Itaú BBA - Mexican rates rise on above-expected US data

Latam FI Strategy Daily

< Back

Mexican rates rise on above-expected US data

August 15, 2017

In Mexico, long rates widened in tandem with Treasuries, after US retail sales surprised to the upside.

With information available until 6:30pm Brasilia time


  • In Mexico, long rates widened in tandem with Treasuries, after US retail sales surprised to the upside. In TIIE swaps, the 10-year increased 6bps to 7.18%. In Colombia, the Coltes widened (May-22: +2bps to 6.17%) as GDP surprised positively and also on Banrep Governor Echevarria’s remarks to lawmakers. “We are running out of space to cut rates” he said. 
  • In LatAm FX, the MXN traded at 17.8069/USD (-0.20%). The COP closed at 2,966/USD (+0.02%). The BRL (+0.63% to 3.1702/USD) outperformed within high-beta pairs. 
  • In Chile, markets were closed due to a national holiday (Assumption Day). 
Macro Backdrop


  • Strong retail sales in June. Core retail sales advanced 1.2% mom/sa in June, above the median of market estimates and our forecast (both at 0.4%). Compared to June 2016, core sales expanded 3.0%, marking a third consecutive gain after 24 months in negative territory. Meanwhile, broad retail sales (including vehicles and construction material) soared 2.5% during the month, also beating the median of market estimates (1.8%) and our call (1.3%). The strong result was widespread, with gains at the margin in eight out of ten components. Eight out of ten broad retail components advanced during the month. The exceptions were supermarkets (-0.4%) and office material and equipment (-2.6%). 
  • Going forward, we expect retail sales will continue to show an upward trend in the coming months. However, coincident indicators are consistent with a preliminary forecast of a 0.4% slide in core retail sales in July. Coincident indicators out so far (retail activity indexes, vehicle sales, surveys with consumers and retail entrepreneurs) suggest that core retail sales will fall 0.4% mom/sa in July. Full Report
  • Itaú Unibanco monthly GDP advances in June. Our monthly GDP proxy went up 0.6% mom/sa in June. Compared to one year earlier, monthly GDP advanced 1.9%. However, in 2Q17, the indicator receded 0.2% on a seasonally-adjusted basis vs. 1Q17, in line with our call for GDP in the second quarter. The decline was driven by a contraction in agriculture GDP (following a strong result in the earlier months of the year) and unfavorable statistical carryover from several GDP components due to weak readings in March. These two factors offset the improvement in underlying growth during the quarter. The monthly advance was widespread among PIBIU components, with eight out of ten posting increases. Retail stood out positively with a gain of 2.5% mom/sa, while the agriculture indicator dropped 1.7% mom/sa. Overall, preliminary data for July suggest another monthly increase in PIBIU. Full Report
  • The central government deficit target was revised upward by BRL 20 billion to a deficit of BRL 159 billion (or -2.4% of GDP) for 2017, and by BRL 30 billion also to a deficit of BRL 159 billion (or -2.2% of GDP) for 2018. The revision follows uncertainty around the feasibility of a high amount of extraordinary revenues and the spending freeze.
Market Developments 
  • GLOBAL MARKETS: The USD posted gains (DXY: +0.47% to 93.8 – a 3-week high) and treasuries widened (10-year: +5bps to 2.26%) as US retail sales figures came in on the strong side of expectations. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Weak day for commodities (CRB futures: -0.68%) on the back falling grain prices. In agriculture, wheat fell 2.61%, corn dropped 2.07% and soybean went down 0.91%. Also, oil prices (WTI: +0.21% to USD 47.83/USD) recovered intraday losses as API is said to report US crude stocks fell 9.2 million bbl last week. In LatAm FX, the MXN is depreciating 0.20% to 17.8069/USD. The COP closed at 2,966/USD (+0.02%). Bucking the regional trend, the BRL (+0.63% to 3.1702/USD) outperformed within high-beta pairs. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads were mixed in the session. Mexican and Colombian spreads inched up 1bp to 106bps and 128bps, respectively. Meanwhile, Chilean country risk fell 3bps to 62bps. At last, Brazilian CDS narrowed the most, to 201bps (-4bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded range bound once again. In DI futures, the Jan-19 stood flat at 8.06% and the Jan-21 inched down 1bp to 9.38%. Conversely, long linkers (past Aug-22) narrowed 2bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican rates widened on rising US treasuries. In TIIE swaps, the 1-year went up 1bp to 7.31% while the 10-year increased 6bps to 7.18%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to a national holiday. In Colombia, the Coltes curve bear flattened (May-22xSep-30: -2bps) as GDP came in above market expectations and also on Banrep Governor Echevarria’s remarks to lawmakers. “We are running out of space to cut rates” he said. The May-22 widened 2bps to 6.17%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Service Sector Survey (PMS) will be released (Thu.), an important indicator for 2Q17 GDP forecast. For June’s PMS, we expect the headline to fall 3.5% year-over-year. Furthermore, the BCB will release its monthly activity index (IBC-Br) for June (Thu.) and CNI will release its industrial business confidence for August (Fri.). The market is also looking into the reforms being discussed in Congress. In that regard, the TLP (new Long Term Interest Rate) report is scheduled to be read on Wednesday at 15:00 PM (SPT) in the joint commission (Lower House and Senate) built to discuss this topic. 
  • In Chile, the BCCh will hold its August monetary policy meeting (Thu.). With July’s inflation coming in slightly above market expectations and activity not deteriorating further, we expect the board to keep the policy rate stable at 2.5% in another split decision. Of interest would be whether the communication announcing the decision re-introduces an easing bias. We currently expect two additional 25-bp rate cuts this year. Moreover, the central bank will publish the National Accounts data for the second quarter of the year (Fri.). At the margin, we expect GDP to gain 0.7% from 1Q17, leading to annual growth of 1.0% year over year (0.1% in 1Q17). Then, the central bank will also publish the 2Q17 current account balance (Fri.). We expect a USD 1.2 billion deficit, up from the USD 1.0 billion deficit in 2Q16, mainly on the back of a smaller trade balance surplus (USD 1.3 billion in 2Q17, after USD 1.7 billion in 2Q16) as mining production gradually recovers from the 1Q17 strike.
  • In Colombia, think-tank Fedesarrollo will release the July consumer confidence (Wed.). The weak consumer confidence levels hint that a fast recovery of private consumption is unlikely. Finally, Banrep will present its quarterly inflation report (Fri.). The central bank will likely implement a downward revision to growth forecasts for this year (currently 1.8%), while confirm the expectation that inflation will accelerate through the remainder of the year. Meanwhile, the report will likely also indicate that room for further easing is narrow, a message already being communicated by various board members. 

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