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Profit taking in Brazilian rates ahead of the budget cut announcement

March 28, 2017

Long DI Futures increase as the government delayed the announcement of the budget measures aiming to compensate the fiscal deficit shortfall.

With information available until 6:30pm Brasilia time

Highlights

  • In rates, long DI Futures increase (Jan-20: +6bps to 9.69%) as the government delayed the announcement of the budget measures aiming to compensate the fiscal deficit shortfall of BRL 58 billion announced on March 22. The government will broadcast the budget cut and the magnitude of tax increases on Wednesday (March 29). In Mexico, yields traded higher as employment data came in better-than-expected (see Macro Backdrop). In TIIE swaps, the 1-year increased 5bps to 7.21% and the 5-year increased 6bps to 7.33%. Accordingly, breakevens widened (5-year: +4bps to 3.78%). 
  • In FX, a strong dollar session as US consumer confidence index rose to new cyclical highs. In LatAm FX, most currencies under our coverage depreciated. The CLP decreased 0.21% to 666.03/USD and the BRL traded 0.47% lower to 3.1413/USD. The MXN was the regional laggard, trading at 19.03/USD (-0.72%). The COP, however, outperformed the majors as oil prices posted strong gains, closing at 2,908.38/USD (+0.37%). 

Macro Backdrop

BRAZIL
  • Supermarket sales (ABRAS) rose in February, resuming a moderate recovery path. According to Valor Pro, supermarket sales rose 0.5% m/m extending gains seen in January (3.7% m/m) following a 3.1% decrease in December. Excluding the decline in December, supermarket sales have shown a moderate recovery path since 2Q16. The two latest ABRAS readings are consistent with rising core retail sales in both January and February. The results for January will be released Thursday (March 30), and we forecast a 0.4% m/m increase in core retail. Meanwhile, the broad segment, which includes vehicle sales and construction material, will likely shrink: we expect a 0.9% decline, pulled down by weaker vehicle sales. It is worth noting that the release carries additional uncertainty due an update in the sample/weight of retailers.
  • Construction confidence (FGV) increased 0.9% in March boosted by expectations. Construction sector confidence rose 0.9% m/m, in line with the upward trend in industry and consumer confidence, which also posted gains in March. The increase was more influenced by the expectations component (+2.0%) than by the current situation component (-0.9%). Construction confidence improved between May and September 2016, remaining virtually stable since then. Construction sector capacity utilization declined somewhat and suggests that production of typical construction inputs will remain stable in February and March.
  • The energy agency (ANEEL) approved an extraordinary adjustment in the tariffs of electricity distributors, reversing a charge linked to the Angra 3 nuclear plant. The estimated impact of this extraordinary adjustment over the IPCA is around -0.35 p.p. in April, +0.30 p.p. in May and +0.02 p.p. in June.
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 29. 
MEXICO
  • Mexico's labor market continues showing signs of strength. February’s unemployment rate came in at 3.4%, below our forecast (3.6%) and market expectations (3.5%), and 0.8 p.p. less than the print recorded in February 2016. At the margin, the unemployment rate decreased to 3.5% in February (January: 3.6%). We highlight that formal employment is still growing at a robust pace (February: 4.2% y/y), although real wage growth was negative in the first two months of 2017 (given the increase in inflation caused by the spike of gasoline prices). Looking ahead, we believe that the labor market will deteriorate, as GDP growth slows down. Tighter macro policies and weaker private investment (given the uncertainty of bilateral relations with the U.S.) will affect employment growth. Hence, we expect the annual average unemployment rate to increase to 4.3% in 2017 (2016: 3.9%).
COLOMBIA
  • The labor market continued to loosen in February with higher unemployment rate, falling labor force participation, and weak job growth. The unemployment rate for February increased half a percentage point from last year, to 10.5%, taking the indicator for the quarter ending in February to 10.3% (one year before: 10.2%). Adjusted for seasonal factors, the national unemployment rate was broadly stable from December at 9.3%, but increased to 9.4% in the moving quarter (4Q16: 9.1%). Additional signs of weakness in the labor market include slowing job creation and the falling labor force participation rate (to 64.1% in the moving-quarter ending in February, from 64.7% one year before). Employment grew only 0.3% y/y. The main contributor to the 72 thousand jobs created in the quarter from the prior year was the real estate sector (+103 thousand), while construction continues to shed jobs (-59 thousand). Meanwhile, public sector employment had its largest contraction (-7.8%) since the international financial crisis, as fiscal consolidation advances. A weak labor market could be a drag to consumption in the short-term. As the central bank is concerned with an excessive deceleration of activity, this would support additional monetary loosening ahead. Full Report
GLOBAL
  • Macro Vision: Has Europopulism been stopped? Support for populist parties in Europe appears to have peaked and may well decline ahead as the economy continues to recover, migration flows dwindle, EU leaders understand the need to return power from Brussels back to member countries, and the examples of recent populist governments start to affect voter opinion. However, the aggregate picture can hide real danger at the country level. With a track record of feeble growth and strong immigration inflows, Italy appears to be a weaker link than France. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk on day as US consumer confidence index rose to new cyclical highs. Labor market indicators (Jobs Plentiful – Jobs Hard to Get) rose to new highs, indicating further declines in the unemployment rate are likely in the coming months. Also, consumer expectations (average of Conference Board and U. Michigan surveys) continue to suggest consumption may accelerate. Equity markets were strong on the green, volatility gauges decreased and Treasuries widened (5-year: +4bps to 1.96%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher and oil prices rally (Brent: +1.16% to USD 51.34/bbl). According to the National Oil Corporation (NOC), oil production from the western Libyan fields of Sharara and Wafa has been blocked, reducing output by 252,000 barrels per day. Copper prices posted gains (+1.41%) as, according to Chile’s copper agency, Cochilco, global demand is on track to grow 2% to 3% this year. And with supply constrained by interruptions at mines including Escondida and Grasberg, the market is set to swing back into deficit to the tune of 200,000 to 250,000 metric tons. In LatAm FX, most currencies under our coverage depreciated. The CLP decreased 0.21% to 666.03/USD and the BRL traded 0.47% lower to 3.1413/USD. The MXN was the regional laggard, trading at 19.03/USD (-0.72%). The COP, however, outperformed the majors as oil prices posted strong gains, closing at 2,908.38/USD (+0.37%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: All across LatAm, credit spreads for the 5-year tenor fell. Chilean spreads went 3bps down to 75bps. Both Mexican and Colombian country risk decreased 5bps to 135bps and 138bps, respectively. CDS in Brazil went to 237bps (-4bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields increase as the government delayed the announcement of the budget measures aiming to compensate the fiscal deficit shortfall of BRL 58 billion announced on March 22. The government will broadcast the budget cut and the magnitude of tax increases on Wednesday (March 29). In DI Futures, while short rates traded marginally lower (Jul-17: -1bp to 11.01%) long rates went up (Jan-20: +6bps to 9.69%; Jan-25: +7bps to 10.26%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded higher as employment data came in better-than-expected (see Macro Backdrop). In TIIE swaps, the 1-year increased 5bps to 7.21% and the 5-year increased 6bps to 7.33%. Accordingly, breakevens widened (5-year: +4bps to 3.78%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, short yields were broadly stable and long yields increased 3bps, on average. In Camara swaps, the 1-year was flat at 2.84% and the 6-year increased 3bps to 3.76%. Chile Rates Tracker In Colombia, rates fell in the session. In IBR swaps, the 1-year went down 5bps to 5.81% and the 10-year decreased 2bps to 6.12%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for 1Q17 will come through (Thu.). We expect the message conveyed in this QIR to leave the doors open for stronger rate cuts (we expect a 100-bp cut in April’s meeting). Then, January’s retail sales numbers will be published (Thu.). We expect a 0.4% m/m increase in core retail, whereas the broad segment will likely shrink: we expect a 0.9% decline, pulled down by weaker vehicle sales. Moreover, the final March reading of FGV’s industrial business confidence will come out (Wed.), for which the preview indicates a 3.3% rise in confidence and 0.2 p.p. rise in capacity utilization. January’s Service Sector Survey (PMS) with data on the sector’s revenues will also come through (Wed.). Ahead on the week, the nationwide unemployment rate will hit the wires (Fri.). We expect the unemployment rate to reach 13.1% in the quarter ended in February. Finally, we count on a possible release of the BCB’s monthly activity index (IBC-Br) for January. We expect a 0.1% m/m decline. The BCB’s credit report release is also relevant (Wed.). Onto fiscal accounts, February’s tax collection may be released throughout the week. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. Then, the consolidated primary budget balance for February will come through (Fri.). We expect a BRL 19.6 billion deficit, with the central government result (Thu.) posting a BRL 20.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.5 billion surplus (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Finally, the National Monetary Council is scheduled to meet to decide on the TJLP long term interest rate (Thu.). We expect no change to the TJLP in the near future, currently at 7.5%. 
  • In Mexico, the Central Bank’s board will meet to decide on the reference rate (Thu.). Given the upward trend of inflation, we expect a 25-bp rate increase to 6.50%. Finally, the Ministry of Finance (“Hacienda”) will announce February’s fiscal balance (Thu.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation is implemented. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of February (Thu.). We expect manufacturing production to contract 3.3% from last year (January: -1.1%), negatively affected by metal related manufacturing amid a prominent mining strike. Then, the central bank will publish the minutes from the March monetary policy meeting (Fri.). In the meeting, the board of the central bank cut the policy rate by 25-bp to 3.25%, in line with expectations. Also, INE will publish the national unemployment rate for the quarter ending in February (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.3% from 5.9% in the equivalent period last year. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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