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LatAm yields narrow amid moderate US payrolls

June 2, 2017

LatAm curves took the route south after US labor report showed moderate payroll growth and tame wage pressures.

With information available until 6:30pm Brasilia time

Highlights

  • LatAm curves took the route south after US labor report showed moderate payroll growth and tame wage pressures. In Mexico, the curve bull flattened (1s10s: -1bp). In Chile, the 5-year fell 4bps to 3.38% and in Colombia the 5-year narrowed 6bps to 5.18%.
  • Bucking the regional trend, the Brazilian curve bear steepened in the session. In DI futures, the Jan-18 widened 2bps to 9.40% and the Jan-21 went up 8bps to 11.55%. After the stronger than expected industrial production figure (see Macro Backdrop), the curve now implies 65bps in cuts (Thursday: 68bps) for the next Copom meeting (July 25-26 bps).

Macro Backdrop

BRAZIL
  • Industrial production expands 0.6% in April, topping the median of market estimates and our forecast (0.1% and 0.0%, respectively). Compared to April 2016, the indicator declined 4.5%, influenced by fewer working days. The March reading was revised upward by 0.24 p.p., so that, considering the level, the surprise in the April result totals approximately 0.8 p.p. (the sum of above-expectation mom/sa growth and the March revision). The breakdown by economic category showed gains for capital goods (1.5%), intermediate goods (2.1%) and durable consumer goods (1.9%), while production of other consumer goods fell slightly (-0.8%). The breakdown by activity pointed to 0.6% growth in manufacturing and a slide of 1.4% in extraction and mining. On a more detailed breakdown, 13 out of 24 activities posted monthly gains. Also, available coincident indicators (capacity utilization, vehicle sales, weekly foreign trade figures, power consumption) point to a drop of 1.0% mom/sa in May. Full Report
CHILE
  • The minutes from the central bank’s May monetary policy meeting reveal that the board was divided in its decision to cut the policy rate by 25bps to 2.5%. Of the five board members, Joaquin Vial voted to keep the policy rate at 2.75% (which was our call for the meeting). The removal of the easing bias at the meeting suggested that the easing cycle (initiated in January and consisting of 100bps), has concluded. The minutes show that the central bank’s current economic outlook is similar to that held in the 1Q17 Inflation Report (IPoM), thereby indicating that no further rate movements are likely at least in the short-run. The 2Q17 IPoM will be published on June 5, likely reaffirming this scenario. Overall, the evolvement of activity and inflation met internal expectations. Yet, there was some discussion among board members on the significance of seemingly favorable data (durable consumption, machinery and equipment investment, improved consumer sentiment), versus adverse shocks of temporary nature (labor disruptions at the end of last year and in 1Q17), as the former could point at improving outlook for activity ahead. 
  • We expect the central bank to keep the policy rate at 2.5% until at least 2H18 as the economy remains weak and inflation well behaved. In the upcoming IPoM, we expect the inflation report to confirm the central bank’s baseline scenario of no further easing, while making only marginal changes to the growth (1%-2% for 2017 in the 1Q17 report) and inflation (2.9% yearend) outlook. However, we note that if activity disappoints and inflation comes below expectations, additional rate cuts remain a possibility. Full Report
  • Commercial activity is still lifted by durable consumption, amid underwhelming non-durable consumption. The commercial activity index fell 0.5% from last year (our call: 1.0%), as retail consumption excluding vehicle sales contracted 0.3% year over year (-0.14 p.p. to the headline gain) and wholesale activity fell 4.1% (-1.86 p.p. contribution). Meanwhile, sales of vehicle and parts expanded 12.5% from last year, adding 1.4 p.p. to the headline figure. Retail activity including vehicle sales contracted 0.4% (well below the 3.0% forecast according to market consensus), with durable consumption (+8.9% year over year, +1.47 p.p. contribution) lifting growth, while non-durable goods were a drag (-2.2% year over year, -1.83 p.p. contribution). In the quarter ending in April, the commercial activity index saw a slowdown to 1.2% year over year (3.0% in 4Q16), dragged down by wholesale activity (-1.5% year over year, from 2.8% in 4Q17), while retail activity excluding vehicle sales was broadly stable from the end of last year (+1.7%, compared to 1.8% previously). Our diffusion index shows commercial activity losing dynamism.
  • The outlook for consumption is far from exciting. The favorable performance of durable consumption will be hampered by a loosening labor market and the end of the tourism season, which reportedly lifted commercial activity earlier in the year. In all, weak commercial activity follows disappointing industrial performance in the first month of 2Q17, and reaffirms our view that the GDP proxy Imacec will show activity contracted 0.5% year over year in April. At last, we expect GDP growth of 1.6% this year, stable from 2016. Full Report

COLOMBIA

  • Export growth slowed in April as the gains from higher commodity prices diminished. In the month of April, total exports rose 6.8% year over year (40.8% in March), with coal and oil exports leading the charge (although both declined in terms of quantity). Oil quantities dropped 5.3% year over year, the lowest decline since July 2016 and could suggest a bottoming out. Oil prices rose 46.4%, far less than the doubling of prices recorded earlier in the year. Coffee exports fell 24.6% from April 2016 (hampered by a high base of comparison). In the quarter ending April, exports increased 20.8% year over year (32.4% in 1Q17 and 13.7% in 4Q16). Coal and oil exports remain the driving forces, while exports excluding Colombia’s traditional goods (coal, coffee, oil and ferronickel) grew a mild 2.9% (8.8% in 1Q17). We expect a current account deficit of 3.6% of GDP this year (4.4% last year), aided by commodity prices being higher, on average versus last year, and weak internal demand. 

ALL LATAM

  • Broad disinflation in Brazil, upward surprises in Mexico. Our Itaú Inflationary Surprise Index fell to -0.12 in May, coming from -0.09 in April. Brazil led downward surprises in May, as the General Price Indexes (IGPs) registered deeper monthly deflation than expected by the markets. Peru’s CPI also recorded a below-expected figure, amid a reversion of the agricultural supply-shock triggered by the El-Niño. In contrast, all three of Mexico’s inflation indices exceeded their respective expectations once again. Full Report
  • Volatility strikes Brazilian financial variables in May. According to our Itaú Unibanco LatAm Market Conditions Index, the region as a whole marginally improved to 0.01 (from: -0.06). However, the general trend as measured by the three-month moving average worsened to 0.20 from 0.42, influenced by Brazil (which saw a deterioration in both financial conditions and commodities), Colombia (impacted by the depreciated COP and falling oil prices), and Peru (with the majority of components deteriorating). Mexico was the positive highlight, with the recent appreciation of the MXN positively impacting financial conditions. Full Report

GLOBAL

  • Global monetary policy monitor: easing bias remains in emerging markets. In May, there were monetary policy decisions in 22 of the 33 countries we monitor. Countries that cut monetary policy rates were Brazil (by 100 bps, in line with expectations), Chile (by 25 bps, while the policy rate was expected to be maintained), Colombia (by 25 bps, in line with the consensus) and Peru (by 25 bps, in line with our expectation, while consensus expected stability). On the other hand, the Mexican central bank opted for another 25-bp hike, in line with expectations. In June, the main highlights are the monetary policy meetings in developed countries. In the U.S., we expect the Fed to implement an additional 25-bp hike. In the Eurozone, we expect the current stimulus to be maintained. Full Report
Market Developments 
  • GLOBAL MARKETS: US Non-farm payroll rose 138 thousand in April, below expectations (185k) but consistent with continued decline in the labor market slack. In addition, the two-month net revision was -66k. Hence, the US dollar weakened versus G10 (-0.54%), with the DXY reaching its weakest level since October 2016. US Treasuries narrowed as the 10-year decreased 5bps to 2.16% - lowest level since the US elections. Equity markets were on the green and volatility gauges fell (VIX: to 9.75 – lowest level since late 1993). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower in the session as oil prices weakened again (WTI: -1.22% to USD 47.77/bbl). In LatAm FX, currencies were, once again, mixed. The COP was broadly stable at 2,895.62/USD (-0.08%). The MXN is 0.20% weaker to 18.68/USD). The CLP (+0.06% to 672.17/USD) strengthened as oil prices fell. At last, the BRL appreciated 0.14% to 3.2457/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound in the session. Brazilian and Colombian spreads stood flat at 237bps and 127bps, respectively. Country risk in Mexico both inched down 118bps. In Chile, spreads also fell 1bp to 69bps – lowest level since August 2016. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened in the session. In DI futures, the Jan-18 widened 2bps to 9.40% and the Jan-21 went up 8bps to 11.55%. After the stronger than expected industrial production figure (see Macro Backdrop), the curve now implies 65bps in cuts (Thursday: 68bps) for the next Copom meeting (July 25-26 bps). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened tracking US treasuries. In TIIE swaps, the 1-year went down 3bps to 7.50% and the 10-year decreased 4bps to 7.51%. Likewise, real rates narrowed as the Jun-19 fell 7bps to 3.05%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates narrowed as well. In Camara swaps, the 1-year fell 1bp to 2.44% and the 5-year went down 4bps to 3.38%. Chile Rates Tracker In Colombia, yields fell 2-4bps. In IBR swaps, the 1-year fell 3bps to 5.17% and the 4-year went down 4bps to 5.07%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Supreme Electoral Court (TSE) will resume the trial that is analyzing the request to annul the Dilma Rousseff/Michel Temer presidential ticket (Tue.). Also, the Senate’s Economic Affairs Committee may vote the labor reform. Then, the Copom minutes will be released (Tue.). In its last meeting, the Copom cut the Selic rate by 100bps to 10.25% p.a., without bias, in a unanimous and a widely expected decision. We'll learn more about the reasoning behind the Copom decision with the release of these minutes. Then, May’s IPCA consumer inflation will be released (Fri.). We forecast a 0.48% monthly rise, with year-over-year inflation slowing to 3.8% from 4.1%. Moreover, economic activity indicators will see a less busy week following the 1Q17 GDP release. Anfavea will release May auto production (Tue.) - we forecast 236k units produced. Serasa may release its May retail activity index (Wed.), an important coincident indicator for IBGE’s retail sales. Finally, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Thu.).
  • In Mexico, the statistics institute (INEGI) will publish March’s gross fixed investment (Wed.). We forecast that gross fixed investment grew 3% year-over-year (up from a 3.1% contraction in February), boosted by a pickup in imports of capital goods and a positive calendar effect. Then, INEGI will announce May’s CPI (Thu.). We expect a 0.13% month-over-month decline in the CPI, driven by the 23.3% reduction of regulated electricity tariffs by the Federal Electricity Commission (CFE) and the decrease of gasoline prices. Assuming our forecast is correct, annual inflation would increase to 6.15% year-over-year (from 5.82% in April). Finally, INEGI will publish April’s industrial production (Fri.). We expect a 2.8% year-over-year contraction (down from a 3.4% expansion in March), based on a deterioration of coincident indicators and a negative calendar effect. 
  • In Chile, the central bank will publish the GDP proxy (Imacec) for the month of April (Mon.). As the labor strike at the country’s largest copper mine ended, we expect mining activity to support a 1.5% expansion from March (-0.3% in the previous month), resulting in an annual decline of 0.5% (+0.3% in March) in the GDP proxy. Also, the central bank will present its 2Q17 inflation report (IPoM) (Mon.). We expect the inflation report to confirm that the central bank’s baseline scenario does not include further easing, with only marginal changes to the growth forecast (1%-2% for 2017 in the 1Q17 report) and inflation (2.9% yearend) outlook. However, the central bank could signal that monetary policy would remain expansionary for a prolonged period (at least during the two-year forecast scenario). Then, the central bank will release the trade balance figures for May (Wed.). We forecast a USD 470 million surplus (USD 564 million surplus in May 2016), taking the rolling 12-month trade balance to USD 3.9 billion (USD 5.3 billion in 2016). Moreover, the National Institute of Statistics (INE) will publish nominal wage growth for April (Wed.). Wage inflation has gradually moderated as the labor market loosens, the economy cools and inertia stays low (as inflation is running below the target). Finally, inflation for the month of May will be published by the National Institute of Statistics (Thu.). We expect prices to be flat from April (+0.2% in April). As a result, annual inflation would dip to 2.4%, from 2.7% previously, closer to lower bound of the 2%-4% tolerance range.
  • In Colombia, the national institute of statistics will release inflation for May (Mon.). We expect consumer prices to gain 0.21% from April, taking annual inflation down to 4.35% (4.66% in April). Then, the central bank of Colombia will release the minutes of the monetary policy meeting held in May (Fri.). At the meeting, a split board decided to cut the policy rate by 25-bps to 6.25%, less aggressive than the 50-bp cut in the previous month. A tick-up in inflation expectations and sticky core consumer prices have created some unease in the board. Nevertheless all board members were in favor of further easing. The minutes will likely reflect heightened concern for inflation dynamics.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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