Itaú BBA - LatAm curves steepen on external headwinds

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LatAm curves steepen on external headwinds

December 1, 2016

LatAm FX were also deep in the red.

With information available until 6:30pm Brasilia time


  • LatAm curves bear-steepened, pressured by the strong widening of global yields. Brazilian nominals sold off across the board (Jan18x25: +31bps), additionally hurt the recent political newsflow. In DI futures, the Jan-21 went up 50bps to 12.26%. The Mexican (1s10s: +7bps) and Colombian (2s10s: +8bps) yield curves reacted similarly, while in Chile, Camara swaps rose less sharply (1s10s: +2bps).
  • LatAm FX were also deep in the red. The BRL underperformed EM peers, depreciating 2.27% to 3.4645/USD. The BCB announced it will start on Friday the roll-over of the regular FX swaps expiring in January (see Macro Backdrop).The MXN traded at 20.74/USD (-0.82%) by the time of writing, and the CLP closed at 674.69/USD (-0.07%). The COP stood flat at 3,072.94/USD (0.02%), as the oil rally offset the broad EMFX weakness.

Macro Backdrop


  • The trade surplus reached USD 4.8 billion in November, beating our expectation (2.8) and the consensus (3.0). The surprise was driven by an oil-drilling rig export (valued at USD 1.9 billion). Exports totaled USD 16.2 billion, rising 13.5% m/m. At USD 11.5 billion, imports fell 3.6% m/m. Compared to November 2015, exports climbed 17.5% y/y, but imports dropped 9.1% y/y.The November trade balance was better than expected due to the pro-forma export of an oil-drilling rig in the end of the month. Notwithstanding a positive surprise, we maintain our forecast of a USD 47 billion surplus in 2016. We expect slightly smaller surpluses in the following years. The trade balance will continue to be the main driver behind lower current account deficits than in recent years. Full Report
  • According to Fenabrave, vehicle sales decreased 0.9% in November (178k), above our call (-4.8%). Sales remained in low levels, but with some stabilization trend at the margin. Our forecast for November auto production (Anfavea) stands at 182k. If confirmed, production will have increased 6.6% m/m. Full Report Below
  • Our proprietary IU-MCI index showed market conditions deteriorated, led by external uncertainties. The Itaú Unibanco Market Conditions Index declined to 0.44 from 0.75 in October, driven by external uncertainties. Despite this result, the three-month moving average remained stable at 0.39. Full Report
  • The BCB announced that will rollover up to USD 750 million in FX swaps (15,000 contracts) on Friday.


  • The minutes of Banxico’s November monetary policy meeting reveal concern over higher exchange-rate pass-through. In this meeting, the Board decided to increase the policy rate by 50 bps (one week after Trump’s election), indicating that the decision was unanimous. All board members agreed that the balance of risks on both inflation and economic activity have deteriorated, with respect to the previous meeting (before the U.S. election).The majority of board members believe that the likelihood of higher exchange-rate pass-through has increased. We expect Banxico to hike by 25bps in December, assuming the Fed makes a similar move, and then deliver two similar hikes next year (also in lockstep with the Fed). Full Report
  • Agustín Carstens stepped down as Central Bank Governor. Carstens presented a resignation letter to President Peña Nieto, and will leave the position on July 1, 2017. The successor will likely have a similar profile as all other member of the board - strong academic and professional credentials. Hence, we believe that Governor Carstens’ recent resignation doesn’t affect the governance nor the credibility of Mexico’s monetary policy.


  • Our Itaú Activity Surprise Index shifted back to negative territory. The activity surprise index registered -0.05% in November, down from 0.02 in October. Results were mixed, with Colombia on the negative end and Peru on the positive end. The index continues to displays volatile behavior in in the last few months. Full Report
  • Our proprietary Itaú Inflationary Surprise Index shows inflationary continue to recede across LatAm. The index registered -0.37 in November (previous -0.28). Inflationary pressures continue to recede in most of the region’s economies, with Brazil still being the major player pulling down on the index. Even with the recent weakening of LatAm currencies as a result of the US presidential elections, most currencies in the region are recording year-to-date gains against the U.S. dollar (Mexico being the exception), which together with weak activity and the waning of some supply shocks, is supporting disinflation in the region. Full Report

Market Developments

  • GLOBAL MARKETS: Risk aversion increased ahead of U.S. Payrolls and amid market talks that ECB considers sending a formal signal after its policy meeting next Thursday that the Q.E. program will eventually end. Volatility measures and U.S. corporate credit spreads increased. DM rates moved upward again, led by U.S. Treasuries (2s30s: +4bps). The 10-year testing 2.25% (+7bps) – a level last seen in 2Q15., amid solid high frequency activity indicators in the U.S.. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Energy supported overall commodities (CRB: 1.11%) again, still on the Opec deal. Brent crude rose 3.84% to 53.83/USD, a 16-month high. On the FX realm, however, the picture was not so bright: commodity-linked FX weakened 0.47%, while EMFX (-0.37%) and LatAm FX (-1.41%) also were in the red. The BRL was underperformed EM peers, depreciating 2.27% to 3.4645/USD. The BCB announced it will start on Friday the roll-over of the regular FX swaps expiring in January (see Macro Backdrop). The MXN traded at 20.74/USD (-0.82%) by the time of writing, and the CLP closed at 674.69/USD (-0.07%). The COP stood flat at 3,072.94/USD (0.02%), as the oil rally offset the broad EMFX weakness. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: EM credit spreads (5-year) inched up 2bps to 157bps, while LatAm CDS increased to 239bps (+10bps). Brazilian spreads rose to 315bps (+18bps). Elsewhere, CDS moved up 2-3bps (Mexico: 185bps; Chile: 91bps; Colombia: 194bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Nominals sold off across the board  (Jan18x25: +31bps), pressured by the widening of global rates and the recent political newsflow. In DI futures, the Jan-21 went up 50bps to 12.26%. Accordingly, nominal-rate bonds widened strongly: the NTN-F 2023 rose 43bps to 12.35%. Real rates posted a poor performance as well: the NTN-B Aug-50 traded at 6.25% (+21bps). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The yield curve bear-steepened some more (1s10s: +7bps), mostly on U.S. Treasuries. In TIIE swaps, the 7-year rose 9bps to 7.52%. Nominal-rate bonds also headed north, as the Mbono Dec-24 increased 6bps to 7.25%. Linkers traded higher alike: the Udibono Nov-40 stood at 3.80% (+6bps). Mexico Rates Tracker
  • LOCAL RATES - Chile and Colombia: The Chilean yield curve also bear-steepened (2s10s: +4bps) on the external headwinds. In Camara swaps, the 7-year rose 7bps to 4.27% Chile Rates Tracker. The Colombian nominal curve reacted similarly (2s10s: +8bps). In IBR swaps, the 7-year increased 11bps to 6.68%. Colombia Rates Tracker

Friday Events

  • In Brazil, we forecast a 0.7% m/m drop in October’s industrial production. 
  • In Mexico, Banxico will publish November’s Economist Survey.
  • In Chile, the November monetary policy meeting minutes will be published as well. 
  • In Colombia, the week brings the export data for October. We expect exports to come at USD 2.7 billion.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today´s editors: Eduardo Marza, Adriana Reali

Macro Reports

BRAZIL - Vehicle Sales (Fenabrave) decreased less than expected in November

According to Fenabrave, vehicle sales reached 178 k in November (-0.9% mom s.a.). The result was above we expected (-4.8%). Sales remained in low levels, but with some stabilization trend at the margin.

·         Passenger Cars + Light vehicles decreased 0.5%.

·         Trucks increased 5.8%.

·         Buses sales contracted 22%.

Our forecast for auto production (Anfavea) is 182k in November. If confirmed, production will increase 6.6% mom s.a. This data will be released on next Tuesday, 06-Dec.

Rodrigo Miyamoto


The Week Ahead in Latam


The Copom will meet again on Wednesday in its final meeting of the year. Recent data showed inflation and activity surprising to the downside. Inflation expectations continued to decline. The COPOM’s inflation forecasts are not expected to change much. We believe the domestic scenario remained favorable for maintaining the easing cycle. However, because of the increased uncertainty over the global scenario, we expect another 25-bp cut, taking the SELIC rate to 13.75%.

3Q16 GDP figures will come through on Wednesday. We estimate a contraction of 1.1% quarter-over-quarter seasonally adjusted. Importantly, the 3Q16 GDP report comes with additional uncertainty, due to the revision in the historical series. From the supply standpoint, services activity is expected to shrink for the seventh consecutive quarter, while industrial GDP is set to retract after growing in 2Q16. From the demand standpoint, we forecast the seventh drop in household spending. Investment will likely decline after an increase in the previous quarter. On Friday, we forecast a 0.7% drop in October’s industrial production, but, going forward, we expect output to increase as inventory levels normalize and demand continues to increase. On Tuesday, we expect the nationwide unemployment rate (PNAD) to hit 11.8% in October. If we are correct, the rate will increase to 12.1% from 11.8% in seasonally adjusted terms. On Wednesday, the final industrial business confidence reading from FGV (Nov.) will come through, for which the preview came at a 1.3% rise month-over-month seasonally adjusted. Vehicle sales data (Fenabrave) will hit the wires on Thursday. We expect sales to reach 167k, a 4.8% month-over-month drop in November.

The consolidated primary result for October (including regional governments and state-owned companies) will come through on Monday. We expect a BRL 36.4 billion surplus with regional governments posting a balanced result.

We expect the trade balance to show a USD 2.8 billion surplus in November (Thu.), above the USD 1.2 billion surplus in November last year. Exports are expected to add up to USD 13.5 billion and imports, USD 10.7 billion. In the month, exports are likely to remain relatively stable and imports to decline 2.8% month-over-month seasonally adjusted. As we have been emphasizing, the trade balance has settled at more modest surpluses relative to the first half of the year, but this does not change our view of high surpluses this year and next.


Starting the week, the statistics institute (INEGI) will announce October’s unemployment rate. We expect the unemployment rate to post4.2%in October (below the 4.6% rate recorded in the same month of last year) given that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), the growth of formal employment accelerated in October.

On Thursday, the Central Bank will publish the minutes of November’s monetary policy meetingwhere the Board decided to increase the policy rate by 50-bps (one week after Trump’s election). The minutes will show whether the decision was unanimous, which is still not clear. Aside from that, we expect little new informational content, considering that the recent Inflation Report (and its press conference) has provided a lot of guidance on Banxico’s actions. In a nutshell, the official view of Banxico is that Mexico is facing real shocks (rather than just volatility), and the priority is to prevent second-round effects on inflation.          

The Central Bank will publish November’s Economist Survey on Friday. Given the “Trump shock”, we believe the market will revise up its exchange rate (weaker) and inflation expectations, as well as lower its GDP growth forecasts. 


On Tuesday, the National Institute of Statistics (INE) will release activity indicators for October. Activity in September was led by a rebound in private consumption, while manufacturing remained sluggish.Available data for the October shows car sales continued its recovery with growth of 11.6% year over year (12.9% in September), meanwhile annual electricity generation slowed to -2.4% (+0.9% in the previous month), the first annual contraction since March 2010. We expect manufacturing production to increase 0.5% from last year (+1.4% in September), and retail sales to grow 4.8% year over year (7.4% previously).

On Wednesday, INE will publish the labor market report and the unemployment rate for the quarter ending in October. The labor market continued to loosen in 3Q16, with the unemployment rate coming in at 6.8% (6.4% in 3Q15), the highest third quarter unemployment rate since 2011. Low quality jobs remain the principal driver behind employment growth. We expect the unemployment rate was 6.8% in the quarter (6.3% in the corresponding 2015 period).

On Friday, the central bank will publish the November monetary policy meeting minutes. As unanimously expected, the central bank left the policy rate unchanged at 3.5% and retained the neutral stance. The decision followed downside surprises to both September activity and October inflation, while external volatility rose following the U.S. presidential election result. The board of the central bank likely debated the alternative scenario of rate cuts, but prefers to monitor the evolution of inflation and emerging market financial conditions before embarking on an easing cycle.


On Wednesday, the institute of statistics (DANE) will publish the October national unemployment rate. In the previous month, the three-month moving average of the national unemployment rate increased to 9.1%, from 9.0% in September 2015. In turn, the participation rate dropped by 0.3 percentage points from the same period last year, supporting the view of deteriorating labor conditions. We still expect to see further deterioration of the labor in months ahead.

DANE will publish export data for October on Friday. Rising coal exports and improved oil numbers have led to better exports. Total exports decreased 9.1% year over year in 3Q16, an improvement from the 19.7% decline in 2Q16 and the 31.8% drop in 1Q16. We expect to see exports of USD 2.7 billion (roughly flat from one year ago).

Itaú BBA Macro Team

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