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LatAm assets start an eventful week under pressure

October 30, 2017

Major central banks will meet this week, apart from the Fed Chair announcement.

With information available until 6:30pm Brasilia time


  • Major central banks will meet this week: the BoJ on Tuesday, the FOMC is scheduled for Wednesday and the BoE holds its meeting on Thursday. Additionally, President Trump will announce the Fed Chair on Thursday, according to the White House. 
  • In FX, LatAm pairs (-0.96%) underperformed within the majors. The BRL was the laggard, closing at 3.2805/USD (-1.37%). The MXN is trading at 19.2513/USD (-0.61%), the COP depreciated 0.45% to 3,024/USD and the CLP weakened 0.50% to 638.82/USD. 

Macro Backdrop

  • The consolidated public sector posted a primary deficit of BRL 21.3 billion in September, better than our forecast (-24.8 billion) and market consensus (-23.4 billion). The consolidated primary deficit accumulated over 12 months remained at 2.4% of GDP. The central government’s result, as published by the National Treasury, was a deficit of BRL 22.7 billion in September (our estimate: -24.4 billion; Central Bank methodology: -22.2 billion), with the surprise reflecting lower transfers to states and municipalities and lower discretionary spending. Regional governments and state-owned companies also posted stronger-than- expected readings, with surpluses of BRL 0.8 billion and BRL 0.2 billion (while we anticipated deficits of 0.5 billion and 0.4 billion, respectively). After extraordinary revenues materialization and recurring revenues improvement, the government should be able to meet its target for the year of a primary deficit of BRL 162 billion (-2.4% of GDP) for the consolidated public sector.  
  • Public debt dynamics remains unfavorable. The general government’s gross debt edged up to 73.9% of GDP in September from 73.7% in August, even though development bank BNDES returned BRL 33 billion (0.5% of GDP) to the National Treasury. Meanwhile, net debt expanded to 50.9% of GDP from 50.2%. If approved, the pension reform will be essential for public debt dynamics — by reversing the current upward trend in pension expenses and being a key step to comply with the constitutional spending cap — and could generate the necessary conditions for the structural decline in interest rates and a firmer rebound in economic activity. Full Report
  • Inflation expectations for 2018 remained stable at 4.02%. According to Focus survey, inflation expectations has barely changed to 3.08% (+2bps) for 2017 and remained stable at 4.02% for 2018 and 4.25% for 2019. Year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations did not change for 2017 (at 0.73%), and also remained flat for 2018 and 2019 (both at 2.50%). Finally, the BRL was virtually flat for 2017 at 3.19/USD (from 3.16/USD); for 2018 at 3.30/USD; and for 2019 at 3.34/USD (from 3.33/USD). See BCB Report
  • FGV’s economic uncertainty index declined 7.0% to 111 in October, the lowest level since February 2015. The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators, given that the analysis of newspaper accounts for 70% of the aggregate index). A high figure is associated with greater uncertainty that is negatively related to economic activity. 
  • According to O Globo newspaper, a poll conducted by Ibope institute shows former president Lula leading voting intentions. In the spontaneous survey, Lula has 26% of voting intentions, followed by Representative Bolsonaro (9%); Marina Silva ranks in third place with 2%, while both Geraldo Alckmin and João Doria have 1%. When the names of the candidates are presented beforehand, Lula ranks first again (35%), Bolsonaro’s votes reach 13%, Mrs. Silva gets 8%, Alckmin 5% and Doria 4%. Finally, in a scenario in which Lula is not running, both Bolsonaro and Marina have 15% of voting intentions, with TV host celebrity Luciano Huck in the third place (8%), Mr. Alckmin with 7% and Doria with 5%. This was the first poll focusing on the 2018 elections led by the Ibope institute.
  • The industrial production index expanded 1.0% year over year in September (5.2% in August), leading to growth of 3.2% in the third quarter of the year (up from -1.7% in 2Q17). The 3.6% year over year gain in mining production (9.2% in August), contributed with 1.6 p.p. to the headline gain in September. Meanwhile, manufacturing production dropped 1.4% year over year (market consensus: -1.5%; our call: -2.0%), overshadowed by the unfavorable calendar effect. Once adjusted for seasonal and calendar effects, manufacturing rose 1.5%, broadly stable from one month earlier. Manufacturing in the month was lifted by leather and metal related goods. In the quarter, manufacturing grew 0.9% in the third quarter of 2017, improving from the 0.9% decline in 2Q17 and the 0.4% drop in 1Q17. Mining (5.8% in 3Q17 vs. -1.7% previously) led industrial production improvement in the quarter (3.2% yoy vs. -1.7% in 2Q17). Meanwhile, utilities improved on its growth rate of 1.3% in 2Q17, with an increase of 2.0% in the third quarter. 
  • We forecast growth of 1.7% this year (1.6% for 2016), with a recovery to 2.7% next year. Higher global growth (supporting copper prices), expansionary monetary policy and improving sentiment will drive an activity recovery going forward. The outcome of the general election and the debate over the reform agenda next year will likely have a significant influence on confidence and investment, and consequently on growth. Full Report


  • The labor market deteriorated in the third quarter of the year. In September, the national unemployment rate rebounded to 9.2% from 8.5% one year prior (above our 8.4% forecast). The deterioration of the indicator followed from the urban unemployment rate increasing to 10.5%, above the 9.2% print in September 2016, and surprised the market consensus and us (who had a 9.8% forecast). Once adjusted by seasonal factors, the national unemployment rate for September was 9.6% (9.3% in the previous month), so the average unemployment rate for 3Q17 was 9.4%, higher than the 9.2% in 2Q17, but in line with 1Q17. As the urban unemployment rate increased to 11% in September (10.1% in August), a 10.8% average was recorded in 3Q17 from 10.6% in the 2Q17 and 10.4% in the 1Q17. Weak dynamics in the labor market likely played a role in the central bank’s decision to frontload part of the expected easing cycle in October. 
  • We expect the quality of job growth to remain weak in coming months, with an average unemployment rate of 9.0% for 2017 (from 9.2% in 2016). The labor dynamics in urban areas (where formal employment is more prevalent) will be a key determinant of the expected activity recovery ahead. Full Report
  • Banrep surprised market expectations and delivered a 25-bp cut to 5%, after staying on-hold for only one month. Five board members voted for the decision, while 2 members favored staying on-hold. This is in sharp contrast with the previous month, when only two board members voted for a 25-bp rate cut (with the majority favoring an unchanged policy rate). According to the statement, a more favorable inflation outlook led to the decision to loosen policy despite a somewhat better outlook for activity. However, the central bank warned the move should not be taken as the beginning of a continuous sequence of rate cuts. 
  • The central bank warned that risks for the external scenario limit the room for a counter-cyclical monetary policy. Meanwhile, in the press conference announcing the decision the central bank General Manager Juan Echavarría provided a more flexible guidance, saying that new cuts would not come necessarily in the next meeting. We maintain our forecast that the easing cycle will end with a policy rate of 4.5%, following two additional 25-bp rate cuts. The timing of rate cuts, however, will be (activity and inflation) data dependent. Full Report


  • S&P raised Argentina’s Long-Term foreign currency rating to B+ from B, keeping the outlook stable. In announcing the decision, the agency cited: “we expect that higher investment and better predictability in economic policies will sustain moderate but stable economic growth in the next three years”. Additionally, S&P noted that the “stable outlook incorporates our expectation that the government will have greater political capacity to continue pursuing its economic agenda, resulting in more predictable economic policy and gradually more institutional and governance effectiveness”. 
Market Developments
  • GLOBAL MARKETS: US Trasuries narrowed (5-year: -3bps to 2.00%) and the USD weakened (DXY: -0.48%) as, according to Reuters, Trump is likely to pick Jerome Powell as the next Fed Chair. According to the White House, President Trump will announce the Fed Chair on Thursday (November 2). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities, oil prices increased (WTI: +0.52% to USD 54.37/bbl. In energy, iron ore dropped 1.45% and copper increased 0.19%. In FX, LatAm pairs (-0.96%) underperformed within the majors. The BRL was the laggard, closing at 3.2805/USD (-1.37%). The MXN is trading at 19.2513/USD (-0.61%), the COP depreciated 0.45% to 3,024/USD and the CLP weakened 0.50% to 638.82/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) went down at the margin. In Brazil and Colombia, CDS inched down 1bp to 173bps and 111bps, respectively. Meanwhile, Chilean and Mexican spreads stood at 51bps and 108bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened as the BRL sold off (-1.37%). In DI futures, the front end was broadly stable (Jan-18 at 7.23%) and the long end widened 6-7bps (Jan-25: +6bps to 10.15%). Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican rates widened 1-3bps on the back of a weaker MXN, even though US rates went down. In TIIE swaps, the 1-year increased 2bps to 7.55%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields were mixed as markets reopened after Friday’s holiday. In Camara swaps, the front end inched up and the long end went down. Chile Rates Tracker In Colombia, the front end narrowed, still adjusting from the unexpected 25-bp cut on Friday, October 27 (see Macro Backdrop). In IBR swaps, the 6-month fell 7bps to 4.65%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom minutes will be released (Tue.). The statement following the decision suggests that the plan remains to slow down the pace of easing moderately, which we read as a signal that the December move will probably be a 50-bp rate cut, taking the Selic to 7.0%. On economic activity, September’s industrial production will be released (Wed.). We expect a 0.7% mom/sa increase. Moreover, the nationwide unemployment rate for September will come out (Tue.). We expect it to decrease 0.1 p.p. to 12.5% (unchanged at 12.6% according to our seasonal adjustment). Then, FGV will release its business confidence surveys on industry and services (Tue.). Also, Fenabrave’s vehicle sales for October will come through (Wed.). On external accounts, we expect October’s trade balance (due Wed.) to once again post a strong surplus (USD 5.0 billion).
  • In Mexico, INEGI will publish the flash estimate of Q3’s GDP growth (Tue.). We expect to come in at 1.6% year-over-year.
  • In Chile, INE will release the national unemployment rate for the third quarter of the year (Tue.). We see the unemployment rate reaching 6.6%. Finally, INE will publish the private consumption activity indicators for September (Fri.). We expect the commercial activity index to have increased 3.2% from last year.
  • In Colombia, DANE will publish exports for the month of September (Wed.). We expect exports to come in at USD 3.3 billion, boosted by a recovery of coal exports.
  • In Argentina, the INDEC will publish the manufacturing and construction data for September (Tue.). Then, tax collection for October will see the light (Wed.). We expect taxes to increase 35.6% yoy (to ARS 227.2 billion) in October. Moreover, the central bank will release its monthly expectations survey. At last, the car-makers association (ADEFA) will release October’s data on production, exports and domestic sales to car dealers.

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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