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LatAm curves steepen on rising core yields

July 25, 2017

Ahead of the FOMC, higher core yields pressured long LatAm rates.

With information available until 6:30pm Brasilia time


  • Ahead of the FOMC, higher core yields pressured long LatAm rates. In DI futures, the Jan-21 went up 5bps to 9.50%. In Mexico, the 10-year TIIE swap increased 2bps to 7.18% and in Colombia the 5-year IBR swap went up 4bps to 5.52%. 
  • In FX, high-beta pairs posted losses in the session. By the time of writing, the MXN is trading 0.25% weaker to 17.7713/USD and the COP closed at 3,031/USD (-0.02%). On the back of higher copper prices (+4.04%), the CLP bucked the regional trend, to 650.30/USD (+0.21%). The BRL was the laggard, closing at 3.1725/USD (-0.82%). 

Macro Backdrop

  • According to FGV's monthly confidence survey, consumer confidence fell 0.4% mom/sa in July, extending the 2.3% drop seen in June following the increase in political uncertainty. The decline was driven by both expectations (-0.3%) and the current situation component (-0.6%). The result goes in the opposite direction of the industry confidence (July: +1.3%), but may be due to a slower response of consumers to the more turbulent scenario. The consumer confidence fell less than the confidence indicator in other surveys in the previous month. The commerce and services surveys will provide additional insights on the outlook for domestic demand. The percentage of people reporting that jobs are hard to get stood flat at 92.3%. The percentage remains at high levels and is consistent with high unemployment rate for a while. The components of expected inflation and intention to purchase durable goods remained stable. 
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 26.
  • Retail sales surprised to the upside in May, but calendar-adjusted data shows that the slowdown continues. Retail sales expanded 4.1%, above our forecast (2.3%) and median market expectations (3.7%). However, according to calendar-adjusted data reported by the statistics institute (INEGI), growth was lower (3.3% year-over-year), pulling down the three-month moving average growth rate to 3.7% year-over-year (from 5.1% in April). So retail sales continue on a decelerating path. At the margin, momentum is much weaker than last year. Seasonally-adjusted retail sales decreased 0.1% from the previous month, with quarter-over-quarter annualized growth standing at 2.5% (from 2.3% qoq/saar in April). Quarterly growth is now less than one third of the average growth rate observed in 2016 (9.4% qoq/saar). 
  • The weaker retail sales figure is consistent with less supportive fundamentals. Real wages were down by 1.4% year-over-year in June (the sharpest contraction in more than seven years), partially offset by the robust growth of formal employment. So the real wage bill expanded by 3% year-over-year, compared with 3.2% in May. However, looking ahead, the benefits of solid U.S. economic growth and lower uncertainties over trade relations with the U.S. will curb private consumption’s sequential slowdown (although in year-over-year terms, retail and consumption in general will likely continue to weaken). Full Report


  • The central bank left the monetary rate unchanged at 26.25%, as expected. The monetary authority noted that despite June inflation hit the lowest rate of the year (1.2% month-over-month for the national reading and 1.4% in the Greater Buenos Aires area), core inflation (1.3% and 1.5% respectively) remains at still uncomfortable levels. Furthermore, according to high frequency surveys tracked by the central bank, headline inflation will likely accelerate in July due mainly to adjustments in regulated prices (fuel, cab fares, health and building maintenance). In the statement announcing the decision, the central bank affirmed that it is not appropriate to loosen monetary policy. The board emphasized that the April increase in the reference rate combined with lower inflation expectations resulted in a tighter monetary policy stance. We note that this tightening was accompanied by an increase in the rate paid on Lebacs (short-term sterilization bills), which is now aligned with the center of the corridor of the active and passive repo rates (27%-25.5%). 
  • We expect the central bank to stay on-hold for a little longer before embarking in an easing process. Still high levels of inflation and the uncertainty related to the mid-term elections (which is probably a key factor behind the recent weakening the exchange rate) mean the pace of rate cuts will be gradual, introducing upside risks to our 22% forecast for the policy rate by the end of this year. Full Report
  • External accounts kept deteriorating in 2Q17. The trade balance registered a USD 0.7 billion deficit in June, bringing the 12-month trade balance to a deficit of USD 1.2 billion (down from a surplus of USD 1.4 billion in 1Q17 and USD 2.1 billion in 2016). At the margin, the trade deficit is running much higher, with the seasonally-adjusted figure at USD 8.2 billion (annualized). The weak performance of exports coupled with strong imports are behind the worse trade balance results. In 2Q17, exports were flat relative to one year before (following a 1.8% expansion in 1Q17). Meanwhile, imports are up by 17.8% year over year in 2Q17, with imports of capital goods (and parts of capital goods) up by 17.5%, while consumer goods are up by 22.5%.
  • With a still-strong real ARS and the on-going internal demand recovery, the current account deficit is set to widen further. In the four-quarter period ended in 1Q17 the current account deficit reached 3.0% of GDP and the trade balance figures for 2Q17 point to a further widening. We expect a 3.9% of GDP current account deficit this year, financed mostly by portfolio investment in hard-currency debt. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the FOMC, core yields widened with better than expected confidence data. The US conference board consumer confidence present situation sub index hit a 16-year high. For the 5-year tenor, US treasuries widened 7bps to 1.89% and EONIA yields went up 3bps to 0.08%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices rose (WTI: +4.77% to USD 48.73/bbl) after the API reported US crude inventories fell 10.2 million last week. Likewise, metal commodities posted gains. On the other hand, agriculture prices went down. In FX, high-beta pairs posted losses in the session. By the time of writing, the MXN is trading 0.25% weaker to 17.7713/USD and the COP closed at 3,031/USD (-0.02%). On the back of higher copper prices (+4.04%), the CLP bucked the regional trend, to 650.30/USD (+0.21%). The BRL was the laggard, closing at 3.1725/USD (-0.82%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads widened in the session. For the 5-year tenor, Chilean rates inched up 1bp to 67bps. In Colombia and Mexico, spreads increased 2bps to 135bps and 108bps, respectively. Brazilian CDS went up 4bps to 217bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened in the session. In DI futures, the Jan-19 inched up 1bp to 8.41% and the Jan-21 went up 5bps to 9.50%. Real rates also widened, as the Aug-22 went up 3bps to 5.09%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened 1-3bps, pressured by the rise in core yields. In TIIE swaps, the 2-year increased 1bp to 7.05% and the 10-year went up 2bps to 7.18%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates widened at the margin. In Camara swaps, while rates until the 18-month increased 1bp, longer yields were broadly stable (5-year flat at 3.43%). Chile Rates Tracker In Colombia, long yields also went up. In IBR swaps, as short rates were flat (1-year at 5.07%), long ones went up (5-year: +4bps to 5.52%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, markets will focus on the Copom meeting (Wed.). We expect the Copom to deliver a 100-bp cut. Moreover, the nationwide unemployment rate for June will come out (Fri.) - we expect a 10bps increase to 13.2% (according to our seasonal adjustment). In addition, FGV’s monthly surveys for July on retail (Wed.), construction (Wed.) and industry (Thu.) will be released. Additionally, the economic uncertainty indicator for July, also from FGV, will be released (Fri.). These surveys will provide an initial glimpse on economic activity in the third quarter. On fiscal accounts, the consolidated primary budget balance for June will come through (Fri.). We expect a BRL 21.9 billion deficit. 
  • In Mexico, INEGI will announce June’s trade balance (Thu.). We expect the trade deficit to widen in June, due to an upsurge of gasoline imports which likely affected the energy balance. Finally, the Ministry of Finance (Hacienda) will announce June’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. Oil revenues, however, will likely weaken, given the drop of international oil prices observed in June. 
  • In Chile, the central bank of Chile will publish the minutes of the July monetary policy meeting (Fri.). We expect the minutes to reveal additional details on the central bank’s evaluation of inflation dynamics. Additionally, we will be looking at whether other options (beyond staying on hold) were discussed and if the decision had the full backing of the board. Also, the national statistics agency (INE) will publish industrial activity indicators for the month of June (Fri.). We expect manufacturing production to expand 0.7% from last year (+1.9% in May), resulting in growth of -1.6% in 2Q17 (-0.4% in 1Q17). 
  • In Colombia, Banrep hosts its monthly monetary policy meeting (Thu.). Since the previous meeting, activity indicators for May disappointed the market further and headline inflation continued to fall. However, core inflation remains at a high level and medium-term inflation expectations ticked up. Additionally, numerous board members (including two who likely voted to lower rates by 50-bps) have communicated that they do not see room for much further easing. In this context, we expect only two additional 25-bp rate cuts before the end of this year (one this week and the other next month). Moreover, local think-tank Fedesarrollo will publish the June industrial and retail confidence indicators (Wed.).  Activity has disappointed and we expect confidence levels to remain low in the months ahead, indicating an activity recovery is not imminent. 
  • In Argentina, the IGA (GDP proxy published by OJF consulting firm) for June will see the light (Wed.). The IGA posted month-over-month gains of 0.3% and 0.1%, respectively, in April and May, pointing to a solid year-over-year growth rate in 2Q17 (around 3%). 

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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