Itaú BBA - LatAm pairs weaken on solid payrolls report

Latam FI Strategy Daily

< Back

LatAm pairs weaken on solid payrolls report

August 4, 2017

LatAm FX (-0.45%) depreciated across the board after strong US payrolls report.

With information available until 6:30pm Brasilia time


  • LatAm FX (-0.45%) depreciated across the board after strong US payrolls report. By the time of writing, the MXN is trading at 17.8824/USD (-0.23%). The CLP posted losses of 0.18% to 650.29/USD and the COP (-1.11% to 2,987/USD) was the laggard within high-beta space. At last, the BRL closed at 3.1305/USD (-0.51%). 
  • Long local rates tracked US treasuries higher in LatAm ex-Brazil. In TIIE swaps, the 10-year widened 4bps. Likewise, the 10-year IBR swap went up 3bps. Also, in Camara swaps, the 10-year yield increased by 1bp.

Macro Backdrop

  • According to Anfavea, auto production reached 225k in July, slightly above our forecasts (224k). The 3-month moving average rose 1.8% seasonally adjusted, still reflecting the strong growth in May. We estimate auto production fell 3.2% mom/sa in July, a decline that combined with the 5.9% decline in June offsets half of the 16.2% increase in May. Along with other economic activity indicators (such as energy consumption, imports and capacity utilization) our preliminary forecast for July industrial production is -0.2% mom/sa. The production breakdown shows the decline was driven by both light vehicles (-0.5%) and trucks and buses (-2.5%). The decline in production of trucks and buses interrupts a sequence of five consecutive increases. Exports rose 7.7% mom/sa, while domestic sales fell 2.6% mom/sa and offset the increase shown in the previous month. The positive year-over-year figures for exports (42.5%) and domestic sales (1.9%) highlight the improvement since 2016, yet the sector activity level remains well below 2011-2013. Also, inventories (relative to sales) are in line with the historical average. Finally, employment in the auto sector rose further to 125.2k from 124.9k in June (and 120.9k in April, lowest level in the last 3 years). 
  • The Serasa Experian Index for Retail Activity rose 0.2% mom/sa in July (our seasonal adjustment), following a 0.7% increase in the previous month. The index shows a gradual increase year-to-date, following stable figures through 2016 and a steep decline in 2015. The breakdown shows declines in supermarkets (-0.7%) and “vehicles & auto parts” (-1.0%), and positive figures for apparel (1.0%) and construction material (1.4%). Moreover, IBGE will release retail sales for June (so the reference is one month earlier than the Serasa index) on August 15 – we forecast core retail sales rising 0.4% mom/sa and broad retail sales up 1.3% mom/sa. Combining with other indicators, our preliminary forecasts for July core and broad retail sales stand at -0.8% and -1.0% mom s.a., respectively, partially offsetting gains we forecast for June. 
  • Macro Vision: potential impacts of the labor reform. This report discusses aspects that make the Brazilian labor market inefficient and how the recently approved labor reform can help to boost productivity, supply and demand for workers. Our analysis suggests that the reform can lift Brazil’s ranking in terms of labor market efficiency to 86th from 117th among 138 nations. Full Report
  • Global monetary policy monitor: Latin America still in easing mode. In July, there were monetary policy decisions in 23 of the 33 countries we monitor, with rate cuts in 3 emerging economies and a rate hike in one developed economy. Specifically, policy rates were reduced in Brazil (by 100-bps), Colombia (by 25-bps), Peru (by 25-bps) and South Africa (by 25- bps). On the other hand, in Canada, the monetary authority implemented a 25-bp hike, in line with expectations. Only in South Africa, the move surprised market expectations. As a result, the number of central banks cutting interest rates was once again higher than the number of central banks hiking policy rates. Full Report
Market Developments 
  • GLOBAL MARKETS: Treasury yields widened (5-year: +3bps to 1.82%) after the US jobs data. Non-Farm Payroll rose 209k in July, above expectations (180k) and consistent with continued decline in the labor market slack. Also, the unemployment rate declined to 4.3% (from 4.4%), despite the rise in the Labor Force Participation to 62.9% (from 62.8%), as employment grew 349k in the household survey. Still, Average hourly earnings rose 0.34% m/m, a bit above expectations (0.3%) and was revised up to 0.19% (from 0.15%) and to 0.15% (from 0.11%) in the prior two months. In all, the labor market trends are consistent with the Fed gradual withdrawal of monetary stimulus (September: balance sheet; December: hike). The Fed funds implied probability of another rate hike this year increased to 42% from 37% as of Thursday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodities, oil prices posted gains (WTI: +0.87% to USD 49.62/bbl). Also, metals posted gains as iron ore climbed 2.50% in the session. On a strong USD day (DXY: +0.65%), LatAm FX (-0.45%) depreciated. By the time of writing, the MXN is trading at 17.8824/USD (-0.23%). The CLP posted losses of 0.18% to 650.29/USD and the COP is at 2,987/USD (-1.11%). At last, the BRL closed at 3.1305/USD (-0.51%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads were mixed in the session. For the 5-year tenor, CDS in Colombia inched down 1bp to 99bps. Meanwhile, country risk in Mexico and Chile were stable at 100bps and 62bps, respectively. On the other hand, Brazilian spreads fell 2bps to 199bps –level last seen prior to the recent spike in uncertainty. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields marginally widened in the session. In DI futures, while short rates were unchanged (Jan-18 at 8.19%), longer ones went up (Jan-21: +1bp to 9.16%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened, tracking US treasuries. In TIIE swaps, the 1-year went up 2bps to 7.32% and the 5-year increased 4bps to 6.89%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 1-2bps upwards. In Camara swaps, the 1-year widened 2bps to 2.31% and the 5-year increased 2bps to 3.33%. Chile Rates Tracker In Colombia, the curve steepened in the session. In IBR swaps, while short rates narrowed (9-month: -2bps to 5.06%), long ones widened (10-year: +3bps to 6.42%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on July’s IPCA consumer inflation (Fri.). We forecast a 0.17% monthly increase, with year-over-year inflation slowing to 2.64% from 3.00%. Despite this increase, inflation will thus continue its long-lasting course of decline, driven mainly by ample slack in the economy and the favorable food price shock. On economic activity, coincident indicators for industrial production in July may be released: traffic of heavy vehicles (ABCR) on toll roads and paper cardboard dispatches (ABPO). Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production on (Thu.). At last, the Congress Commission debating the creation of the TLP (new BNDES benchmark rate) is expected to vote the rapporteur’s report during the week. 
  • In Mexico, the statistics institute (INEGI) will announce July’s CPI inflation (Wed.). We expect a 0.32% month-over-month variation, driven by the seasonal increase in the price of air tickets and tourism services, higher agricultural prices, and the hike of national highway tolls. Moreover, the National Association of Department Stores and Supermarkets (ANTAD) will announce July’s same-store-sales (Wed.). We expect the growth of ANTAD sales to slow down moderately (to 4.5% year-over-year, from 5.4% in June). Furthermore, Banxico will announce its policy rate decision (Thu.). We expect the board the leave the reference rate unchanged at 7%, considering the guidance provided in the latest statement, which signaled the end of the tightening cycle (400-bps since December 2015). Finally, the statistics institute (INEGI) will publish June’s industrial production (Fri.). We expect a 0% year-over-year expansion (down from 1% in May), based on coincident indicators – such as vehicle production, oil output, and public investment – which weakened in June. 
  • In Chile, the central bank will publish the GDP proxy (Imacec) for the month of June (Mon.). We expect the GDP proxy IMACEC to be flat from May, resulting in an annual increase of 1.0% year over year in June (1.3% in May) and 0.8% in 2Q17 (0.1% in 1Q17). At the same time, BCCh will release the trade balance figures for July (Mon.). We forecast a USD 50 million surplus (USD 32 million deficit in July 2016), resulting in a USD 831 billion surplus in in the quarter ending in July (USD 906 million in the equivalent 2016 period). Still, the National Institute of Statistics (INE) will publish nominal wage growth for June (Mon.). Finally, the National Institute of Statistics will publish inflation for the month of July (Tue.). We expect prices to increase 0.1% from June (0.2% in July 2016). As a result, annual inflation would dip further to 1.6%, from 1.7% previously, below the lower bound of the 2%-4% tollerance range. 
  • In Colombia, the national institute of statistics will release inflation for July (Sat.). We expect consumer prices to gain 0.08% from June (0.52% in July 2016), taking annual inflation down to 3.53% (3.99% in June), the lowest inflation since October 2014. Moreover, Banrep will release the minutes of the July monetary policy meeting (Fri.). 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting (Tue.). We expect the central bank to stay on hold for longer before embarking on an easing cycle. Then, the INDEC (the official statistical agency) will publish the National CPI for July (Thu.). According to private estimates, headline inflation likely increased to 2.1% in July mainly due to adjustments in regulated prices, while the core measure hit 1.8%. 

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

< Back