Itaú BBA - Mexican yields rise in tandem with US treasuries

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Mexican yields rise in tandem with US treasuries

August 14, 2017

NY Fed’s Dudley stated in an interview that he would support another rate hike this year, provided that inflation returns to a moderate pace in the 2H17.

With information available until 6:30pm Brasilia time


  • Long Mexican rates widened 1-2bps, tracking US treasuries higher. The US curve shifted 3bps upwards as NY Fed’s Dudley stated in an interview that he would support another rate hike this year, provided that inflation returns to a moderate pace in the 2H17. 
  • LatAm FX was mixed. Oil exporters posted gains (COP: 0.37% to 2967/USD; MXN: +0.37% to 17.7655/USD). On the other hand, the CLP depreciated 0.19% to 648.04/USD on weaker than expected Chinese activity data. 
  • In Brazil, the challenging fiscal scenario has prompted headlines of a possible change in the fiscal target for 2017. The current context is different from 2015 since Brazilian fiscal policy now has another important anchor established in the Constitution, namely the spending ceiling. In our Monthly Strategy Report, we argue that without investment grade status and given the substantially lower foreign partaking in the local debt market than two years ago, there is little reason to expect that a modification of the fiscal target for 2017 would necessarily trigger a sell-off in the back end. 
Macro Backdrop

  • 2017 inflation expectations slightly increased. According to Focus survey, IPCA expectations increased to 3.50% (+5bps) for 2017, while it has remained flat for 2018 at 4.20% and 2019 at 4.25%. Year-end Selic expectations remained flat at 7.50% for 2017 and 2018, and at 8.00% for 2019. The BRL also remained stable for the three years horizon: 3.25/USD for 2017; 3.40/USD for 2018; to 3.45/USD for 2019. Finally, GDP growth expectations did not change for 2017 (0.34%), 2018 (2.00%), and 2019 (2.50%). See BCB Report
  • Formal employment continued supporting private consumption in the beginning of 2H17. The Mexican Institute of Social Security (IMSS) reported that formal employment expanded 4.5% year-over-year in July, leaving the three-month moving average growth rate at 4.4% (above the 4.3% recorded in June). Importantly, formal employment is the only fundamental determinant of private consumption that remains strong. In contrast, real wages are falling, due to higher inflation; consumer confidence is at low levels, not far from the average of 2009 (when Mexico was in recession); consumer credit is slowing down, amid higher domestic interest rates; and the growth of remittances converted into pesos is decreasing, because of MXN appreciation. 
  • Looking ahead, we expect formal employment growth to weaken somewhat, dragged by the deterioration of gross fixed investment (May: -0.9% qoq/saar). To be sure, the creation of new jobs critically depends on new investments. Nevertheless, we only expect a modest weakening of formal employment growth, considering that the uncertainty affecting investments has been diminishing (namely, there is more clarity on the course of Nafta renegotiation, and the rating agencies S&P and Fitch revised Mexico’s credit rating outlook to stable from negative). An important risk for investment (and the labor market), however, is the proximity of the presidential elections (July 2018), which could affect business confidence down the road. 


  • In June, retail sales grew 1.0% year over year (0% in May), in line with market consensus and our forecast, and 0.5% (0.4% in May) after correcting for calendar effects. Hence, in 2Q17, retail sales contracted 0.3% year-over-year, less intense than the 1.4% decline in 1Q17. Vehicle and motorcycle sales were again a principal drag in the quarter (-4.0% vs. -2.5% in 1Q17). Excluding vehicle sales, retail sales was up by 0.2% (-1.2% in 1Q17). At the margin, retail sales, excluding vehicle and fuel sales, accelerated to 0.6% qoq/saar following the drop of 7.3% in 1Q17 (when activity was negatively affected by the rise in sales tax). Lower inflation and falling interest rates will aid a consumption improvement going forward. However, a loosening labor market in urban areas and consumer confidence still languishing in pessimistic territory suggest a meaningful bounce-back is unlikely. 
  • Meanwhile, industrial production fell 1.9% year over year (-0.8% in May), inferior to the -1.5% market consensus but not as weak as our -4.5% forecast. Industrial production dropped 0.9% (-1.2% in May), after adjusting for calendar effects (one fewer working day). Industrial production dropped 3.1% year-over-year in 2Q17 (+0.3% in 1Q17). However, once calendar effects are considered, industrial production posted a null variation from 2Q16, an improvement from the -2.6% recorded in 1Q17. At the margin, industrial production increased 3.1% qoq/saar, following the 6.7% drop in 1Q17. 
  • The performance of the activity indicators is consistent with GDP growth of 1.4% in 2Q17, a mild improvement from the 1.1% in the prior quarter. Overall, we expect mining to remain an important drag on activity in the quarter, while financial services and the sustained recovery in the agriculture sector will lift activity. For the year, we expect growth of 1.6% (vs. 2.0% growth in 2016), but acknowledge downside risks. Full Report
  • The trade deficit in June came in at USD 832 million, broadly in line with market consensus and slightly smaller than our USD 922 million forecast. The deficit is larger than the USD 771 million deficit recorded one year ago, while a deficit of USD 2.2 billion was recorded in 2Q17 (from USD 2.5 billion in 2Q16). As a result, the rolling 12-month trade deficit narrowed to USD 9.7 billion, from the USD 10.0 billion as of 1Q17 (USD 11.5 billion in 2016; USD 15.6 billion in 2015). The narrowing is due to a growing energy balance, while the non-energy balance deficit is broadly stable. However, at the margin exports are deteriorating mostly due to lower oil prices. Hence, the three-month trade deficit came in at USD 11.9 billion (seasonally-adjusted and annualized), from USD 9.1 billion in 1Q17 (USD 7.8 billion in 4Q16). Imports (FOB) increased 5.1% year over year in 2Q17, slowing from the 7.0% rise in 1Q17. Meanwhile, total exports rose 10.6% year over year in 2Q17, a slowdown from the 32.4% in 1Q17. 
  • We forecast a current-account deficit of 3.7% of GDP this year (4.3% in 2016). The low oil price limits the current-account-deficit correction, in spite of weakening internal demand. Full Report
  • The ruling coalition (Frente Cambiemos) got important support in the primaries for the upcoming mid-term elections. Primaries in Argentina are open and mandatory. As most of the coalitions presented only one list of candidates for the most important disputes, the result of the primaries is a good indicator for voting intentions in the October election. 
  • According to preliminary data corresponding to 95.7% of total polling stations, Frente Cambiemos garnered 35.9% of the total votes at national level, followed by the Peronist party with 20.3% and Unidad Ciudadana (Cristina Kirchner´s party) with 17.1%. As expected the results will not give a majority to Cambiemos in the Lower House or in the Senate, but the ruling coalition is on its way to register a victory in important regions (Cordoba, City of Buenos Aires and Mendoza). A victory in the race for the Lower House seats belonging to the Province of Buenos Aires is also likely. 
  • In the race for the Senate seats of the Province of Buenos Aires - the focus of markets and public opinion - there is a virtual tie, with the Cambiemos ticket (headed by Esteban Bullrich) only slightly ahead Cristina Kirchner’s ticket (34.19% vs. 34.11%). Sergio Massa (dissident Peronist) is in a distant third place, with 15.5% of the vote. These results are better for the government than those indicated by the available polls. Importantly, given the high rejection rate of Cristina Kirchner and the fact that Esteban Bullrich is still unknown to part of the electorate, it is likely that part of Sergio Massa voters switch to Cambiemos in October elections, leading to a victory also in the Senate for the Province of Buenos Aires.  
Market Developments 
  • GLOBAL MARKETS: Treasuries widened (5-year: +3bps to 1.77%) and the USD strengthened (DXY: +0.32%) after an interview with New York Fed’s Dudley. The FOMC voting member hinted that if inflation evolves in line with his expectations, he would likely support another rate hike later this year. The Fed funds futures implied probability of another rate hike this year increased to 37% from 26% as of Friday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses (CRB futures: -1.17%) after Chinese data came in below expectations in July. Industrial production decreased to 6.4% yoy (consensus: 7.1%), fixed investment came at 8.3 % yoy ytd (consensus: 8.6%) and retail sales decelerated to 10.4% yoy (consensus: 10.8%). In metals, iron ore fell 0.84% and copper weakened 0.33%. Notwithstanding, oil prices (WTI) dropped 2.74% to USD 47.63/bbl. In LatAm FX, the MXN is trading 0.34% stronger to 17.7716/USD. The COP appreciated 0.37% to 2,967/USD. On the other hand, the BRL closed at 3.1901/USD (+0.11%) and the CLP depreciated 0.19% to 648.04/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads narrowed at the margin. Mexican spreads stood flat at 105bps. In Chile, country risk inched down 1bp to 64bps. Meanwhile, CDS in Brazil and Colombia both narrowed 2bps to 203bps and 127bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded range bound in the session. In DI futures, the Jan-19 inched down 1bp to 8.05% and the Jan-21 was stable at 9.39%. Real rates, however, narrowed as the Aug-22 fell 1bp to 4.78%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican rates widened 1-2bps, tracking US treasuries. In TIIE swaps, the 1-year went up 1bp to 7.30% and the 5-year increased 1bp to 6.89%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 1-bps downwards. In Camara swaps, the 1-year went down 1bp to 2.40% and the 5-year fell 2bps to 3.34%. Chile Rates Tracker  In Colombia, the front end narrowed as much as 4bps. In IBR swaps, the 9-month fell 4bps to 4.96% and the 3-year went down 1bp to 5.14%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the key economic activity releases will be June’s retail sales (Wed.) and the Service Sector Survey (PMS) (Thu.), two important indicators for 2Q17 GDP forecast. We expect a 0.4% increase in core retail (month-over-month, seasonally adjusted), and a 1.3% growth in the broad segment, which includes vehicle sales and construction material. 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.). Moreover, the government may announce changes to its primary fiscal targets for 2017 and 2018 during the week. Also, July’s tax collection may also be released, for which we forecast BRL 108.3 billion, or a 1.8% y/y decrease in real terms. The market is also looking into the reforms being discussed in Congress. In that regard, the TLP (new Long Term Interest Rate) report can be read by this week in the joint commission (Lower House and Senate) built to discuss this topic. In addition, the Lower House Commission may finish the vote on the political reform. 
  • 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, the national statistics authority will publish the supply-side breakdown of GDP growth for 2Q17 (Tue.). Based on activity indicators for the quarter, we estimate activity increased 0.7% from the previous quarter, resulting in annual growth of 1.4%, up from the 1.1% in 1Q17. Following the publication, the statistics agency will release the coincident activity indicator (ISE) for the month of June (Tue.). May data remained weak but there were signs of stabilization. Then, 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. 

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For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa

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