Itaú BBA - LatAm pairs underperform EMFX peers

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LatAm pairs underperform EMFX peers

April 25, 2017

The BRL depreciated 0.61% to 3.1472/USD. The tender pared the opening losses after the Lower House Special Commission approved the labor reform.

With information available until 6:30pm Brasilia time


  • The CLP was the laggard across the EM-currency space, closing at 661.92/USD (-1.02%). The COP came next, posting losses of 1.00% to 2,902.50/USD. By the time of writing, the MXN was the third worst-performing emerging currency, trading at 18.86/USD (+0.70%). Finally, the BRL depreciated 0.61% to 3.1472/USD. The tender pared the opening losses after the Lower House Special Commission approved the base text of the labor reform (see Macro Backdrop).
  • In rates, the Brazilian curve bear steepened (Jan18x21: +10bps) as the BRL weakened. Additionally, market concerns on a possible delay of the Social Security reform voting in the Lower House could have pressured yields. In DI futures, the Jan-18 increased 3bps to 9.53% and the Jan-21 widened 13bps to 10.05%. In Mexico, yields also traded higher in the session. Breakevens widened as the 5-year increased 5bps to 3.69%.
  • Global growth positive momentum continues, with a synchronized pick-up in activity indicators. Barring a negative surprise in French elections, in our Monthly Strategy Report we argue that LatAm asset prices stand to benefit from the positive momentum.

Macro Backdrop

  • Narrowest current account deficit in 1Q17 since 2007. The current account surplus totaled USD 1.4 billion in March, topping our estimate (USD 50 million surplus) and market consensus (USD 450 million). The reading was better than the USD 864 million deficit recorded in March 2016. Over 12 months, the current account deficit receded to USD 20.6 billion (1.1% of GDP). The seasonally-adjusted annualized three-month moving average declined to a USD 9 billion deficit in March (February USD 25 billion). The biggest positive contribution came again from the trade balance, with a USD 6.9 billion surplus, way up from USD 4.2 billion in March 2016. The trade surplus is set to weaken this year, due to the decline in commodity prices from current levels and to some rebound in economic activity. Yet, the trade surplus will continue to be the main driver supporting low current account deficit. Notwithstanding larger service and income deficits, the all-time high trade surplus in 1Q17 helped to maintain the current account deficit at a low level. We still expect large trade surpluses this year (as in 2016), but a slightly stronger exchange rate (on average, in real terms), a rebound in domestic demand and lower commodity prices (from current levels) tend to produce weaker readings in the coming months. Thus, the current account deficit is set to widen from current levels throughout the year. We forecast a 1.5% of GDP deficit in 2017.
  • In the financial account, direct investment in the country (DIC) added up to USD 7.1 billion, in line with our estimate and market consensus (both at USD 7.0 billion). Equity capital transactions accounted for 60% of total DIC. Meanwhile, DIC over 12 months expanded to USD 86 billion from USD 84 billion. Preliminary data published by the Central Bank show DIC inflows of USD 3.4 billion as of April 20. Foreign investment in the local capital markets again posted outflows, totaling USD 2.3 billion (USD 2.3 billion outflows from stocks and investment funds and USD 59 million outflows from fixed income). Over 12 months, foreign investment in the local capital markets remains negative, by USD 13 billion. Preliminary data released by the Central Bank show inflows into fixed income and stocks as of April 20 (USD 4.7 billion and USD 703 million, respectively). International reserves ended March at USD 375.3 billion under the liquidity concept and at USD 370.1 billion under the cash concept. The USD 5.2 billion gap is due to the BCB’s positions in repurchase lines. In terms of financing, DIC remains resilient, reducing Brazil’s reliance on volatile capital flows. Portfolio flows (stocks and fixed income) are still negative over 12 months. Full Report
  • The Lower House Special Commission approved the base text of the labor reform with 27 votes in favor and 10 against. It is expected that the bill will be voted in the Lower House floor Wednesday (April 26).
  • BCB placed the full offering of 16,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 16,000 contracts on April 26. 
  • Activity weakened in February. The monthly GDP proxy (IGAE) expanded by 1% y/y - slightly below market expectations (1.1%) - pulling down the 3-month moving average growth rate to 2% y/y (previous: 2.9%). At the margin, GDP barely grew from the previous month (0.1%), and quarter-over-quarter annualized growth slowed down to 3.4% q/q (previous: 3.6%). Manufacturing is increasingly showing better momentum than services, which last year was the engine of activity. At the margin, services expanded 3.7% q/q in February (previous: 4%) amid mounting headwinds for consumers. On the industrial side, growth was 0.8% q/q in February (previous: 1%).
  • We expect GDP growth to slow down to 1.8% in 2017 (2016: 2.3%), with weaker domestic demand partly offset by firmer exports. Services would weaken amid headwinds for consumers; mainly, higher inflation eating through real wages and tighter macro policies affecting the labor market. Construction and mining will likely be hurt by the fiscal consolidation. On the bright side, the pick-up of U.S. industrial production and a competitive real exchange rate is already boosting manufacturing. The risk of trade protectionism in the U.S. has diminished over the past months, which is positive for export-oriented investment. 
  • The University of Chile’s quarterly employment survey of greater Santiago shows that the labor market remains weak. In the first quarter of 2017, the unemployment rate came in at 7.7%. Although this is 1.7 p.p. down from 1Q16 (which was itself an unexpectedly high print and raised measurement concerns), it remains a historically high rate (1Q15: 6.5%). In comparison, the National Statistics Institute’s (INE) greater Santiago survey for the quarter ending in February reflected a 0.3 p.p. rise in the unemployment rate over the last 12 months to 6.5%. The reported unemployment rate came in due to the 4.4% y/y employment growth (previous: +3.2%). The 13.0% rise in government and financial services employment (previous: +0.8%) lifted the overall gain. Unlike the data reported by the national statistics institute (INE), employment in construction continues to expand (+3.3% vs. +13.9% in 4Q16), in spite of the end of the tax-credit induced real estate boom. Meanwhile, manufacturing employment growth is still low at 1.6% (previous: -1.3%). Salaried employment grew a mild 1.8% y/y (4Q16: -0.6%), reflecting that total employment growth is led by low quality job creation. The participation rate came in at 61.2%, 1.0 p.p. above one year ago. Full Report Below
Market Developments 
  • GLOBAL MARKETS: Markets continued trading on a risk on tone. Equity markets were strong on the red as volatility gauges slightly increased. In rates, DM yields widened substantially as, in Treasuries, the 10-year went 7bps up to 2.34%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher (CRB futures: +0.54%) as oil prices increase (Brent: +0.68% to USD 51.95/bbl) and metals posted gains. In FX, currencies under our coverage underperformed. The MXN is trading at 18.86/USD (+0.70%) and the COP posted losses of 1.00% to 2,902.50/USD. The BRL depreciated 0.61% to 3.1472/USD. The CLP was the regional laggard, closing at 661.92/USD (-1.02%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Most LatAm Credit spreads for the 5-year tenor traded lower. CDS in Chile inched down 1bp to 73bps and Colombian went to 128bps (-2bps). Mexican spreads narrowed 4bps to 121bps. In Brazil, however, country risk stood flat at 218bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened (Jan18x21: +10bps) as the BRL weakened. Additionally, market concerns on a possible delay of the Social Security reform voting in the Lower House could have pressured yields. In DI futures, the Jan-18 increased 3bps to 9.53% and the Jan-21 widened 13bps to 10.05%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded 3-4bps higher in the session. In TIIE swaps, the 1-year increased 3bps to 7.24% and the 10-year wet up 4bps to 7.50%. Accordingly, breakevens widened as the 5-year increased 5bps to 3.69%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates traded higher at the margin. In Camara swaps, while the 1-year stood flat at 2.50%, the 5-year increased 1bp to 3.39%. Chile Rates Tracker In Colombia, long rates decreased in the session. In IBR Swaps, while short traded range bound (1-year: flat at 5.49%), long narrowed (5-year: -4bps to 5.21%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, FGV’s industrial business final industrial business confidence reading by FGV will also be released (Fri.). Then, the nationwide unemployment rate will also hit the wires (Fri.). We expect the rate to reach 13.5% in the quarter ended in March, standing still at 13.1% in seasonally adjusted terms. On fiscal accounts, March’s tax collection will be released throughout the week. We forecast BRL 99.5 billion in tax collections. Moreover, the consolidated primary budget balance for March will come through (Fri.). We expect a BRL 11.8 billion deficit, with the central government result (due Thur.) posting a BRL 8.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.0 billion deficit (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). 
  • In Mexico, the statistics institute (INEGI) will announce the growth rate of February´s retail sales (Wed.). In January, retail sales fell 1.1% from December, posting two consecutive declines, bringing quarter-over-quarter annualized growth down to 2.2% (December: 7.0% q/q). Moreover, INEGI will publish trade balance for March (Thu.). We expect the trade deficit to continue narrowing on the back of higher U.S. growth, a competitive real exchange rate and a deceleration of internal demand. Still, INEGI will release the GDP figures for 1Q17 (Fri.). We have recently revised our GDP growth forecast for 2017 to 1.8% (from: 1.6%). Still, higher inflation, tighter macro policies and remaining uncertainties over trade relations with the U.S. are consistent with a slowdown from 2016. Finally, the Ministry of Finance will announce the fiscal balance for March (Fri.). We expect that a whopping dividend from the central bank will likely allow the government to surpass the fiscal targets set for 2017, reducing the odds of a sovereign rating downgrade.
  • In Chile, INE will publish the national unemployment rate for 1Q17 (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.6%, from 6.3% in the equivalent period last year, and decelerating job creation. Recent data has shown that employment growth is exclusively sustained by low quality jobs as salaried jobs are being shed, a reflection of an even weaker labor market. Then, the national statistics agency (INE) will publish the industrial activity indicators for the month of March (Fri.). We expect manufacturing production to contract 1.5% from last year (February: -1.0%), negatively affected by metal related manufacturing.
  • In Colombia, the highlight of the week in Colombia will be central bank’s monthly monetary policy meeting (Fri.). We expect another 25-bp rate cut this month, taking the policy rate to 6.75%, as the central bank remains cautious. Looking ahead, we cannot rule out the possibility of more aggressive moves. Then, Fedesarrollo will publish the March retail and industrial confidence levels (Thu.). With the economy continuing to show signs of weakness, we expect confidence levels to remain at low levels. Moreover, the national unemployment rate for the month of March will be released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

Latam Macro Calendar

Today's editors: Eduardo Marza, Pedro Correa

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