Itaú BBA - MXN boosted by stronger than expected US data

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MXN boosted by stronger than expected US data

August 30, 2017

The MXN (+0.68% to 17.7208/USD) outperformed EM peers as the US 2Q GDP second reading surprised to the upside.

With information available until 6:30pm Brasilia time


  • The MXN (+0.68% to 17.7208/USD) outperformed EM peers as the US 2Q GDP second reading surprised to the upside. The BRL closed at 3.1584/USD (+0.20%). Andean pairs were the laggards in LatAm FX (COP: -0.60% to 2,953/USD; CLP: -0.80% to 630.28/USD). 
  • The Chilean curve shifted 3-5bps upwards as the manufacturing growth came in above market expectations (see Macro Backdrop). In Camara swaps, the 6-month widened 5bps to 2.37%. 
Macro Backdrop

  • The consolidated public sector posted a primary deficit of BRL 16.1 billion in July, slightly worse than our forecast (-14.7 billion), but better than market consensus (-17 billion). The consolidated primary deficit accumulated over 12 months widened to 2.7% of GDP (June: 2.6%). The central government’s result, published by the National Treasury, was below expectations (-20.2 billion, while we estimated -19.3 billion), as negative surprises in terms of revenues offset spending moves. Regional governments posted a wider-than-expected deficit of 2.7 billion (vs. an estimated -0.5 billion), while state-owned companies posted a surplus of 0.5 billion (vs. an estimated 0.7 billion deficit). 
  • All in all, the government will likely achieve the revised primary deficit target of BRL 162 billion (-2.4% of GDP) for the consolidated public sector. However, there is still risks regarding the execution of extraordinary revenues, particularly tax amnesty program Refis/PERT and auctions of hydropower plants. Full Report
  • Macro Vision: reforms could bring Brazil’s potential GDP to 3.5%. In this report, our macro team argues that a fiscal adjustment that increases domestic savings and stabilizes public debt, combines with the implementation of microeconomic reforms, could bring potential GDP to 3.5%. Without these adjustments, potential GDP would be closed to 1.5%.
  • The Congress joint budget committee (CMO) approved the central government’s new fiscal targets of BRL 159 billion set for 2017 and 2018. Previously, the targets were BRL 139 billion for 2017 and BRL 129 billion for 2018. By the time we wrote this piece, the text was being debated in Congress. 
  • The TLP (long-term interest rate) cleared the Lower House. The remaining three amendments to the core text approved last week were rejected. The bill is scheduled to be voted in the Senate’s floor on Tuesday (September 5). The provisional measure creating the new BNDES benchmark rate expires next week (September 6). 
  • FGV’s economic uncertainty index declined 4.3% to 130.1 in August, close to the level before the heightened political uncertainty. The survey is relevant for mapping part of the economic agents’ risk aversion that was not explained by traditional financial conditions indicators. A high figure is associated with greater uncertainty that is negatively related to economic activity. 
  • According to FGV, confidence in the services sector rose 0.4% to 83.2 in August. The improvement partially offsets the decline in June and was driven expectations (1.0%). Meanwhile, the current situation assessment fell slightly (-0.4%). 
  • In the 3Q17 inflation report, Banxico increased the mid-point of its growth forecasts for this year (to 2.3%, from 2.0%) and the next (to 2.5%, from 2.2%). In spite of the more optimistic view on growth and the recent upside surprises on inflation, the central bank forecasts lower inflation in 2018 relative to the previous report, possibly due to the stronger MXN. The central bank sees balanced risks to its forecasts for both growth and inflation. In the report, Banxico reaffirms that the current level of monetary policy rate (7%) is consistent with a neutral monetary policy (that is, a real ex-ante policy rate within the range considered neutral), which - added to solid growth forecasts, likely Fed rate hikes, and uncertainties associated with Nafta renegotiation and the presidential elections - means there is no rush in reducing interest rates. Consistent with this, when presenting the report Governor Carstens stated that the central bank should be “very patient about reducing rates”, also in-line with previous commentaries by different board members in the press.  
  • We see the policy rate in Mexico at 7% at least until the beginning of the 2H18. While the central bank’s view on inflation (or at least the view of the majority of its board members) indicates that rate hikes are unlikely, we believe there is no appetite for cuts, considering the risks associated to Nafta, elections and monetary policy in the US, in a context of solid growth and an interest rate within a range consistent with neutrality. Full Report
  • The industrial production index grew 3.3% year over year in July, up from the 1.8% drop in the previous month as mining’s contribution turned positive for the first time since December 2016. Mining production increased 4.7% year over year after falling every month during the first half of the year (-6.1% in June). Meanwhile, manufacturing production rose 2.6% from July last year (partly due to a low base of comparison), from the upwardly revised 1.8% in June (0.9% initially). Manufacturing growth was above market consensus of 2.0%, but in line with our call of 2.7%. Production in the month was boosted by vehicle manufacturing (0.7 p.p. contribution to the total gain), followed by metal related manufacturing (0.6 p.p.). The main drag in the month was from paper production and printing industries (-0.7 p.p.). 
  • With mining recovering, low inflation and an expansionary monetary policy in place, a modest activity recovery in the second half of the year is likely. We expect private consumption activity to rise 3.5% in the month, lifted by durable consumption, leading to a mild recovery in total activity from the 1.4% recorded in June. In all, after the economy expanded 1.6% last year, we expect GDP growth of 1.3% for 2017, with a recovery to 2.5% next year. Full Report
Market Developments 
  • GLOBAL MARKETS: Equity markets gave back recent losses as geopolitical concerns ease and markets focus on US data. 2Q GDP in the US was revised up to 3.0% qoq/saar (from 2.6%), above market expectations (2.7%). The revision is explained especially by the stronger private domestic demand, especially consumption (up to 3.3% from 3.0%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -1.06% to USD 46.50/USD) as markets reassess the impacts of Hurricane Harvey over US refineries. In FX, the MXN (+0.68% to 17.7208/USD) outperformed in EM peers on stronger than expected activity data in the US. The BRL closed at 3.1584/USD (+0.20%). Andean pairs were the laggards in LatAm FX (COP: -0.60% to 2,953/USD; CLP: -0.80% to 630.28/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor narrowed substantially. In Chile spreads fell to 59bps (-2bps), the lowest level since May 2011. In Brazil, CDS also went down 2bps to 198bps. Mexican and Colombian country risk both decreased 3bps to 103bps and 125bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed as the BRL appreciated. In DI futures, the Jan-19 fell 2bps to 7.76%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields narrowed at the margin in the session. In TIIE swaps, the belly was under pressure (2-year: -2bps to 7.06%). Likewise, real rates marginally fell (Jun-19: -1bp to 3.06%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 3-5bps upwards as the manufacturing growth came in above market expectations (see Macro Backdrop). In Camara swaps, the 6-month widened 5bps to 2.37%. Chile Rates Tracker In Colombia, most rates trader lower once again (5-year IBR swap: -5bps to 5.52%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the main highlight of economic activity will be the 2Q17 GDP (Fri.). We expect it to be flat on quarter-over-quarter seasonally adjusted terms. In addition, the nationwide unemployment rate for July will come out (Thu.), for which we expect a flat figure at 12.9% (according to our seasonal adjustment). On external accounts, we expect August’s trade balance (due Fri.) to once again post a strong surplus (USD 4.3 billion). 
  • In Chile, the national statistics agency (INE) will publish the national unemployment rate for the quarter ending in July (Thu.). As we expect job growth dynamics to endure, we see the unemployment rate reaching 7.0%. Then, the BCCh will publish the minutes of the August monetary policy meeting (Fri.). The minutes will build the base for the upcoming Inflation Report, providing details on the central bank’s evaluation of inflation dynamics and the course for monetary policy. Going forward, the national statistics agency (INE) will publish the private consumption activity indicators for July (Fri.). We expect the commercial activity index to have increased 3.5% from last year.
  • In Colombia, the unemployment rate for the month of July will be released (Thu.). We expect the urban unemployment rate to rise to 10.7% in July. Then, Banrep hosts its monthly monetary policy meeting (Thu.). We expect a 25-bp cut to 5.25%, the last expected move for the year as the board will likely wait for inflation to revert to a downward trend early next year before engaging in further policy rate cuts. 
  • In Argentina, the INDEC will publish the manufacturing and construction data for July (Thu.). Then, tax collection for August will see the light (Fri.). We expect taxes to increase 30% yoy to ARS 215.5 billion in August. 

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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