Itaú BBA - Oil rout hurts the COP

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Oil rout hurts the COP

June 7, 2017

Oil prices dropped (WTI: -4.94% to USD 45.81/bbl) after the DOE report showed crude supplies unexpectedly rose by 3.3 million barrels last week.

With information available until 6:30pm Brasilia time

Highlights

  • Oil prices dropped (WTI: -4.94% to USD 45.81/bbl) after the DOE report showed crude supplies unexpectedly rose by 3.3 million barrels last week. This marks the first growth in nine weeks and the largest weekly increase of total stockpiles (crude and other liquids) since 2008. Hence, the COP depreciated 0.77% to 2,916.26/USD. The CLP stood broadly flat at 669.05/USD (-0.07%) as the oil rout offset the copper gains (+0.29%). At last, the BRL appreciated 0.26% to 3.2696/USD and the MXN is trading range bound at 18.23/USD (+0.06%). 
  • Chilean rates past the 2-year widened 2-4bps pressured by higher DM yields and slightly stronger than expected wage growth (see Macro Backdrop). In Camara swaps, while short rates (up to 18-month) stood flat, long ones went up (5-year: +3bps to 3.38%).

Macro Backdrop

BRAZIL
  • The Serasa Experian Index for Retail Activity rose 0.6% mom s.a. in May (official seasonal adjustment), following a 0.2% decline in the previous month. The index has been roughly stable since 1Q16, following a steep decline in 2015. The breakdown shows declines in “fuel and lubricants” (-4.7%), “autos & parts” (-2.7%), “apparel” (-2.2%) and “construction material” (-0.7%), while “supermarket, food and drinks” and “furniture” went up (2.2% and 0.5%, respectively). Combining with other indicators, our preliminary forecasts for May core and broad retail sales stand at -0.5% and -1.0% mom s.a., respectively. The divergence is explained by other indicators and by differences in weights and price indexes between Serasa’s index and official data. Our final forecasts will be out after the release of the official April retail sales (to be released June 13 – we forecast core falling 1.6% mom s.a. and broad retail sales declining 0.2% mom s.a.) and May’s supermarket sales (ABRAS, to be released near the end of June). 
  • In the second day of the Dilma-Temer ticket trial in the electoral court (TSE), preliminary motions were discussed. Moreover, the court’s President Gilmar Mendes called extraordinary sessions for Thursday (9h and 14-18h, SP time), Friday (9-12h, 14-18h and 19h) and Saturday (9-12h, 14-18h and 19h). 
  • The BCB placed the full offering of 8,200 FX swaps. After closing, the central bank called for a roll over auction of up to 8,200 contracts on June 8. 
CHILE
  • Following the conclusion of a major mining strike in February and March, mining exports are recovering and resulting in the continuance of a comfortable trade balance. The USD 723 million surplus in May (consensus: USD 524 million; our call: USD 470 million) came in above the USD 564 million recorded one year ago as mining and industrial exports improve. The rolling 12-month trade surplus came in at USD 4.2 billion, broadly stable from 1Q17 (USD 5.3 billion in 2016), reflecting low external vulnerabilities. Our seasonally adjusted series shows that, at the margin, the trade balance surplus picked up to USD 3.7billion (annualized) in May, from the USD 1.1 billion annualized surplus recorded in 1Q17,as mining exports return to normality. Moreover, copper exports grew 12.0% year over year, following the 1.8% decline and 3.3% increase in March and April, respectively. Hence, total exports increased 10.7% year over year (-0.9% in April). On the other hand, total imports grew 8.5% year over year in May (5.9% in April) as capital goods imports remain a drag (-5.4% vs. -11.4% in April), while consumer goods are growing at double digit rate across all divisions. 
  • The current account deficit is set to remain comfortably low. A further improvement of the trade balance in the months ahead is expected. As internal demand stays weak and mining exports rebound, we expect the current-account deficit to remain broadly stable from last year at 1.2%of GDP. Full Report
  • Stable wage growth in April. The institute of statistics (INE) reported nominal wage growth of 4.3% year-over-year in April, stable from the previous month. Nominal wages also grew 4.3% in the quarter ending in April (same as in 1Q17, but a slowdown from the 4.9% in 4Q16 and 5.1% in 3Q16). Adjusted for inflation, wage growth was 1.6% year-over-year in April (1.5% in March). In the quarter, real wages grew 1.5%, stable from 1Q17, but down from 2.0% in 4Q16. The real wage bill growth was 2.9% in the quarter (3% in 1Q17 and 4Q17), when total employment growth is considered. Meanwhile, when only salaried employment is included, the real wage bill in the quarter increased to 1.8% (1.0% in 1Q17 and 1.9% in 4Q16). Wage inflation is likely to stay low and possibly moderate further amid a loose labor market and low headline inflation. 
Market Developments 
  • GLOBAL MARKETS: Ahead of a busy Thursday (ECB monetary policy meeting and general elections in the UK), equity markets were mixed and volatility gauges remained hovering at historically low levels. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses (CRB futures: -1.38%) in the session. The main drag was the oil drop (WTI: -4.94% to USD 45.81/bbl) after the DOE report showed crude supplies unexpectedly rose by 3.3 million barrels last week. This marks the first growth in nine weeks and was also the biggest hike in oil stocks since 2008. In addition, iron ore prices fell 1.46%. In FX, currencies under our coverage were mixed. On the back of lower oil prices, the COP depreciated 0.77% to 2,916.26/USD. The CLP stood broadly flat at 669.05/USD (-0.07%). Likewise, the MXN is trading range bound at 18.23/USD (+0.06%). At last, the BRL appreciated 0.26% to 3.2696/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor widened at the margin. Mexican spreads stood flat at 111bps. In Chile and Colombia, country risk inched up 1bp to 69bps and 126bps, respectively. Finally, CDS in Brazil increased 2bps to 239bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded range bound in the session. In DI futures, while short rates inched down (Apr-18: -1bp to 9.22%), long widened (Jan-21: +2bps to 10.47%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Most Mexican rates widened. In TIEE swaps, the 6-month increased 2bps to 7.44% and the 5-year went up 1bp to 7.19%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long rates widened 2-4bps pressured by higher DM yields and slightly stronger than expected wage growth (see Macro Backdrop). In Camara swaps, while short rates (before 18-month) stood flat, long went up (5-year: +3bps to 3.38%). Chile Rates Tracker In Colombia, most rates increased in the session. In IBR swaps, the 2-year inched up 1bp to 4.81% and the 10-year increased 4bps to 5.84%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, May’s IPCA consumer inflation will be released (Fri.). We forecast a 0.48% monthly rise, with year-over-year inflation slowing to 3.8% from 4.1%. Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Thu.).
  • In Mexico, INEGI will announce May’s CPI (Thu.). We expect a 0.13% month-over-month decline in the CPI, driven by the 23.3% reduction of regulated electricity tariffs by the Federal Electricity Commission (CFE) and the decrease of gasoline prices. Assuming our forecast is correct, annual inflation would increase to 6.15% year-over-year (from 5.82% in April). Finally, INEGI will publish April’s industrial production (Fri.). We expect a 2.8% year-over-year contraction (down from a 3.4% expansion in March), based on a deterioration of coincident indicators and a negative calendar effect. 
  • In Chile, inflation for the month of May will be published by the National Institute of Statistics (Thu.). We expect prices to be flat from April (+0.2% in April). As a result, annual inflation would dip to 2.4%, from 2.7% previously, closer to lower bound of the 2%-4% tolerance range.
  • In Colombia, Banrep will release the minutes of the monetary policy meeting held in May (Fri.). At the meeting, a split board decided to cut the policy rate by 25-bps to 6.25%, less aggressive than the 50-bp cut in the previous month. A tick-up in inflation expectations and sticky core consumer prices have created some unease in the board. Nevertheless all board members were in favor of further easing. The minutes will likely reflect heightened concern for inflation dynamics.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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