Itaú BBA - Mexican yields took the route north after the GDP upward surprise

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Mexican yields took the route north after the GDP upward surprise

May 22, 2017

TIIE swaps widened after 1Q17 GDP came in better-than-expected, beyond the robust flash estimate.

With information available until 6:30pm Brasilia time


  • TIIE swaps widened after 1Q17 GDP came in better-than-expected, beyond the robust flash estimate (see Macro Backdrop). The 1-year increased 4bps to 7.50% and the 5-year went up 5bps to 7.34%. Likewise, the MXN is the only pair under our coverage on the green, trading 0.35% higher to 18.66/USD.
  • Elsewhere, the CLP posted losses of 0.17% to 670.38/USD. The COP ranked the bottom performer among the majors, closing at 2,905.41/USD (-0.70%). The BRL was volatile in the session, closing at 3.2666/USD (-0.38%). The pair opened testing the 3.30/USD handle, but somewhat recovered during the session. 

Macro Backdrop

  • Expectations are more or less stable. According to BCB’s Focus survey, inflation expectations for 2017 inched down to 3.92% (-1bp), and 2018 expectations dropped to 4.34% (-2bps). Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. Markets now see the BRL at 3.23/USD by YE17 (previous: 3.25/USD). At last, GDP growth expectations remained stable. BCB Report
  • FGV industrial business confidence (preview) rose 1.3% m/m s.a. in May. The index is now at 92.4, still below the level seen as neutral (100). The opening shows an increase of 1.5% in the current component and a 0.8% rise in the expectations component. Since the data was collected until May 17, the index still doesn’t show the effects of the political uncertainty. The final data will come through next Monday (May 29) and could show some impact. The capacity utilization preview indicates a fall in the month, still well below the historical pattern and without tracking the confidence improvement observed since 2016. 
  • In the roll over auction, the BCB placed the full offering of 8,000 FX swaps announced on Friday (May 19). After closing, the central bank called for a roll over auction of up to 8,000 contracts on May 23. 
  • In the second extraordinary auction, the central bank placed 14,000 contracts (USD 700 million) due in August 2017. For the October 2017, were placed 11,000 contracts (USD 550 million). For the January 2018, were sold 15,000 contracts (USD 750 million). After closing, the BCB confirmed another USD 2 billion FX swap auction on May 23. According to the note published on Thursday, this will be the third and last auction of the same size.
  • According to Agência Estado, the labor reform rapporteur Ricardo Ferraço confirmed he is reading his report on Tuesday (May 22). The news agency also reported that the Lower House Speaker Rodrigo Maia said the voting of the pension reform in the plenary will start between June 5 and 12. 
  • After a robust flash estimate, which surprised market expectations, Mexico’s GDP growth for 1Q17 was revised up, reflecting resilience to the shocks. The monthly GDP proxy (IGAE) expanded by 4.4% year-over-year in March - above our forecast (4.1%) and market expectations (4.2%) - leaving the GDP growth rate of 1Q17 at 2.8% year-over-year (beating the 2.7% flash estimate announced three weeks ago). Adjusting for calendar effects, GDP growth was 2.6% year-over-year, up from 2.3% in 4Q16. At the margin (seasonally-adjusted), GDP expanded 0.7% from the previous quarter, bringing quarter-over-quarter annualized growth to 2.7% in 1Q17 (below the 2.9% qoq/saar observed in 4Q16). 
  • The takeaway is that the Mexican economy has performed better than expected in 1Q17, casting doubt on how severe the headwinds will really be. The spike of inflation, the uncertainty surrounding bilateral relations with the U.S., the tightening of macroeconomic policies (fiscal cuts and rate hikes), and the consistent fall of oil output haven’t had a broad-based impact in GDP figures yet. We recently revised up our GDP growth forecast for 2017 (to 2%, from 1.8%) but still expect a slowdown from last year’s annual growth (2.3%). In our view, domestic demand will likely slowdown in coming quarters, as the effects of the abovementioned shocks spread through the economy. Conversely, stronger manufacturing exports - supported by the pick-up of U.S. industrial production and a competitive real exchange rate - will act as a buffer. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the FOMC minutes coming during the week (Wednesday), US equity markets were on the green as volatility gauges receded. Havens posted gains on geopolitical concerns in the Pacific as gold prices rose 0.54%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains in the session. Oil prices rose (WTI: +0.73% to USD 51.04/bbl) after Saudi Arabia’s Energy Minister Khalid Al-Falih said on Sunday (May 21) that “prolonging the cuts will help producers reach their goal of trimming stockpiles in developed economies to the five-year average”. Metal prices have also strengthened (copper: +0.81%; iron ore: +0.75%), much like soybean (+0.37%). In LatAm FX, most currencies under our coverage depreciated. The MXN, on the other hand, is trading 0.35% higher to 18.66/USD. The CLP posted losses of 0.17% to 670.38/USD. The COP ranked the bottom performer among the majors, closing at 2,905.41/USD (-0.70%). The BRL was volatile in the session, closing at 3.2666/USD (-0.38%). The pair opened testing the 3.30/USD handle, but somewhat recovered during the session. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor were mixed in LatAm. Chilean spreads decreased 1bp to 71bps. CDS in Colombia stood flat at 127bps and in Mexico they widened 1bp to 115bps. Country risk in Brazil went up 2bps to 249bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields remained volatile over domestic news flow. DI futures bear steepened as the Jan-18 widened 8bps to 9.75% and the Jan-19 increased 26bps to 10.23%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates widened after 1Q17 GDP surprised to the upside (see Macro Backdrop). In TIIE swaps, the 1-year increased 4bps to 7.50% and the 5-year went up 5bps to 7.34%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, short yields narrowed as long widened. In Camara swaps, the 6-month inched down 1bp to 2.49% while long rates increased (5-year: +3bps to 3.52%). Chile Rates Tracker In Colombia, rates narrowed in the session. In IBR Swaps, the 1-year went down 2bps to 5.27% and the 5-year fell 1bp to 5.33%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, May’s IPCA-15 consumer inflation preview will be released (Tue.). We forecast a 0.20% monthly rise, with year-over-year inflation slowing to 3.7% (from 4.4%). The main risks for inflation are of political nature, especially on matters that would interfere with the Social Security reform process in Congress. On fiscal accounts, April’s tax collection will be released throughout the week. We forecast BRL 114.6 billion in tax collections, or a decline of 0.7% year-over-year in real terms. Then, the consolidated primary budget balance for April will come through (Fri.). We expect a BRL 9.0 billion surplus, with the central government result (due Thur.) posting a BRL 8.2  billion surplus and regional governments and state-owned companies’ result amounting to a BRL 2.0 billion surplus (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Onto the balance of payments report (Tue.), we expect a current account surplus of USD 950 million in April, topping last year’s surplus of USD 411 million for the same month. Over twelve months, the current account deficit should sum to USD 20 billion (-1.1% of GDP). We expect direct investment in the country (DIC) to register inflows of USD 5.5 billion in April - if confirmed, DIC will amount to USD 85 billion over 12 months. Also to be released are confidence indicators (FGV) for consumers (Wed.), retail (Thu.) and construction (Fri.). 
  • In Mexico, the statistics institute (INEGI) will announce March’s retail sales (Tue.). We estimate that retail sales picked up to 5% year-over-year, after growing 3.6% year-over-year in February. Moreover, INEGI will publish CPI inflation figures for the first half of May (Wed.). We expect bi-weekly inflation to post -0.42%, explained by the decrease of electricity tariffs announced by the Federal Electricity Commission (CFE), a decrease of gasoline prices, and a drop of agricultural prices (which spiked in April). Assuming our forecast is correct, headline inflation would increase to 6.08% year-over-year (from 6.01% in the second half of April). Following, INEGI will announce April’s trade balance (Thu.), which we expect to come in at USD -1,500 million. We expect the trade deficit to continue narrowing at the margin, driven by an improvement in the non-energy balance which is explained by firmer manufacturing exports (boosted by stronger industrial output in the U.S. and a competitive real exchange rate). Shortly after, the Central Bank will publish Q1’s current account balance (Thu.). We expect the current account deficit at USD 6,795 million in 1Q17, with the 4-quarter rolling deficit narrowing to USD 25.8 billion (2.5% of GDP, according to our calculations) from USD 27.9 billion (2.7% of GDP) in 4Q16. Finally, INEGI will announce April’s unemployment rate (Fri.). We expect the unemployment rate to post 3.3% (below the 3.8% rate recorded in the same month of last year) given that labor market conditions remain tight. 
  • In Colombia, local think-tank Fedesarrollo will publish the April industrial and retail confidence indicators (Wed.). With the economy continuing to show signs of weakness, we expect confidence levels to remain at low levels. Then, the central bank hosts its monthly monetary policy meeting (Fri.). Last month, a split board surprised the majority of the market by cutting the policy rate by 50bps to 6.50%. We believe that the increased concern with activity will likely lead a majority of the board to favor a second consecutive 50-bp cut to 6.00%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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