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Labor reform headwinds impact Brazilian yields

May 30, 2017

DI futures widened after the voting of the labor reform in the economic affairs commission of the Senate was cancelled.

With information available until 6:30pm Brasilia time

Highlights

  • DI futures widened after the voting of the labor reform in the economic affairs commission of the Senate was cancelled. Headlines suggest the voting could take place next week. The Jan-18 went up 4bps to 9.31% and the Jan-19 increased 10bps to 9.36%. For the Copom meeting on Wednesday, the curve still implies 100bps in cuts. 
  • In Commodities, oil prices went down (Brent: -0.30% to USD 49.65/bbl). In LatAm FX, oil-linked pairs posted losses. The MXN is trading 1.20% lower to 18.70/USD and the COP depreciated 0.26% to 2,918.92/USD. On the other hand, the CLP stood broadly flat at 674.85/USD (-0.02%). Likewise, the BRL closed at 3.2579/USD (-0.03%). 

Macro Backdrop

BRAZIL
  • Confidence in the services sector rose 0.5 p.p. in May. According to FGV’s survey, confidence in the services sector rose to 84.7, partially offsetting a 1.1 p.p. decline in the previous month. The increase was driven by a 1.3 p.p. increase in the current situation index, while, expectations fell 0.4 p.p. to 91.7. The index is 8.4 p.p. up year-to-date, yet it remains 12.3 p.p. below the ‘neutral level’ (100). Also, the diffusion of growth among sectors is consistent with the aggregate result. The expected employment component rose to 97.0 from 94.5 in the previous month, maintaining a gradual convergence to the neutral level (100, consistent with stable employment in the services sector). Since the survey was collected between May 2 and 26, it can be affected by the recent increase in political uncertainty. 
MEXICO
  • Fiscal accounts continued improving in April, even if the effect of the Central Bank’s dividend is excluded, which reduces the risks of sovereign risk downgrade. Over the past years, the MXN depreciation has created exchange rate gains on international reserves - MXN 31 billion in 2015 (0.2% of GDP) and MXN 239 billion in 2016 (1.2% of GDP) – reaching a record-high of MXN 322 billion this year (1.6% of GDP). Still, the improvement of the fiscal accounts goes beyond the abovementioned windfall effects. In fact, excluding 70% of the amount of the dividends from the time series (as the rest is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary deficit narrowed to 22 billion (0.1% of GDP) in April from 24.5 billion in March, while the public sector nominal deficit widened a bit – to MXN 538.4 billion (2.6% of GDP) from MXN 525.6 billion – during the same period. Also excluding dividends, the public sector borrowing requirements – that is, the broadest measure of the fiscal deficit – stood broadly unchanged at MXN 620.9 billion (3% of GDP). Net debt and gross debt are falling in terms of GDP, and now stand at 45% of GDP and 48.1% of GDP, respectively. 
CHILE
  • The industrial production index fell 4.2% year over year in April, an improvement from the mining-led 8.3% drop in March. Mining fell 1.3%, significantly less than the 21.4% decline at the peak of the labor strike in March. Utilities contracted a mild 0.8% (-1.2% in April), dragged down by lower hydroelectric generation. Meanwhile, manufacturing shrunk 7.5% year over year (+1.7% previously), a negative surprise compared to the Bloomberg market consensus of -1.0% and our forecast of -2.5%. Correcting for the relevant calendar effect in April, manufacturing fell by much less (0.8%), broadly in line with the 0.9% drop recorded in March, so the industrial production index declined 2.3% (-5.8% in March). In 1Q17, manufacturing fell 2.5% (1Q17: -0.4%) and utilities contracted 1.1% (from +0.3%). Overall, the weakness of manufacturing is still evident with 62% of the categories shrinking (compared to 38% one year ago). When calendar effects are accounted for, industrial production fell 3.6% year over year in the quarter ending in April (1Q17: -3.4%; 4Q16: -1.5%). 
  • Activity indicators remain weak in Chile and the lack of an evident catalyst suggests a meaningful recovery is not on the near horizon. Low private sentiment and a looser labor market will hinder growth this year. Meanwhile, an expansionary monetary policy, low inflation and higher copper prices (on average, compared to last year) will aid activity. With partial information (private consumption activity will be released on June 2), we preliminarily expect the GDP proxy (IMACEC) to have contracted 0.5% year-over-year in April (+0.3% previously). We expect activity growth of 1.6% this year, stable from that recorded in 2016. Full Report
Market Developments 
  • GLOBAL MARKETS: Coming back from Monday’s holiday in the US and the UK, US Treasuries narrowed (5-year: -3bps to 1.75%). Meanwhile, markets were closed due to a holiday in China, Hong Kong and Taiwan. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower in the session. Oil prices went down marginally (WTI: -0.30% to USD 49.65/bbl). Additionally, soybean fell 1.48% and iron ore went down 0.52%. In LatAm FX, oil-linked pairs posted losses. The MXN is trading 1.20% lower to 18.70/USD and the COP depreciated 0.26% to 2,918.92/USD. On the other hand, the CLP stood broadly flat at 674.85/USD (-0.02%). Likewise, the BRL closed at 3.2579/USD (-0.03%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. Chilean and Brazilian spreads inched down 1bp to 70bps and 237bps, respectively. Country risk in Mexico went up 1bp to 117bps. In Colombia, CDS widened 2bps to 126bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates widened after the voting of the labor reform in the economic affairs commission of the Senate was cancelled. Headlines suggest the voting could take place next week. In DI futures, the Jan-18 went up 4bps to 9.31% and the Jan-19 increased 10bps to 9.36%. For the Copom meeting on Wednesday, the still curve implies 100bps in cuts. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve shifted 4-6bps upwards in the session. In TIIE swaps, the 6-month increased 4bps to 7.45% and the 5-year widened 5bps to 7.47%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long yields narrowed 5-6bps. In Camara swaps, while very short rates fell at the margin (9-month: -1bp to 2.47%), long went up (5-year: -5bps to 3.50%). Chile Rates Tracker In Colombia, on a late reaction to Monday’s holiday, yields traded lower. In IBR swaps, the 9-month fell 2bps to 5.31% and the 5-year narrowed 3bps to 5.29%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Copom meeting (Wed.). We expect the central bank to deliver a 100-bp cut, thus maintaining the pace of the previous meeting, compared to previous expectations of a sharper cut. Then, this year’s first-quarter GDP figure will be the main highlight on economic activity (Thu.). We expect a 1.1% quarter-over-quarter seasonally adjusted increase, the first positive figure since 4Q14. In addition, April’s industrial production will be released (Fri.), for which we expect a flat figure, seasonally adjusted. Moreover, the nationwide unemployment rate for April will come out (Wed.). We expect a 0.1 p.p. increase to 13.3% (according to our seasonal adjustment). Also to be released are ABRAS supermarket sales for April (Wed.) and FEBABRAVE’s vehicle sales for May (Thu.). On external accounts, we expect the trade balance (due Thu.) to once again post a strong surplus (USD 7.0 billion) in May, topping the surplus of USD 6.4 billion in May last year. 
  • In Mexico, the central bank will publish the second Quarterly Inflation Report of the year (Wed.). We expect the central bank to increase its official GDP growth forecast for 2017 – currently 1.3%-2.3%. We also expect a more hawkish tone on inflation, in line with May’s monetary policy statement. Moreover, Banxico will publish the minutes of May’s monetary policy meeting (Thu.). We believe the minutes are likely to show more hawkish views on inflation, at least from some board members. Also, the Central Bank will publish May’s Economist Survey (Thu.). We expect an increase in both GDP growth and inflation expectations for 2017, given the upward surprises in the latest data. 
  • In Chile, the national statistics agency (INE) will publish the national unemployment rate for the quarter ending in April (Wed.). We expect the labor market to continue loosening, with the unemployment rate ticking up to 6.8% (6.4% one year ago). Moreover, the central bank will publish the minutes from the May monetary policy meeting (Fri.). Given the weak economy and low inflation, we expect the minutes to shed some light on the circumstances that could lead the central bank to reopen the doors for rate cuts.  Finally, the national statistics agency (INE) will publish the private consumption activity indicators for April (Fri.). We expect the commercial activity index to have increased 1.0% from last year (+4.9% previously).
  • In Colombia, the national unemployment rate for the month of April will be released (Wed.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. Going forward, DANE will publish export data for April (Fri.). We expect exports to come in at USD 2.6 billion, representing annual growth of 7.9%, lifted by oil exports.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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