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Latam yields widen on Fed guidance

February 14, 2017

Long DI futures halted a 10-day rally and the BRL tested levels last seen on July 2015.

With information available until 6:30pm Brasilia time

Highlights

  • DM yields widened on the back of Chinese inflation data and Yellen’s testimony to the Congress. The stronger than expected PPI in China reinforces the “reflation” story in DMs and Fed chair signaled a rate raise in the upcoming meetings. In our view, this guidance is consistent with the next rate hike before June (85% probability).
  • Long DI futures halted a 10-day rally. The Jan-21 went up 2bps to 10.26%. Andean curves bear steepened, pressured by the rise in global yields. In IBR swaps, the 1-year widened to 6.65% (+1bp), the 10-year went up to 5.37% (+10bps). In currencies, the BRL outperformed owing to technical drivers, trading at 3.0852/USD (+0.81%), a level last seen on July 2015.

Macro Backdrop

BRAZIL
  • In line with our expectations, retail sales declined… Core retail sales fell 2.1% m/m in December, close to our forecast (-1.9%) and the median of market estimates (-2.0%). Compared to December 2015, core sales decreased 4.9%. In 2016, sales slid 6.2% vs. 2015. Broad retail sales (including vehicles and construction material) were virtually unchanged in December (-0.1%), slightly better than our forecast (-0.4%) and the consensus (-0.5%). Compared to December 2015, broad retail sales dropped 6.7%.
  • …driven by a payback of yearend purchases in November (due to Black Friday). Going forward, we expect the deterioration of the labor market to slow down. Hence, retail sales should continue to decline, albeit at a milder pace than in recent months. Full Report
  • Itaú Unibanco monthly GDP (PIBIU) expanded 0.4% m/m in December. Our monthly GDP proxy advanced on a seasonally-adjusted monthly basis, but fell 2.5% y/y. In 4Q16, the indicator declined 0.8% q/q. In 2016, PIBIU contracted 4.5% vs. 2015. The decline in 4Q16 points to another contraction in GDP during this period. On the other hand, coincident indicators signal an increase in monthly GDP in January, suggesting a positive start for economic activity this year. Full Report
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 15.
CHILE
  • As predicted, BCCh left its policy rate at 3.25%. The communiqué announcing the decision retained a loosening bias, signaling a further easing would continue in the short term. The board highlighted that short-term inflation expectations for the relevant horizon remain anchored, but closer term expectations are below the 3% target. Meanwhile, the board notes activity is weak and the labor market continues to gradually adjust. The press release noted the fall in long-term rates and the appreciation of the CLP. The improvement in international financial conditions supported the region, as copper prices increased since last month due to supply-side shocks, and oil remains broadly stable. The incoming February inflation figure will be the key decider at the March meeting, when we expect BCCh will likely cut rates by 25-bps. We forecast the full loosening cycle to encompass 100-bps cuts this year, taking the policy rate to 2.5% before yearend.
COLOMBIA
  • Despite yearend improvement, activity remains weak. In December, industrial production grew 2.2% y/y, above our expectation (0.5%) and consensus (1.2%). Oil refining related activity contributed 1.9 p.p. to the growth in the month. Also, industrial production rose 1.4% in 4Q16, down from 2.2% in 3Q16. In spite of the slowdown in the 2H16, industrial production grew 3.5% in 2016 (2015: 1.7%), the highest rate since 2011. Excluding oil refining related activity, industrial production was up only 0.5% in 2016. Retail sales increased 6.2% y/y in December, above our forecast (2.5%) and the consensus (4.0%), led by the double-digit rise in automobile sales. Overall, private consumption related activity weakened last year, with retail sales growth slowing to 1.2% y/y (2015: 2.4%; 2014: 7.9%). We estimate that GDP grew by 1.8% last year, but acknowledge a downside risk to our estimate. Higher oil prices and a more favorable investment outlook on the back of the 4G PPP initiatives would boost a recovery to 2.3%. Full Report
  • Banrep survey show inflation expectations continue to edge up. Since the January survey, inflation surprised to the upside, which likely led the market to revise the yearend inflation forecast to 4.60% (from: 4.46%). Core inflation expectations also ticked up for 2017, reaching 4.21% (from: 4.13%). Meanwhile, inflation expectations for the 2-year horizon remained stable at 3.50%. The latest inflation expectations bolster the likelihood that the central bank will stay on hold at the February 24 monetary policy meeting.
  • In this context, analysts now expect the central bank to stay on hold until the April meeting. Medium expectations for the policy rate at the end of this year remain at 6.0%. We see the policy rate ending the year at 5.5%, with the majority of the rate cuts coming in the later part of the year. The timing of the next rate hike will likely depend on how inflation and inflation expectations evolve. Full Report Below

Market Developments 

  • GLOBAL MARKETS: DM yields widened on the back of Chinese inflation data and Yellen’s testimony to the Congress. The stronger than expected PPI in China reinforces the “reflation” story in DMs. The Fed chair repeated that “waiting too long to remove accommodation would be unwise…”, signaling a rate hike in the upcoming meetings, if data remains in line with expectations. Hence, US Treasuries (5-year and 10-year) increased to 1.97% (+6bps) and 2.49% (+5bps), respectively. The Fed funds futures implied probability of a March hike rose to 34% from 30% as of Monday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed (CRB futures index: 0.11%). Both iron ore (-0.85%) and soybean (-0.91%) fell, while Brent went up to USD 55.92/bbl. In LatAm currencies, the BRL outperformed to) owing to technical drivers, trading at 3.0852/USD (+0.81%), a level last seen on July 2015. The MXN strengthened 0.04% to 20.28/USD and the CLP appreciated 0.17% to 641.68/USD. The COP was the regional laggard, depreciating to 2,874.52/USD (-0.02%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: All over LatAm, the 5-year tenor credit spreads slightly fell, except for Chile. In Mexico and Colombia, spreads decreased 1bp to 143bps and 137bps. Chilean risk premium stood flat at 75bps. Brazilian CDS fell the most, again, reaching 218bps (-3bps) – lowest since February 2015. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long DI futures halted a 10-day rally. The Jan-21 went up 2bps to 10.26%. The curve now implies roughly 335bps in rate cuts for 2017. Also, breakevens widened, on average, 3bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear steepened, tracking US yields. The 1-year widened 4bps to 7.24% and the 10-year went up 5bps to 7.93%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean curves bear steepened, pressured by the rise in global yields. Camara rates traded higher. The 1-year went up to 2.98% (+1bp) and the 10-year widened to 4.17% (+3bps). Chile Rates Tracker In IBR swaps, the 1-year widened to 6.65% (+1bp), the 10-year went up to 5.37% (+10bps). The cuts implied in the curve for this year are between 97bps and 123bps, pending of the term premium assumption. 
    Colombia Rates Tracker

Upcoming Events

  • In Brazil, external data and high-frequency activity indicators are on the radar. December’s real service sector revenues will be released (Wed.), for which we expect a decline of 4.4% y/y. Also, industrial business confidence (CNI) for February will be released (Thu.). Moreover, the Central Bank’s activity index (IBC-Br) may be disclosed. We expect the IBC-Br to drop 0.3% m/m in December. Still, January’s Current Account Balance will be released (Fri.). We expect the current account deficit to reach USD 5.6 billion. Finally, direct investment in the country (former FDI) in January will be released (Fri.), for which we expect to sum up to USD 10 billion.
  • In Colombia, the trade balance is on the limelight. DANE will publish the December trade balance (Fri.). We expect a trade deficit of USD 455 million, smaller than the USD 1.4 billion deficit recorded one year ago. Also notworthy, Fedesarrollo will publish the consumer confidence index for January (Wed.).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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