Itaú BBA - Long Brazilian yields tighten on political news

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Long Brazilian yields tighten on political news

September 5, 2017

LatAm curves shifted downwards as US Treasuries traded substantially lower in the session.

With information available until 6:30pm Brasilia time


  • LatAm curves shifted downwards as US Treasuries traded substantially lower in the session. In Brazil, the long end of the curve fell substantially (Jan25: -13bps to 10.1%), on recent political news (see Macro Backdrop). Elsewhere, the curves shifted 1-2bps downwards, on average. 
  • The BRL (+0.70% to 3.1174/USD) outperformed within high-beta space. The CLP appreciated 0.44% to 621.84/USD as copper prices increased 0.27%. On the other hand, the COP (-0.07% to 2,934/USD) and the MXN (-0.16% to 17.9009/USD) depreciated at the margin. 
Macro Backdrop

  • Industrial production posts a widespread gain in July. Industrial production rose 0.8% in July, above the median of market expectations (0.4%) and our forecasts (0.3%). The last four readings came in above the median of market expectations. The increase accumulated since March 2017 stands at 3.4%. The breakdown by economic category shows gains in all categories: capital goods (1.9%), durable consumer goods (2.7%), intermediate goods (0.9%), and semi-durable and non-durable consumer goods (2.0%). At last, the first coincident indicators are consistent with stability of industrial production in August, consolidating the increase accumulated over the past 4 months. Full Report
  • In a press conference transmitted by Globo television on Monday (September 4), Attorney General Rodrigo Janot said new evidence has emerged regarding the leniency deal that provided grounds for President Temer’s corruption charges. Mr Janot said he is opening an investigation to assess new audio evidence, and added the deal could be revoked if it is concluded the Batista brothers had not been forthcoming about all of their crimes. The prosecutor underscored that the evidence resulting from the plea bargain testimony will stand regardless of whether the immunity granted to the collaborators will be revoked or not. 
  • Gross fixed investment - currently the weakest component of domestic demand - was subdued in 2Q17, but nevertheless seems to have overcome the lowest point, considering that the uncertainty putting investment decisions on hold has diminished. The monthly GFI indicator fell 1% year-over-year in June, almost matching our forecast (-0.9%) and below median market expectations (-0.6%). According to calendar-adjusted data reported by the statistics institute, gross fixed investment also contracted, by 0.9% year-over-year in June, which implied a 0.7% year-over-year contraction in 2Q17 (up from a 2% fall in 1Q17).  Quarter-over-quarter annualized growth actually rebounded to 1.9% (from -6.4% qoq/saar in 1Q17). 
  • While on a year-over-year basis gross fixed investment will likely remain weak until the end of this year, we expect sequential growth to remain at a moderate pace. Although there is still uncertainty over the fate of Nafta, risks seem lower than what it was right after the US presidential elections. Furthermore, the solid US economy also encourages capital expenditures in Mexico. On the other hand, the on-going fiscal consolidation will likely remain a drag on investment (although its benefits on the sovereign credit rating is an offsetting factor), and uncertainty over economic policies after the next presidential elections (scheduled for July 2018) can also have a negative impact. Full Report
  • After hitting an all-time low in January, Mexico’s consumer confidence has been recovering gradually over the course of 2017. For the past months, we have argued that the recovery has been modest but the improvement has been sustained. In August, seasonally-adjusted consumer confidence increased by 0.7% month-over-month, reaching the level of 87.6 (now further above the depressed levels of 2009). In year-over-year terms, seasonally-adjusted consumer confidence is still down (by 1.7%) although by much less than at the beginning of the year. 
  • Looking ahead, we believe consumer confidence will show a more substantial improvement only in 2018, when inflation falls significantly and Nafta renegotiation attains an acceptable compromise for all parties (giving a sense of improving bilateral relations between Mexico and the US). The presidential elections (scheduled in July 2018), however, pose a risk for consumer sentiment, considering the lead of the left & anti-establishment candidate, Andrés Manuel López Obrador, in the polls, and the uncertainty that is posed over the future course of economic policies. 
  • Activity showed an improvement in July as mining production stopped being a drag on activity for the first time since November last year. The Imacec (monthly proxy for GDP) grew 2.8% year over year in July (1.4% in June), above our forecast and market consensus (both at 2.3%). Once corrected for seasonal and calendar effects, growth in July was somewhat lower at 2.5% (1.4% in June). At the margin, mining temporarily lifted overall growth to 6.3% qoq/saar from 3.1% in 2Q17 and 0.5% in 1Q17. 
  • An activity recovery in the second half of the year is our baseline scenario, although it is unlikely that mining production will continue at the current levels. Activity will be favored by higher copper prices, the monetary stimulus applied by the central bank and low inflation. Our baseline scenario (1.3% growth for 2017, with a recovery to 2.5% next year) has two additional 25-bp rate cuts before yearend, taking the policy rate to 2.0%, to be announced in the 3Q17 Inflation Report (IPoM). It is still unclear whether the recent activity data represents a trend-change, while inertia and the favorable evolution of the exchange-rate make an inflation pick-up unlikely. However, as recent data suggests lower risks for the growth outlook (with risks likely to play a key role in the case of additional easing, according to the latest minutes), we cannot rule out the possibility that the central bank keeps the path for the policy rate unchanged at 2.5%. Full Report
  • In August, business confidence stayed above its respective 2016 levels and inched towards the neutral level. Think-tank Icare’s August business confidence index posted its 41st consecutive month in pessimistic territory (below 50), but gained 3 p.p. from August 2016 to reach 43.2 points (previous: 42.4). This was the 6th consecutive month business sentiment has been above the level recorded one year prior. The mining sub-index remains in optimistic territory (52.8), and is now joined by commercial confidence (reaching 50.0 from 47.1 one year ago and 48.6 in the previous month). Meanwhile, industrial confidence increased 2.7 p.p. to 42.7 and construction confidence rose 4.7 p.p. to 25.0. Our expectation of an activity recovery into 2018 considers a confidence improvement that would lead to an improved investment performance. 
  • According to Adimark’s August public opinion survey, Sebastian Piñera’s lead over his nearest presidential rivals remains broadly stable at nearly 20 p.p. and is in line with other surveys. The Chilean presidential election is to be held November 19 and although the former president and current candidate for the center-right coalition (Chile Vamos) holds an imposing lead, it remains insufficient to prevent a runoff vote in December. Adjusting for likely participation, former president Piñera received 40% of the voting intention (39% in in July), ahead of Alejandro Guillier (candidacy is supported by the majority of parties in the ruling coalition), who obtained a stable 21%. Far-left candidate Beatriz Sanchez comes in at 16% (down 4 points from July). Adimark is yet to simulate results for the expected runoff vote. A CEP survey out last week showed that in a runoff scenario, Piñera leads Alejandro Guillier by just over 10 p.p., and was in line with the 12 p.p. according to a recent Cadem simulation. Clarity on the political agenda after the presidential elections is key for a meaningful and sustained rebound of confidence and investment in Chile.


  • Low base effects aided an export growth pick up in July, but indications are that the current account deficit will remain wide. Total exports rose 37.6% year over year in July, up from the 0.8% rise in June. The low base inflicted by a major trucking strike last year explains this striking growth rate. Volatile coal exports lifted exports in the month, meanwhile oil exports moderated its decline (-0.5% vs. -10.7% in June) as prices gains improved while the decline in quantities was stable. In the quarter ending in July, total exports grew 19.6% (10.5% in 2Q17 and 32.4% in 1Q17), boosted by coffee and coal exports, along with an improvement in exports that exclude Colombia’s traditional goods (coal, coffee, oil and ferronickel) to 26.4% (9.2% in 2Q17 and 8.8% in 1Q17). Oil exports dropped 3% in the quarter (+6.8% in 2Q17 and +47.7% in 1Q17). At the margin, exports fell 12.4% qoq/saar, versus -31.7% in 1Q17 and +29.6% in 1Q17. A moderation of the decline of coal exports offset a slight quickening of the fall of oil exports. We forecast a current account deficit of 3.7% of GDP this year (4.3% in 2016). 


  • Analysts kept unchanged their inflation forecasts for this year but adjusted upwardly those for 2018. According to the latest Central Bank survey of expectations, inflation expectations for 2017, measured by the national index, stood at 22.0%, well above the target set by the central bank (12-17%). For 2018, analysts revised inflation expectations upwardly to 15.7% from 15.5%, also above the target set for the year (10% +/- 2%). Survey participants continue to expect a reduction from the current level of the monetary reference rate but now forecast higher rates by end-2017 (to 24.75%, from 23.75%) and 2018 (to 18.25% from 17.5%). Finally, the analysts increased their growth forecasts for this year to 2.8% from 2.7% but kept them for 2018 at 3.0%. Full Report


  • Itaú Activity Surprise Index: Widespread positive surprises in Brazil. Our Itaú Activity Surprise Index moderated to 0.14 in August, coming from 0.16 in July. The Brazilian component was the only one to improve in August, buoyed by positive surprises in June’s activity indicators and better-than-expected labor data for the month of July. Elsewhere, Chilean releases printed stronger than forecasted by the market, whereas Mexican indicators disappointed. Full Report
  • Itaú Inflationary Surprise Index: Upward surprises in Mexico, mixed releases in Brazil. Our Itaú Inflationary Surprise Index rose to -0.26 in August, coming from -0.36 in July. The Mexican surprise index stood flat in August, as tradable goods disinflation has proven slower than anticipated by the market and the non-core food component stayed high. After four consecutive months of declines, the Brazilian surprise indicator increased in August. The country’s inflation indexes registered mixed surprises in the month, but underlying inflation remains low. In Chile, CPI came in a tad above median market projections, whereas in Colombia inflation fell short of the most optimistic forecast. Full Report
Market Developments 
  • GLOBAL MARKETS: Back from the holiday, US Treasuries rallied (5-year: -9bps to 1.65%) on haven demand due to geopolitical tensions in the Korean peninsula. Furthermore, Fed’s Neel Kashkari said during a talk at the University of Minnesota that “it’s very possible that our rate hikes over the past 18 months are leading to slower job growth, leaving more people on the sidelines, leading to lower wage growth, and leading to lower inflation and inflation expectations”. The FOMC voting member added the committee may be overestimating how tight the labor markets is or “may have allowed inflation expectations to drift lower”. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices rebounded in the session (WTI: +2.25% to USD 49.07/USD). Agriculture commodities posted widespread gains (soybean: +2.00%; sugar: +2.04%). On a weak dollar day (DXY: -0.35%), most LatAm FX (+0.32%) posted gains. The BRL (+0.70% to 3.1174/USD) outperformed within high-beta space. The CLP appreciated 0.44% to 621.84/USD as copper prices increased 0.27%. On the other hand, the COP (-0.07% to 2,934/USD) and the MXN (-0.16% to 17.9009/USD) depreciated at the margin. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor traded lower in the session. Brazilian country risk receded 2bps to 189bps – a 32-month low. In Colombia, spreads also fell 2bps to 119bps. In Chile and Mexico, CDS was stable at 57bps and 99bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed substantially, tracking US Treasuries. The BRL appreciation could also have pressured rates. In DI futures, the Jan18 fell 2bps to 7.74% and the Jan-25 went down 13bps to 10.01%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve shifted 1bp downwards in the session. In TIIE swaps, the 1-year went down 1bp to 7.35%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Andean curves narrowed on falling US Treasuries. In Chile, the 1-year IBR swap fell 2bps to 2.29%. Chile Rates Tracker In Colombia, the 1-year IBR swap went down 1bp 4.87%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Copom meeting (Wed.). We expect the committee to cut the policy rate by 100bps, maintaining the easing pace of the previous decision. Then, August’s IPCA consumer inflation will be released (Wed.). We forecast a 0.32% monthly increase, with year-over-year inflation slowing to 2.6% from 2.7%. In addition, August’s coincident indicator for auto production (Anfavea) will be released (Wed.). 
  • In Mexico, the statistics institute (INEGI) will announce August’s CPI inflation (Thu.). We expect a 0.47% month-over-month variation. 
  • In Chile, the BCCh will  publish the 3Q17 inflation report (Wed.). Regarding the policy rate, we expect the updated baseline scenario to infer a path somewhat below that outlined in various surveys (one additional 25-bp cut). Then, the central bank will release the trade balance figures for August (Thu.). We forecast a USD 250 million surplus (USD 235 million deficit in August 2016). Still, the National Institute of Statistics (INE) will publish nominal wage growth for July (Thu.). Finally, the National Institute of Statistics will publish inflation for the month of August (Fri.). We expect prices to increase 0.2% from July (0% in August 2016). 

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

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