Itaú BBA - Mexican yields widen, tracking US treasuries

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Mexican yields widen, tracking US treasuries

September 14, 2017

The belly of the Mexican curve widened in tandem with US treasuries (5-year: +2bps to 1.79%).

With information available until 6:30pm Brasilia time


  • The belly of the Mexican curve widened in tandem with US treasuries (5-year: +2bps to 1.79%). In TIIE swaps, the 2-year increased 2bps to 7.02%.
  • In LatAm FX, the COP (-0.09% to 2,912/USD) and the CLP (-0.10% to 17.7462/USD) posted gains. The MXN is trading at 17.661/USD (+0.46%) by the time of writing. The BRL closed at 3.1209/USD (+0.46%).
Macro Backdrop


  • According to Valor newspaper, Prosecutor-General Rodrigo Janot filed a second set of charges against President Temer. According to the law, for the Brazilian President to go on trial, the Lower House must grant permission in a plenary vote. A two-thirds majority (342 Representatives) is required. 
  • According to BCB, the IBC-Br Activity Index rose 0.41% mom/sa in July, above expectations (0.1%). The result for the previous month was revised upward by 0.13 p.p.. Relative to the same month in 2016, the IBC-Br rose 1.41% (consensus: 0.75%). The result is consistent with several monthly indicators released for July showing positive growth (industrial production, retail sales, employment, sugarcane harvest), despite a weak figure in services real revenue.
  • After closing, the BCB announced a roll over auction of up to 12,000 FX swaps on September 14. If this pace is maintained throughout the month, the central bank will have rolled over 60% of the outstanding amount expiring in September (out of the USD 9.975 billion the central bank will allow USD 3.975 billion to expire). 
  • As unanimously expected by the market, the BCCh left its policy rate unchanged at 2.5% in September. The neutral guidance in the communiqué appears to be the first step towards the implementation of the revamped communication scheme laid out in the IPoM. The board made specific reference to the forecast scenario of the 3Q17 IPoM, by saying that the monetary policy rate would remain stable at the current 2.5% until normalization reassumes, something that would only happen when the output gap begins to close (in the latter part of 2018, according to the IPoM). The central bank reiterated short-term risks to inflation prevail, and reassured it remains vigilant of deviations from the baseline scenario that jeopardize the convergence of inflation to the 3% target in the forecast horizon.
  • While a board divided on the need for additional monetary stimulus increases the possibilities of no additional rate cuts, we see there is space for easing ahead. Short-term forecasts for inflation (namely, for September), point at an atypically low inflation reading. Moreover, the strength displayed by the CLP and a still weak labor market will likely keep inflationary pressures subdued, so a slower convergence to the 3% target (compared to the central bank’s forecast scenario) remains a risk. Full Report


  • Retail sales gained 3.1% year-over-year, above the 2.6% market consensus and our 2.2% forecast. Retail sales growth improved from the 0.9% recorded in June, boosted by sales of food and non-alcoholic beverages, household appliances, and vehicles. Together, these components added 2.9 p.p. to the annual gain. Excluding vehicle sales, retail sales increased 2.5% year-over-year (1.1% in June). The rebound in retail sales is in line with a mild improvement in consumer confidence and a significant decrease in inflation from the end of last year. 
  • Meanwhile, industrial production grew 6.2% year over year, well above the market consensus (4%), but closer to our 6.8% estimate. Today’s data support our view that growth will pick up in 2H17 after a weak beginning to the year. A low base of comparison (due to the transportation strike in July 2016) led the industrial production revival to +6.2% year-over-year in July, from -1.7% in June. Oil refining (+10.8%), beverage (+12.2%) and non-mineral metallic (+7.3%) production contributed with 3.9pp to the headline figure. 
  • Retail sales and industrial production indicators are favorable for the expected recovery in activity. On the back of today’s data, we expect the coincident activity indicator (ISE), to expand 4% in July (+1.4% in June). Low inflation and the monetary easing will support activity in 2H17. We expect GDP growth of 1.6% this year (2.0% in 2016) and a further improvement to 2.5% in 2018. Full Report
  • Unemployment rate fell to 8.7% in 2Q17 from 9.3% in 2Q17 according to the INDEC (the official statistical agency). Employed people rose 0.1 million to 11.4 million in one year and 67K relative to 1Q17. However, the employment rate fell to 41.5% from 41.7% in the same quarter one year ago.  The participation rate also decreased to 45.4% in 2Q17 from 46.0% in 2Q16. Across regions, the highest unemployment rate was registered in the greater Buenos Aires (10%) which explains 56% of the work force.  We expect a reduction of the unemployment rate. We expect the unemployment rate to fall to an average 8.3% this year from 8.5% in 2016 in line with the expansion of the economy. 

Market Developments 

  • GLOBAL MARKETS: The GBP (+1.40% to 1.3399/USD) outperformed the major currencies following the Bank of England’s monetary policy meeting. As expected, the BoE remained on hold but the majority of the board sees scope for stimulus reduction in coming months. On another note, the US core CPI came in stronger than expected in August. This way, the Fed funds implied probability of a rate hike by YE17 increased to 47% from 39% as of Wednesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Metallic commodities dropped substantially (copper: -0.62%; iron ore: -2.35%) after Chinese industrial production came in below expectations. Also, oil prices rose in the session (WTI: +0.82% to USD 50.16/USD). LatAm currencies appreciated in the session (+0.54%). The COP (-0.09% to 2,912/USD) and the CLP (-0.10% to 17.7462/USD) posted gains. The MXN is trading at 17.661/USD (+0.46%) by the time of writing. The BRL closed at 3.1209/USD (+0.46%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor widened at the margin. In Colombia, Mexico and Chile CDS inched up 1bp to 114bps, 100bps and 54bps, respectively. Meanwhile, Brazilian country risk remained at 182bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan18x25: -7bps) in the session. In DI futures, the Jan-25 fell 8bps to 9.89%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: In tandem with US treasuries, Mexican rates widened at the margin. In TIIE swaps, the belly was under pressure as the 2-year increased 2bps to 7.02%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted, on average, 1bp upwards. In Camara swaps, the 1-year widened 1bp to 2.46%. Chile Rates Tracker In Colombia, rates were mixed in the session. In IBR swaps, while short yields were broadly stable (1-year flat at 4.84%), long ones narrowed (10-year: -1bp to 6.09%). Colombia Rates Tracker

Upcoming Events

  • In Colombia, activity indicators for the month of July will be published. We expect industrial production to rise 6.8% year over year. Meanwhile, retail sales likely saw growth of 2.2% in twelve months. Then, Banrep will release the minutes of the monetary policy meeting held in August. The minutes may provide the context in which more easing this year would be likely. 

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

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