Itaú BBA - Mexican yields tighten on weak activity data and Banxico’s guidance

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Mexican yields tighten on weak activity data and Banxico’s guidance

April 5, 2017

While consumer confidence posted a timid recovery from historical lows, Mexico’s gross fixed investment declined at the margin.

With information available until 6:30pm Brasilia time

Highlights

  • In rates, Mexican yields fell after disappointing data. While consumer confidence posted a timid recovery from historical lows, Mexico’s gross fixed investment declined at the margin. Also, Banxico’s Carstens said the evolution of inflation expectations may permit the central bank to decouple from the Fed in the medium term. In TIIE swaps, the 1-year fell 7bps to 7.11% and the 10-year also decreased 7bps to 7.19%. In Colombia, the curve bull steepened amid the soon-to-be Banrep board member José Ocampo remarks (see below). In IBR swaps, the 1-year fell 6bps to 5.71% and the 5-year decreased 3bps to 5.70%.
  • In LatAm FX, most currencies under our coverage appreciated. The CLP posted gains of 0.32% to 658.37/USD and the COP strengthened to 2,859.55/USD (+0.21%). The MXN was broadly stable at 18.83/USD. On the other hand, the BRL (-0.89% to 3.1212/USD) was the regional laggard on market concerns over the Social Security reform debate.

Macro Backdrop

MEXICO
  • Consumer confidence continued recovering timidly. The index went to 81 in March (February: 75.7), after hitting an historical low of 68.5 in January (amid the spike of gasoline prices and tension in bilateral relations with the U.S.). Nevertheless, the 3-month moving average growth rate of consumer confidence went further below to -16.7% y/y (February: 16.2%). Granted, the uncertainty surrounding bilateral relation with the U.S. has moderated – which has improved sentiment a bit – but it is still present. In spite of the improvement, consumer confidence remains at a very low level. The implication for the economy is that depressed consumer sentiment can have negative effects on activity. According to conventional macro theory, if households expect lower future income (i.e. threat of losing job) or suffer a fall in their wealth (i.e. deterioration of balance sheets) that would be conducive to less consumer spending in the short-run, as people try to save more and spend less (in anticipation of tougher times ahead). 
  • Mexico's gross fixed investment weakened in January. It contracted 0.5% y/y, undershooting our forecast of a modest expansion (0.3% y/y) and a more optimistic market consensus (0.8% y/y). At the margin, seasonally-adjusted gross fixed investment fell 1.6% from the previous month, with quarter-over-quarter annualized growth falling to negative terrain (-1.5%; December 2016: 1.2% q/q). Both construction investment and investment in machinery & equipment contracted at the margin. Uncertainty is having an impact on investment decisions. Even though the tension between the U.S. and Mexico has moderated somewhat, we still foresee weaker investment down the road.
CHILE
  • The monthly GDP proxy (Imacec) for February was expectedly weak, dragged down by the extended labor strike at the country’s largest copper mine. Imacec contracted 1.3% y/y, compared to the 1.4% drop expected by market consensus and our updated -1.5% forecast following the publication of sector data earlier this week. This is the lowest growth rate since October 2009, and follows the 1.4% rise at the start of the year. In addition to the supply shocks, activity was negatively affected by the leap-year effect. The mining drag on activity in the month added to the impact of the one less working day. The 17.1% y/y decline in mining activity (previous: +0.1%) led the 1.3% headline contraction. Meanwhile, non-mining activity increased 0.2% (January: +1.6%) lifted by commerce and partly countered by shrinking manufacturing. At the margin, non-mining activity is progressing. From January, the seasonally adjusted index fell 0.7%, led by the 12.0% monthly decline in mining (-5.6% q/q vs. -7.7% in 4Q16). Meanwhile, non-mining activity expanded 0.3% from January and accelerated to 1.7% q/q, though this follows a very weak 4Q16 (-0.7% q/q). 
  • We expect activity to remain weak in March as the labor strike persisted into that month. As a result, activity in 1Q17 will likely be the weakest since the global financial crisis. We expect GDP growth of 1.8% this year, broadly in line with the 1.6% recorded last year. Higher copper prices, low inflation and further monetary easing will support activity. Meanwhile, the continued loosening of the labor market, less fiscal support and private sentiment that remains depressed will keep the recovery contained. Full Report
  • Business confidence remains in pessimistic territory, hinting that an activity recovery ahead will likely be mild. Think-tank Icare published its business confidence index for March, which came in at 45.1 (50 is neutral), from the 42.8 one year ago (previous: 46.0). Confidence has now completed three full years in pessimistic territory. Construction confidence in still the lowest sub-index following the end of the tax-incentivized real estate boom. The commerce sub-index is neutral, as was the case one year ago. Low inflation and declining interest rates could lead to an improvement of this sub-index in the months ahead. In spite of the labor strike at Escondida in February and March, mining confidence remains elevated at 61.4 as copper prices stabilize at improved levels. Once the volatile mining confidence is excluded, business confidence sits at 41.3 (March 2016: 41.8). We expect an activity recovery to 1.8% this year, from the 1.6% for 2016, with depressed private sentiment – and resulting subdued investment – playing an important role in the mild recovery.
GLOBAL
  • Global Monetary Policy Monitor: Mexico and South America in opposite trends. In March, there were monetary policy decisions in 26 of the 33 countries we monitor. For another month, the number of central banks hiking interest rates was equal to the number of central banks cutting rates. On the contractionary side, the US and Mexican central banks hiked rates by 25bps, while in China several interest rates were up. On the expansionary side, Chile and Colombia reduced rates by 25bps, in line with expectations, and the Russian central bank surprised the market with a 25-bp rate cut (when it was expected to stay on hold). We expect the monetary easing process to continue in South America: we forecast additional cuts in Brazil, Chile, Colombia and Argentina. In April, we highlight the Brazil’s monetary policy meeting. We expect the BCB to accelerate the pace of interest rate cuts to 100 bps, bringing the Selic rate to 11.25%. In Mexico, the pace of monetary tightening is slowing, consistent with the more favorable behavior of the exchange rate and real interest rates already at a contractionary level. We expect two additional rate hikes (25 bps) in Mexico this year, before the cycle ends. Full Report

Market Developments 

  • GLOBAL MARKETS: Volatility gauges increased amid US employment data and the Fed’s March Minutes. The ADP report showed the US private sector tacked on 263 thousand jobs in March, more than analysts’ expectations of 185 thousand. Given the size and composition of the ADP surprise, we now expect the Non-Farm Payroll (released April 7) to show a creation of 200 thousand jobs in March, from our previous forecast of 175 thousand. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher as metals posted gains and oil prices fell at the margin. After the DOE report, oil prices pared daily gains after flirting with highest levels in nearly a month (Brent: -0.17% to USD 54.08/bbl). The weekly report showed the US production reached 9.199 million barrels a day, a 14-month high. In LatAm FX, most currencies under our coverage appreciated. The CLP posted gains of 0.32% to 658.37/USD and the COP strengthened to 2,859.55/USD (+0.21%). The MXN was broadly stable at 18.83/USD. On the other hand, the BRL (-0.89% to 3.1212/USD) was the regional laggard on market concerns over the Social Security reform debate. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor were mixed. Chilean country risk inched up 1bp to 73bps and Mexican went down 1bp to 130bps. Colombian spreads stood flat at 134bps again. On the other hand, CDS in Brazil fell the most in the region, to 221bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Short Brazilian yields traded lower in the session. In DI Futures, short rates fell (Jan-18: -4bps to 9.76%) while long ones traded range bound (Jan-21: -1bp to 9.80%; Jan25: +1bp to 10.11%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates fell in the session after disappointing soft and hard data. While consumer confidence posted a timid recovery from historical lows, Mexico’s gross fixed investment declined at the margin. Also contributing to the flattening of the curve was Banxico’s Carstens statement “we will be evaluating how inflation expectations behave and perhaps in the mid-term it will permit us to not follow one- to-one the movements of the Fed". In TIIE swaps, the 1-year fell 7bps to 7.11% and the 10-year also decreased 7bps to 7.19%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, most rates widened marginally. In Camara swaps, the 1-year inched up 1bp to 2.74% and the 5-year increased 2bps to 3.50%. Chile Rates Tracker In Colombia, the curve bull steepened amid José Antonio Ocampo remarks. The upcoming Banrep board member stated: “I think the tendency is that there will be more cuts agreed by the central bank because the inflation rate is coming down and the economy is in a relatively cool state, so there is a possibility of more expansion”. In IBR swaps, the 1-year fell 6bps to 5.71% and the 5-year decreased 3bps to 5.70%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, Anfavea will release data from the automobile sector in March (Thu.), providing relevant coincident indicators for both industrial production and broad retail sales. Then, March’s IPCA consumer inflation will be released (Fri.). We forecast a 0.27% monthly rise, with year-over-year inflation falling to 4.6% (February: 4.8%).
  • In Mexico, the statistics institute (INEGI) will announce March’s CPI inflation (Fri.). We expect a 0.44% m/m variation, driven by an increase of core goods (tradable) prices - which are pressured by the lagged effects of exchange rate depreciation - and a rebound of agricultural prices. 
  • In Chile, the National Institute of Statistics (INE) will publish nominal wage growth for February (Thu.). In the previous month, nominal wage growth moderated to 4.4% y/y (previous: 4.7%), as low inflation and the loosening labor market ease wage pressure. Still, INE will publish inflation data for March (Fri.). We expect prices to gain 0.5% from February (previous: +0.2%). Consumer prices are expected to be pulled up by seasonal increases to lemon and tomato prices. As a result, annual inflation would remain at 2.8%, hovering below the center of the central bank’s 2%-4% tolerance range. Finally, the central bank will publish the trade balance for March (Fri.). We forecast a USD 50 million surplus (previous: USD 236 million surplus), taking the rolling 12-month trade balance to USD 4.1 billion (2016: USD 5.3 billion). 
  • In Colombia, the monetary policy meeting minutes from March will be published (Fri.). At the meeting, the central bank cut the policy rate by 25-bp to 7.0%. The decision was by a three-way split. The minutes will likely confirm that the policy rate will keep falling at a steady pace in the months ahead, with the timing of each cut being data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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