Itaú BBA - LatAm FX stage a recovery as US payrolls herald a gradual Fed

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LatAm FX stage a recovery as US payrolls herald a gradual Fed

May 5, 2017

The report is positive for risky assets as the US economy keeps expanding without major wage pressures and the Fed’s can remain gradual.

With information available until 6:30pm Brasilia time

Highlights

  • The US labor report showed a solid payroll growth despite the downside surprise in average hourly earnings. Overall, the report is positive for risky assets as the US economy keeps expanding without major wage pressures and the Fed’s rate normalization process can remain gradual. Commodity prices pared the weekly losses and CDS spreads narrowed across LatAm. 
  • Accordingly, LatAm currencies appreciated in tandem with commodity-linked FX (+0.69%). The CLP posted gains of 0.58% to 672.11/USD and the MXN is trading 0.32% higher to 18.99/USD. The BRL strengthened 0.35% to 3.1775/USD. At last, the COP ranked among the top performers in EMFX space, closing at 2,949.23/USD (+1.03%).

Macro Backdrop

BRAZIL
  • According to Anfavea, auto production reached 191k in April, below our forecasts (197k). We estimate that production fell 1.7% mom s.a., maintaining a volatile pattern since a rebound in Nov/16. The breakdown continues to show a rebound in trucks and buses – the combined production rose 8.1% mom s.a. Exports fell 12.5% mom s.a. (but remain well above 2016 levels), while domestic sales rose 1.1% over the same period. Inventories remain at low levels, not only in absolute terms but also relative to sales. Along with other economic activity indicators (such as energy consumption, imports and capacity utilization) our preliminary forecast for industrial production in April is 0.1% mom s.a.
CHILE
  • The monthly GDP proxy (IMACEC) for March was weak, but less so than anticipated. Imacec rose a mild 0.2% year over year in March, compared to the 0.4% drop expected by the market and our -0.5% forecast. According to the press release announcing the data, commerce and industrial manufacturing led non-mining activity growth. The 22.7% year-over-year decline in mining activity (-17.1% previously), was a drag, meanwhile, non-mining activity increased 2.2% (-0.2% in February). March was favored by an additional working day, hence once corrected for calendar and seasonal factors, activity contracted 0.4% from last year (-0.3% previously). Despite the better-than-expected figures, the first quarter showed the weakest start to a year since 2009. In 1Q17, activity slowed down to +0.2% year-over-year (0.8% in 4Q16), with mining activity falling 13.3% (-3.3% in 4Q16), while non-mining activity grew 1.4% (0.8% in 4Q16). Partly offsetting the weak mining performance was the front-loaded fiscal expenditure. At the margin, activity grew as non-mining activity advanced. Given the impact of the labor strike, mining contracted 23.9% qoq/saar (vs. -7.7% in 4Q16), while non-mining activity expanded 3.0% qoq/saar, from a weak -0.7% qoq/saar in 4Q16. Mining is expected to rebound in 2Q17.
  • We do not expect a significant activity recovery this year. Our 1.8% growth forecast has a downward bias, and the publication of the 1Q17 National Accounts data on 18 May could lead us to revise down our growth estimate. Activity will be aided by higher average copper prices this year, low inflation and the loose monetary policy. Meanwhile, the continued weakening of the labor market and depressed private sentiment will limit growth. Today’s better than expected data increases the probability the central bank takes a pause at its May monetary policy meeting, capitalizing on the opportunity to evaluate the evolution of further data. Full Report
  • Wage inflation was broadly stable in the month of March, leading to a slowdown in the first quarter of the year. The institute of statistics (INE) reported nominal wage growth of 4.3% year-over-year in March (after a 4.2% rise in the previous month). In high seasonal month, wages grew 0.8% from the previous month, in line with the gain one year ago, led by the mining sector. Thus, nominal wages grew 4.3% in 1Q17, slowing from the 4.9% in 4Q16 and 5.1% in 3Q16 (5.5% in 1Q16). Adjusted for inflation, wage growth was 1.5% year-over-year in March (1.4% in February). In the quarter, real wages grew 1.5%, down from 2.0% in 4Q16. The real wage bill growth was stable from 4Q16 at 3.0%, when total employment growth is considered. Meanwhile, when only salaried employment is included, the real wage bill in the quarter moderated to 1.0% (+1.9% in 4Q16). As the labor market loosens further, the economy remains weak and headline inflation stays low, wage inflation is likely to moderate ahead.
GLOBAL
  • Global Monetary Policy Monitor: Interest rate paths diverge in Latin America. In April, there were monetary policy decisions in 19 of the 33 countries we monitor. The number of central banks cutting interest rates exceeded the number of central banks hiking rates. Argentina's central bank hiked rates by 1.5 p.p. and Turkey’s central bank increased the late liquidity overnight rate by 0.50 p.p., both surprising the market. On the expansionary side, Brazil’s central bank cut rates by 1.0 p.p., as expected, and there were surprises in Chile (0.25 p.p. cut, while rates were expected to be held stable), Colombia and Russia (both with a 0.50 p.p. cut, more aggressive than the 0.25 p.p. expected cut in both countries). In May, we highlight the monetary policy meetings in Brazil, Peru and Mexico. We expect the Brazilian central bank to deliver another 1.0 p.p. interest rate cut, bringing the Selic rate to 10.25%, whereas we expect a 0.25 p.p. rate cut in Peru and a 0,25 p.p. hike in Mexico. Full Report
Market Developments 
  • GLOBAL MARKETS: US non-farm payroll rose 211k in April, above expectations and consistent with continued decline in the labor market slack. Despite the economy seemingly close to full employment, as the unemployment rate dropped to 4.4% (from 4.5%), wage pressures remain muted, allowing the Fed to keep a gradual pace of tightening. Overall, the report is positive for risky assets as the US economy keeps expanding without major wage pressures. Ahead of the French elections, equity markets were on the green. After the uncertainty in the first round, investors are (correctly in our view) all but certain that Macron will become France President this Sunday, as his margin over Le Pen went up to 23%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities pared weekly losses as the oil sell-off took a breather (WTI: +2.09% to USD 46.47/bbl). Likewise, metal prices recovered at the margin (copper: +1.08%). In FX, LatAm currencies appreciated on higher commodity prices (Commodity FX: +0.69%). The CLP posted gains of 0.58% to 672.11/USD and the MXN is trading 0.32% higher to 18.99/USD. In addition, Banxico rolled over USD 200 million in FX hedges and extended maturities to July 6. Also, the central bank called for a roll over action of USD 200 million FX hedges for May 8. The BRL strengthened 0.35% to 3.1775/USD. At last, the COP outperformed across LatAm, closing at 2,949.23 (+1.03%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed across LatAm. CDS in Colombia, however, stood flat at 129bps. Then, Mexican and Chilean spreads went down 1bp to 117bps and 74bps. Country risk in Brazil fell the most, to 213bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed as the BRL appreciated.  In DI futures, the Jan-18 went down 4bps to 9.40% and the Jan-21 decreased 5bps to 9.96%. Accordingly, breakevens fell as the 5-year narrowed 6bps to 4.57%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Most Mexican rates decreased. In TIIE swaps, while the 1-year stood flat at 7.27%, the 5-year went down 5bps to 7.23%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields increased 2-3bps as the GDP proxy rose mildly (see Macro Backdrop). In Camara swaps, the 1-year widened 2bps to 2.55% and the 5-year also increased 2bps to 3.43%. Chile Rates Tracker In Colombia, the very front fell and long widened again. In IBR Swaps, while the 9-month fell 3bps to 5.39%, the 5-year increased 5bps to 5.26%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Social Security reform’s president in the Special Committee, Carlos Marun (PMDB), scheduled a voting session on amendments to the proposal’s base text, which was approved earlier this week, to Tuesday (May 9) starting 9:30 AM (SP time). The next step is the vote in the Lower House plenary, scheduled for the second half of May. Then, IPCA consumer inflation for April will be released (Wed.). We forecast a 0.15% monthly rise, with year-over-year inflation decelerating to 4.1% from 4.6%. Moreover, the key releases on economic activity will be March’s retail sales figures (Thu.) and the Service Sector Survey (PMS) (Fri.). We forecast a 0.5% setback in core sales (month-over-month, seasonally adjusted), whereas the broad segment, which include vehicle sales and construction material, will likely decline 0.8% month-over-month. Following, Serasa may release its April retail activity index, an important coincident indicator for IBGE’s retail sales (Mon.). Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Thu.). Finally, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for April, two relevant coincident indicators for industrial production, may be released. 
  • In Mexico, the statistics institute (INEGI) will announce April’s CPI inflation (Tue.). We expect a 0% month-over-month variation. Assuming our forecast is correct, headline inflation would rise from 5.35% year-over-year in March to 5.69% year-over-year in April. Then, the National Association of Department Stores and Supermarkets (ANTAD) will announce April’s same-store-sales (Wed.). We expect ANTAD sales to grow at a weak 2.5% year-over-year (from 4% in March). Finally, the statistics institute (INEGI) will publish March’s industrial production (Fri.). We expect a 1% year-over-year expansion (up from a 1.7% contraction recorded in February), helped by a positive calendar effect (from the Easter holidays, which last year took place in March). 
  • In Chile, INE will publish inflation data for April (Mon.). We expect prices to gain 0.2% from March (+0.4% in March). As a result, annual inflation would remain at 2.7%, hovering below the 3% target. Then, the central bank will publish the trade balance for April (Mon.). We forecast a USD 600 million surplus (USD 805 million surplus in April 2016), taking the rolling 12-month trade balance to USD 4.1 billion (USD 5.3 billion in 2016).
  • In Colombia, the monetary policy meeting minutes from April will be published (Fri.). At the meeting, the central bank once again surprised the market by implementing a larger than expected 50-bp rate cut, to 6.5%. The minutes will provide more indication on the thought process behind the more aggressive rate cut and what conditions will determine the pace of future rate cuts. Then, activity indicators for the month of March will be published (Fri.). In the month of February, activity indicators came in notably frail, consolidating activity’s weak footing at the start of the year. We expect industrial production to increase 2.2% year over year (-3.2% in February). Meanwhile, retail sales are likely to rise 2.0% in twelve months (-7.2% previously), as car sales improved.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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