Itaú BBA - Mexican rates rally again, still reflecting Banxico’s new guidance

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Mexican rates rally again, still reflecting Banxico’s new guidance

June 23, 2017

Mexican rates kept adjusting to Banxico’s new flight plan.

With information available until 6:30pm Brasilia time

Highlights

  • Mexican rates kept adjusting to Banxico’s new flight plan. The belly compressed 20bps in average, additionally supported by Governor Carstens statements in an interview. According to him, Banxico’s communiqué “has the connotation that if things continue the way things have been going, this would give us an opportunity of a pause”. He added the central bank can stay on hold even as the Fed hikes again later in the year. In TIIE swaps, the 2-year dropped 22bps to 6.75% and the 5-year tightened 19bps to 6.67%. In Mbonos, the 2021s rallied 22bps to 6.55%. The curve implies rate cuts starting already this year, with nearly 90bps in monetary easing until YE18.
  • Most LatAm currencies posted gains, as commodities trimmed the weekly losses. The MXN gained 0.60% to 18.01/USD, outperforming EMFX peers (0.28%). Andean pairs also appreciated (CLP: 0.33% to 661.46/USD; COP: 0.14% to 3,023.50/USD), whereas the BRL closed near opening levels (-0.01% to 3.3427/USD).

Macro Backdrop

BRAZIL
  • The mid-month consumer price index IPCA-15 advanced 0.16% in June, close to our estimate and slightly above the median of market forecasts. Year-over-year inflation decelerated to 3.52% from 3.77% in May. Housing provided the biggest contribution to the monthly increase (0.14 p.p.), due to the hike in electricity bills. On the opposite end, food and beverages provided a negative contribution (-0.12 p.p.), thanks to falling prices for fresh fruits and vegetables. Based on current information, our forecast for the headline IPCA in June stands at -0.15%, with the year-over-year rate slipping to 3.1%. Full Report
  • BCB placed the full offering of 8,200 FX swaps. After closing, it announced another roll over auction of up to 8,200 (USD 410 million) contracts on June 26.
MEXICO
  • Retail sales expanded 1.4% year-over-year in April, closer  to our forecast (1.5%) than to median market expectations (2.3%), leaving the three-month moving average growth rate at  3.7% year-over-year (from 4.9% in March). Growth was higher in calendar-adjusted terms (4.6% year-over-year), but still registering a decelerating trend (1Q17: 5.3%; 4Q16: 9.7%). At the margin, sales expanded 1.2% from the previous month (after falling by the same magnitude in March), with quarter-over-quarter annualized growth at 2.7% (from a -1.9% qoq/saar contraction in March).
  • In all, the weaker consumption is consistent with fundamentals. Although formal employment remains robust, real wages are falling, the impulse of remittances converted into Pesos is waning (given the stronger MXN), and consumer confidence remains at low levels (in spite of the gradual recovery observed since February).
Market Developments
  • GLOBAL MARKETS: Risk appetitive recovered at the margin, as the sell-off in oil took a breather. Oil prices could stabilize since WTI near USD 40/bbl is starting to pressure US energy high-yield CDS spreads, thus likely bringing some supply discipline from shale-oil producers. Indeed, as they are the marginal producers in the global oil markets, the fact that prices at USD 40/bbl deteriorate their credit position suggests the average marginal cost in the sector is above such level. The short term risk is that prices need to dip below USD 40/bbl to force a faster adjustment from US producers. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil recovered some more (Brent: +1.06% to USD 45.70/bbl) as did metals (copper: 0.94%). The MXN gained 0.60% to 18.01/USD, outperforming EMFX peers (0.28%). Andean pairs also appreciated (CLP: 0.33% to 661.46/USD; COP: 0.14% to 3,023.50/USD), whereas the BRL closed near opening levels (-0.01% to 3.3427/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: CDS kept adjusting lower all across LatAm, as spreads fell 2bps for each country (Brazil: 241bps; Mexico: 111bps; Chile: 66bps; Colombia: 134bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Despite the risk appetite abroad, Brazilian yields traded under pressure throughout the curve. In DI futures, the Jan-19 edged up 3bps to 9.01% and the Jan-21 widened 6bps to 10.24%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican kept adjusting to Banxico’s new flight plan. The belly compressed 20bps in average, additionally supported by Governor Carstens statements in an interview. According to him, Banxico’s communiqué “has the connotation that if things continue the way things have been going, this would give us an opportunity of a pause”. He added the central bank can stay on hold even as the Fed hikes again later in the year. In TIIE swaps, the 2-year dropped 22bps to 6.75% and the 5-year tightened 19bps to 6.67%. In Mbonos, the 2021s rallied 22bps to 6.55%. The curve implies rate cuts starting already this year, with nearly 90bps in monetary easing until YE18. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Amid a lack of macro drivers, Chilean yields closed the week softly lower. Camara swaps had another quiet session, as the 5-year inched down 1bp to 3.41%.Chile Rates Tracker Colombian rates tightened 2-3bps past the 5-year, trimming the weekly sell-off. The 10-year fell 2bps to 6.06%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, next week’s highlight will be the National Monetary Council meeting (Thu.). The CMN will decide on the 2019 inflation target and the TJLP long term interest rate. In our view, a lower inflation target for 2019 would reinforce the outlook for lower inflation and anchored expectations. Local news have been indicating a reduction in the 2019 inflation target to 4.25% or 4.0% (from 4.5%). In addition, we expect no change to the TJLP in the near future, currently at 7.0%. Moreover, the nationwide unemployment rate for May will come out (Fri.), and we expect a 0.2% increase to 13.4% (our seasonal adjustment). On fiscal accounts, the consolidated primary budget balance for May will come through (Fri.). We expect a BRL 21.5 billion deficit. Onto the balance of payments report (Tue.), we expect a USD 1.9 billion current account surplus in May. We expect direct investment in the country (DIC) to register inflows of USD 3.0 billion in May - if confirmed, DIC will amount to USD 82 billion over 12 months. Also noteworthy, FGV’s monthly surveys for June on consumer, commerce, construction, industry and services will be released through the week.
  • In Mexico, all eyes on activity and fiscal releases. The Statistics Institute (INEGI) will announce May’s unemployment rate. We expect May’s unemployment rate (Mon.) to print at 3.7% given that labor market conditions remain tight. INEGI will also publish April’s monthly GDP proxy (Mon.), which we forecast to contract -0.7% year-over-year (after growing 4.4% in March). Also noteworthy, May’s trade balance (Tue.) will come through. Finally, the Ministry of Finance (Hacienda) will announce May’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway.
  • Activity data is on the market’s radar in Chile. The national statistics agency (INE) will publish the industrial activity indicators for the month of May (Fri.). We expect manufacturing production to decline 0.3% from last year (-7.5% in April). INE will also publish the national unemployment rate for the quarter ending in May (Fri.). We expect the unemployment rate to reach 6.9% (6.8% one year ago).
  • In Colombia, we expect Banrep to deliver another 25-bp rate cut (taking the policy rate to 6.0%) in its monthly monetary policy meeting (Fri.). The unemployment rate for the month of May will be also released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy and see the urban unemployment rate to rising to 10.7% in May.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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