Itaú BBA - Mexican yields widen alone in LatAm

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Mexican yields widen alone in LatAm

October 13, 2017

Mexican rates increased after Banxico’s communiqué.

With information available until 6:30pm Brasilia time


  • Mexican rates increased after Banxico’s communiqué. In a presentation posted in the central bank’s website, Deputy Governor Javier Guzman stated that increases in the policy rate cannot be ruled out. In TIIE swaps, the 2-year widened 11bps to 7.30% and 6-month increased 5bps to 4.76%. The MXN is trading at 18.9112/USD (-0.03%).
  • Elsewhere in LatAm, rates narrowed and currencies appreciated after the weak US CPI print. Coming back from the holiday, short DI futures narrowed 1-2bps, as the Jan-19 fell 2bps to 7.27% and the BRL strengthened 0.86% to 3.1460/USD. Andean rates narrowed on falling core yields after the weak US CPI print; COP: +0.26% to 2,935/USD; CLP: +0.13% to 623.60/USD. 
  • We estimate the recent correction in short US yields accounts for roughly two-thirds of the weakening of our LatAm FX index over the past month. Furthermore, our baseline is consistent with further upward correction in US rates and some additional USD appreciation. In our Strategy Monthly report, we argue that the slow adjustment of Colombia’s current account deficit renders the COP the most vulnerable LatAm currency to a re-pricing of core yields. 

Macro Backdrop

  • Banxico published the minutes of September’s monetary policy meeting shedding more light on why the majority view is that the balance of risks, for both inflation and growth, has deteriorated. The statement accompanying September’s decision had already mentioned this deterioration, but the minutes provide some new informational content. On inflation, the minutes revealed that most board members believe inflation peaked in August, and began a downward trend in September. However, they also acknowledged that upward risks on prices have intensified; highlighting that volatility associated to Nafta negotiations and the presidential elections could pressure the MXN in the short-term (and thus fan inflation). Against this backdrop, two board members (out of the five) explicitly said that they are not ruling out the possibility of further rate hikes. 
  • Our base-case is that the policy rate will be kept at 7% at least until the beginning of the 2H18. Banxico’s survey shows that the market is expecting cuts to kick-in in 2018, but this seem hard to materialize in the short-term. Even more so when two board members are not ruling out hikes. Thus, we reaffirm our view that Banxico has no appetite for cuts, considering the risks associated to Nafta, elections and monetary policy in the US, and a reference rate level within the range consistent with neutrality (as per Banxico’s official estimates, presented in the quarterly inflation report). Full Report
  • Industrial production remained weak in August, with poor performances of the mining (largely oil) and construction sectors partly offset by stronger manufacturing output. Industrial production fell 0.5% year-over-year, close to our forecast and median market expectations (contractions of 0.6% and 0.8%, respectively). According to calendar-adjusted data reported by the statistics institute (INEGI), the fall was slightly larger (0.6% year-over-year), pulling down the three-month moving average contraction rate to 0.7% year-over-year in August (from 0.5 in July). 
  • We expect a sequential improvement of industrial production in coming quarters, mainly driven by the positive effects of firmer US activity on Mexico’s manufacturing exports. In fact, the US ISM manufacturing index rose to 60.8 in September; the highest level in more than thirteen years. Moreover, the fiscal consolidation – which has negative effects on both oil output (through the reduction of PEMEX’s capex) and construction activity – will be much smaller in 2018 than in the previous two years, according to the 2018 budget bill. Two important points to be considered, however, are the growing uncertainty about Nafta and the presidential elections, which could put investment decisions on hold (and thus hurt construction activity). 
  • The minutes from Banrep’s September monetary policy meeting show the question is more centered on when, rather than whether, to cut. The pause implemented in September followed 5 members voting to keep the rate stable at 5.25% while the remaining two favored a 25-bp cut, based on weak economic activity. All members agreed that while leading indicators for activity signal an improved 3Q17, growth remains subdued. The majority remains concerned about inflation and the evolution of the slow current account deficit adjustment. 
  • We believe the pause in the monetary cycle will extend until yearend. The minutes show the board agrees economic data calls for further cuts, but the timing of these cuts remains the key issue. The decision to increase the monetary stimulus will likely depend on incoming data. Hence, we consider the easing cycle will resume in the first half of 2018, taking the policy rate to 4.50% (from 5.25%), once inflation resumes a downward trajectory towards the 3% target. Full Report
  • August activity indicators came in weak, partly affected by a high base of comparison, but there remain signs that activity is on a recovery path. Retail sales fell 1.2% year-over-year, below the +1.2% market consensus and our +0.5% forecast. Meanwhile, industrial production contracted 3.1% year over year, inferior to the market consensus (-1.0%), but not as dramatic as our -5.5% estimate. Nevertheless, once adjusting for seasonal and calendar effects, the declines of both indicators are greatly reduced. 
  • Higher real wages (as inflation falls) and lower interest rates, along with a favorable external environment, will likely help support the economy going forward. We believe an activity recovery in 2H17 will generate growth of 1.6% this year (2.0% in 2016), with a pickup to 2.5% growth next year. Full Report


  • National inflation accelerated in September due to a rebound in core prices. Consumer prices gained 1.9% between August and September, well above expectations (1.3%) and marking the highest reading of the last five months. Prices have accumulated a 17.6% year-to-date increase, surpassing the upper band of the target range set by the central bank for this year (12%-17%). The last-three-month cumulative inflation rose, ticking up to 21.9% (annualized) from 18.6% in August. 
  • The central bank faces significant challenges to reduce inflation, in particular in the core items, which may lead to a tighter monetary stance. The economy is growing (and the credit expanding rapidly) amid pending adjustments in regulated prices. The monetary authority aims to reduce inflation to an average 1% monthly in the last quarter, a level considered by the central bank to be consistent with the 2018 target (8%-12%). We note that to anchor inflation expectations is critical, in particular regarding future wage negotiations. We expect 22% inflation this year and 16% in 2018, again above the central bank target. Full Report

Market Developments 

  • GLOBAL MARKETS: The US treasury curve tightened (5-year: -3bps to 1.90%) after the inflation data miss forecasts triggered a widespread risk-off tone. Core CPI rose 0.13% m/m, below market expectations (0.2%). Most of the surprise (5bps) was in the Core  Goods (-0.23%m/m), while Services Ex-Shelter rose 0.20% m/m and Rent of Shelter rose 0.27% m/m. We continue to foresee firmer trends in core Services (in tandem with tighter labor market), and Core Goods should to firm up (given the weaker USD, stable commodities and stronger global growth). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were boosted by strong Chinese imports (actual: 18.7% yoy; consensus: 14.7%).  The biggest upward contributions came from metals, where iron ore rose 5.72% and copper 0.43%. Oil prices were also lifted after, according to Baker Hughes, working rigs fell by five this week (WTI: +1.51% to USD 51.70/bbl). LatAm FX appreciated after the weak CPI print triggered a weak USD. Coming back from the holiday, the BRL outperformed in the region, closing at 3.1460/USD (+0.86%). Andean pairs posted gains on the back of stronger oil and copper prices: COP: +0.26% to 2,935/USD; CLP: +0.13% to 623.60/USD). Bucking the EM trend, the MXN was the laggard in LatAm (-0.03% to 18.9112/USD) on uncertainty over Nafta negotiations. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) were mixed. In Brazil, CDS fell 2bps to 181bps. In Chile, spreads were stable at 56bps. In Mexico and Colombia, both spreads widened to 114bps (+2bps) and 118bps (+1bp), respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Front end DI futures narrow 1-2bps, tracking US treasuries and a stronger BRL. The Jan-19 fell 2bps to 7.27%. Linkers past the 2022s were flat whereas short ones narrowed. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates widened on the back of a weaker MXN and on Banxico communiqué. In a presentation posted in the central bank’s website, Deputy Governor Javier Guzman states that increases in the policy rate cannot be ruled out. The belly of the TIIE swaps curve was under most pressure (2-year: +11bps to 7.30%) while the very short and the long ends widened to a lesser extent (6-month: +5bps to 4.76%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean rates narrowed on falling core yields after the weak US CPI print. In Chile, Camara swaps past the 1-year fell 2bps and the very short end was stable. Chile Rates Tracker In Colombia, rates also decreased due to the weak activity figures in September (see Macro Backdrop). In IBR swaps, the 1-year fell 4bps to 4.72%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, October´s IPCA-15 consumer inflation preview will be released (Fri.). We forecast a 0.35% monthly rise, with year-over-year inflation increasing to 2.7% from 2.56%. On economic activity, September’s CAGED formal job creation may come through. We expect a net creation of 62k jobs (stability in seasonally adjusted terms). Also, August’s Service Sector Survey (PMS) will be released (Tue.), for which we expect a 2.8% year-over-year decline. Moving forward, BCB will release its monthly activity index (IBC-Br) for August (Wed.). On fiscal accounts, September’s tax collection will be released throughout the week, for which we forecast BRL 103.5 billion, or a 6.6% y/y increase in real terms. Finally, the Lower House Constitution and Justice Committee (CCJ) is expected to vote the charges against President Temer between Tuesday and Thursday. Voting in the Lower House floor is expected to take place in the following week, which starts on October 23. 

  • In Mexico, INEGI will announce September’s unemployment rate (Fri.). We expect the unemployment rate to post 3.6%. 

  • In Chile, the BCCh will hold its monthly monetary policy meeting (Thu.). We expect the board to keep the rate unchanged at 2.5%. 

  • In Colombia, think-tank Fedesarrollo will release the September consumer confidence (Tue.). Moreover, the trade balance for August will be published (Wed.). We expect a trade deficit of USD 928 million, broadly stable from one year before (USD 991 million deficit). 

  • In Argentina, the BCRA will publish its quarterly monetary policy report (Wed.). We expect the report to shed light on the monetary policy stance given the challenges to meet the inflation target range in 2017 and 2018. Then, the fiscal accounts for September will see the light (Fri.). We expect the government to meet its official target deficit of 4.2% of GDP in 2017. 

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

Today's editors: Eduardo Marza, Pedro Correa

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