trucks and buses stayed virtually unchanged (0.3% mom/sa) after a strong decline in September. Both series are highly positive in year-over-year terms; light vehicles: 41.8% and trucks and buses: 27.1%. Exports and domestic sales decreased in October (-5.2% and -2.8% respectively). The positive year-over-year figures for exports (66.6%) and domestic sales (27.6%) highlight the improvement since 2016, yet the sector activity level remains well below 2011-2013. Inventories (relative to sales) are now in line with the historical average. Finally, our preliminary forecast for October industrial production is 0.3% mom/sa. 
  • The Serasa Experian Index for Retail Activity rose 1.3% mom/sa in October (our seasonal adjustment), extending gains shown in the previous month. The index is 5.7% up year-to-date, following stable figures through 2016 and a steep decline in 2015. The breakdown shows the increase was driven by “furniture and appliances” (up 6.4% mom/sa), while the other components fell over the same period. IBGE will release retail sales for the month of September next week – we forecast core and broad retail sales to rise approximately 1.0% mom/sa. Combining with other indicators, our preliminary forecasts for October core and broad retail sales stand at 1.0% and 0.6% mom/sa, respectively.
CHILE
  • Inflation continues to surprise, but in October it was to the upside, partly normalizing the low September print. The monthly surprise (0.6% print vs. 0.3% expected) is once again explained by a handful of volatile goods (14 items) including tourism packages (0.1pp of the surprise) and some food products. The net surprise over the last two months was -0.1pp. As the October print puts inflation closer to the central bank’s baseline scenario – reinforcing the view that the low inflation reading in September was due to specific factors – inflation convergence to the target in the relevant policy horizon remains broadly on track. In this context, rate cuts in the short term are less likely. 
  • Inflation is set to remain below the central bank’s 3% target until early 2019. The lagged effect of the prolonged strong performance of the CLP and inertia will help keep inflation low. Our 2018 inflation forecast is for a pickup to 2.8% and assumes a narrowing of the output gap, some depreciation of the peso and the gradual normalization of fresh food prices. Full Report

GLOBAL

  • Global Monetary Policy Monitor: Emerging markets keep reducing rates (except Argentina). In October, the countries that reduced their policy rates were: Colombia (by 25bps, while maintenance was expected), Russia (by 25bps, in line with expectations) and Brazil (by 75bps, in line with expectations). Argentina, on the other hand, hiked the policy rate by 150bps, against markets’ expectation of staying on hold. In the Eurozone, the ECB announced it will reduce its asset purchasing program to EUR 30 billion (from 60 billion) for nine months, starting in January 2018. Full Report
Market Developments
  • GLOBAL MARKETS: In China, the trade growth moderated in October, in line with expectations. Exports came at 6.9% yoy, while imports came at 17.2% yoy. As a result, the trade balance surplus rose to USD 38.2 billion (previous: USD 28.7 billion). All in all, China’s exports and imports are a positive trend since 2H16, in line with the synchronized improvement in the global economy. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -0.78% to USD 56.98/bbl) after the DOE report showed US crude stockpiles rose more than expected. On the other hand, iron ore went up 1.72% and copper strengthened 0.42%. In LatAm FX (+0.51%), the BRL outperformed, closing at 3.2505/USD (+0.69%). The COP appreciated 0.63% to 3,019/USD (+0.63%) and the CLP posted gains of 0.31% to 632.51/USD (+0.31%). At last, the MXN is trading at 19.0968/USD (+0.28%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) traded range bound in the session. In Brazil and Mexico, CDS was stable at 178bps and 109bps, respectively. Chilean and Colombian spreads inched up 1bp to 53bps and 120bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: DI futures curve bull flattened as headlines suggest renewed government efforts in approving some social security reform. The Jan-19 fell 4bps to 7.25% and the Jan-21 went down 8bps to 9.26%. Real rates went south by 2-3bps (Aug-22: -2bps to 4.67%). Brazil Rates Tracker
  • LOCAL RATES – Mexico: The belly of the Mexican curve widened 2-3bps, in tandem with US Treasuries. In TIIE swaps, the 2-year went up 3bps to 7.38%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve bear flattened as the CPI came in above the ceiling of market forecasts (see Macro Backdrop). In Camara swaps, the 9-month went down 6bps to 2.45% and the 10-year fell 3bps to 4.17%. Chile Rates Tracker In Colombia, yields were mixed in the session. In IBR swaps, the 1-year fell 2bps to 4.47% and the 10-year widened 2bps to 6.24%.  Colombia Rates Tracker

Upcoming Events

  • In Brazil, October’s IPCA consumer inflation will be released (Fri.). We forecast a 0.50% monthly increase, with year-over-year inflation rising to 2.78% from 2.54%. On economic activity, the key releases will be coincident indicators for October: traffic of heavy vehicles and paper cardboard dispatches (ABCR and ABPO, respectively).
  • In Mexico, the statistics institute (INEGI) will announce October’s CPI inflation (Thu.). We expect a 0.60% month-over-month variation, driven by the energy and regulated prices. Still, Banxico will hold its monetary policy meeting (Thu.). We expect the board to keep the reference rate at 7%. Finally, INEGI will publish September’s industrial production (Fri.). We estimate that industrial production fell by 2.2% year-over-year.
  • In Colombia, Banrep will publish the minutes of the surprise decision to cut the policy rate by 25-bp (to 5.0%) at the October monthly meeting (Fri.). We expect the minutes to show that further cuts will be data dependent.

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



< Back