Itaú BBA - Post-Copom rally in Brazilian yields

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Post-Copom rally in Brazilian yields

September 8, 2017

The Brazilian curve bull flattened (Jan19x25: -11bps) after the Copom delivered the final 100-bp cut on Wednesday, September 6.

With information available until 6:30pm Brasilia time


  • The Brazilian curve bull flattened (Jan19x25: -11bps) after the Copom delivered the final 100-bp cut on Wednesday, September 6 (see Macro Backdrop). In DI futures, the Jan-25 fell 11bps to 9.78%.
  • In FX, the CLP (-0.98% to 620.35/USD) was the laggard in EM space as copper prices fell 3.34%. Oil-linked currencies weakened as crude dropped 2.89% (MXN: -0.22% to 17.7114/USD; COP: -0.01% to 2,907/USD). The BRL (+0.42% to 3.0872/USD) outperformed its LatAm peers and is below levels seen prior to May 17. 
Macro Backdrop


  • Copom: no surprise for now, slower easing later. The Copom delivered the widely expected outcome, a 100bps rate cut to 8.25%pa, in an unanimous vote. In the statement, the Committee assesses that data released since the last policy meeting are consistent with a gradual economic recovery – indicating that, for the Copom, the economy is already post stabilization. There is no mention that the increase in uncertainty on reforms and (fiscal) adjustment might have negative implications on activity. The committee evaluates that inflation developments remain quite favorable (only favorable, previously), with several measures of underlying inflation at low levels, including of the components most sensitive to monetary policy (that is, service prices).
  • Looking forward to the next one, the committee states that with the economy performing as expected, and (importantly) taking into account the stage of the cycle, it would be proper to moderately slow down the pace of easing – moderate increments meaning, judging by recent communication patterns, 25bps increments. A recovering economy, and inflation that is at the (likely) bottom of this cycle support the Copom´s intention to slow down and eventually end the cycle, which we think, for now, will take place with a sequence of cuts of 75bps in October and 50bps in December, with the Selic at 7.0%, and all-time low, by the end of the year. Full Report
  • Traffic of heavy vehicles fell 0.7% mom/sa in August (our seasonal adjustment). Despite this fall, the index shows a clear upward trend since 2H2016 and is consistent with our scenario of gradual recovery in economic activity. 
  • In August, CPI inflation was pressured by persistently high non-core food inflation; core goods’ (tradables) prices, in spite of the MXN appreciation; the seasonality of education fees; and higher energy prices. CPI inflation came at 0.49% month-over-month, in between our forecast (0.47%) and median market expectations (0.50%). The main source of the pressure were agricultural prices (non-core food), which climbed 2.06% and contributed 20bps to monthly CPI inflation. Core goods (tradables) increased by 0.47%, adding 17bps. This result was surprising, considering that the gap between the five-year median variations (our proxy for normal inflation prints) and the observed variations for tradables had been narrowing substantially over the past months (reflecting the lagged effects of MXN appreciation), but widened unexpectedly in August.
  • We expect CPI inflation to decrease to 5.7% year-over-year by the end of 2017. Disinflation for tradables is taking longer than we expected and non-core food inflation keeps rising, but we believe annual CPI inflation will begin decreasing in September. The appreciation of the MXN observed so far this year (14% year-to-date, almost matching last year’s 19% depreciation) will be the leading driver for disinflation, mainly materializing through core goods (tradables). Moreover, non-core food inflation (which is volatile and currently running at an abnormally high level) will likely show a reversion soon. Full Report
  • Consumer prices increased 0.2% from July to August, above the null variation recorded one year ago. The monthly rise was broadly in line with both the market consensus (0.3%) and our expectation (0.2%). The main group driving price gains in the month was the food and non-alcoholic division (1.0% increase from July and a 0.2 p.p. contribution to the total gain). Meanwhile, the transportation division was the principal drag (-0.1 p.p. contribution), as the winter vacation period ended. Tradable goods prices rose 0.5% (+0.1% last year), lifted by energy price gains and some fruits and vegetables. On the other hand, non-tradable prices fell 0.1% from July (0% one year ago) dragged down by transportation. Excluding food and energy, prices also dropped 0.1% in the month (+0.1% one year ago). 
  • Low growth, inertia and the favorable performance of the CLP combined with well-anchored inflation expectations will likely contain inflationary pressures. We expect inflation to remain low for the remainder of the year (2.4% year-end) and to remain below the target in 2018 (2.8% year-end). In this context, we see space for the central bank to implement additional monetary easing ahead. However, considering the lack of a meaningful downside surprise, we expect the central bank to stay on hold this month. In the recently published Inflation Report, the central bank ruled out further easing unless short-term downside risks to inflation materialize. Full Report
  • In the month of August, the trade balance surprised market analysts to the upside boosted by mining exports. The USD 597 million trade surplus came in above the USD 125 million market consensus and our call (USD 250 million) with mining and agriculture exports accelerating in the month. The rolling 12-month trade surplus came in at USD 5.1 billion, remaining at a comfortable level (USD 5.3 billion in 2016). Our seasonally adjusted series shows that, at the margin, the trade balance surplus picked up to USD 8.2 billion (annualized) in the quarter ending in August, largely due to mining, from the USD 2.6 billion annualized surplus recorded in 2Q17 (USD 1.0 billion in 1Q17). 
  • We expect the current-account deficit to remain low this year as internal demand stays weak, the effects of mining strike continue to fade and copper prices remain high. With mining exports expected to remain firm ahead as copper prices stay high, Chile’s external vulnerabilities will likely stay contained. We see a current account deficit of 1.4% of GDP (from the rolling-4Q deficit of 2.2% of GDP recorded as of 2Q17), in line with that recorded in 2016. Full Report
  • Consumer confidence is inching up to the neutral level but still has some distance to advance. In August, Adimark’s consumer confidence moved to 41.1 points, a 9.6 p.p. gain over the last 12-months (July: 41.0). However, this concluded the 39th consecutive month in pessimistic territory (below 50). All sub-indices posted an improvement since August 2016. Household goods consumption confidence is in optimistic territory for the fourth consecutive month (at 55.9; 13.9 points higher than one year ago), while the 12-month expectations of the economy picked up 13.8 points from August last year to reach 47.2 (48.9 in July 2017). The evaluation of the current economic state is at 36.5 points and the 5-year forecast sits at 31.4 points, still deep in pessimistic territory. Consumer confidence will likely be favored as inflation and interest rates stay low. As uncertainty from the upcoming elections moderates, confidence could improve further. We expect economic growth of 1.3% this year, down from 1.6% in 2016, with a sentiment improvement aiding a growth recovery next year to 2.5%.

Market Developments 

  • GLOBAL MARKETS: The dollar hit a 33-month low ending the week (DXY: -0.36% to 91.34). Risk off day with equity markets mixed and widening volatility gauges ahead of the weekend. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the red in the session (CRB futures: -0.93%). Oil prices dropped (WTI: -2.89% to USD 48.10/USD) as Baker Hughes data showed the US oil rig count rose by 1 this week, despite oil production drop. Base metals posted losses (copper: -3.34%; iron ore: -2.69%) as Chinese imports of raw materials came in flat on a sequential basis. In FX, the CLP (-0.98% to 620.35/USD) was the laggard in EM space as copper prices fell 3.34%. Oil-linked currencies weakened as crude dropped 2.89% (MXN: -0.22% to 17.7114/USD; COP: -0.01% to 2,907/USD). The BRL (+0.42% to 3.0872/USD) outperformed its LatAm peers and is below levels seen prior to May 17. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor traded range bound in the session. In Brazil and Chile, country risk was stable at 182bps and 55bps, respectively. On the other hand, in Mexico and Colombia, CDS inched up 1bp to 99bps and 115bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x25: -11bps) after the Copom delivered the final 100-bp cut on Wednesday, September 6 (see Macro Backdrop). In DI futures, the Jan-25 fell 11bps to 9.78%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican rates went down 1-2bps in the session. In TIIE swaps, while very short rates inched up (6-month: +1bp to 7.39%), long ones fell (5-year: -2bps to 6.76%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields were mixed in the session. In Camara swaps, the 1-year fell 3bps to 2.43% and the 7-year widened 2bps to 3.71%. Chile Rates Tracker In Colombia, long yields also fell in the session. In IBR swaps, the 10-year went down 2bps to 6.14%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom minutes will be released (Tue.). We expect the Committee to deliver a 75-bp cut in October and a 50-bp cut in December, with the reaching 7.0% in by YE17. On economic activity, the key releases for the week will be July’s retail sales (Tue.) and the Service Sector Survey (PMS) (We.). We expect a 0.1% mom/sa increase in core retail, and a 0.2% decline in the broad segment. For July’s PMS we expect the headline to fall 0.8% year-over-year. Furthermore, BCB will release its monthly activity index (IBC-Br) for July (Thu.). Finally, paper cardboard dispatches (ABPO) for August may be released during the week. 
  • In Mexico, the statistics institute (INEGI) will publish July’s industrial production (Mon.). We expect it to grow at a modest 0.6% year-over-year. Moreover, the National Association of Department Stores and Supermarkets (ANTAD) will announce August’s same-store-sales (Mon.). We expect ANTAD sales to grow 4.5% year-over-year. 
  • In Chile, the BCCh will hold its September monetary policy meeting (Thu.). In the absence of data surprises, we expect the central bank to hold the policy rate stable at 2.5% and keep a neutral bias. 
  • In Colombia, activity indicators for the month of July will be published (Fri.). 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 (Fri.). The minutes may provide the context in which more easing this year would be likely. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We expect the central bank to leave the monetary-policy rate unchanged at 26.25%. Then, the INDEC (the official statistical agency) will publish the National CPI for August (Tue.). Moreover, the INDEC will release the unemployment rate for 2Q17 (Thu.). We expect a reduction in the unemployment rate to 9.0% from 9.3% in the same quarter one year ago. 

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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