Itaú BBA - Relief rally in Brazil

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Relief rally in Brazil

August 23, 2017

The BRL (+0.68% to 3.1415/USD) outperformed within high-beta pairs as the quasi-fiscal reform bill moved to the Lower House floor.

With information available until 6:30pm Brasilia time


  • The BRL (+0.68% to 3.1415/USD) outperformed within high-beta pairs as the quasi-fiscal reform bill moved to the Lower House floor. Additionally, the lower-than-expected inflation print (see Macro Backdrop) put more receiving pressure on the belly of the curve. In DI futures, the Jan-20 fell 12bps to 8.75%. 
  • Elsewhere in FX, Andean pairs posted some gains (COP: +0.10% to 2,982/USD; CLP: +0.03% to 17.6831/USD). The MXN was the regional laggard, trading at 17.6831/USD (-0.13%).
Macro Backdrop

  • The mid-month consumer price index IPCA-15 climbed 0.35% in August, below our estimate and the median of market expectations (both at 0.40%). Year-to-date, the IPCA-15 is up by 1.79% (down substantially from 5.66% in the year-earlier period). Year-over-year inflation decelerated to 2.68% (July: 2.78%), the lowest reading under this metric since March 1999. Transportation (0.24 p.p.) and housing (0.15 p.p.) provided the largest upward contributions, driven by fuels and electricity. The increase in fuel costs followed tax hikes for gasoline, ethanol and diesel, enacted on July 20. Electricity costs went up after the red flag was activated under the tariff flag system and also due to tariff adjustments by some utilities. On the opposite side, food and beverages provided noteworthy downward contribution. Based on current information, our preliminary forecast for the headline IPCA in August was revised downward to 0.37% from 0.50%, with the year-over-year rate slipping to 2.64%. Full Report
  • The current account deficit totaled USD 3.4 billion in July, in line with our estimate (USD -3.5 billion) and market consensus (USD -3.4 billion). The reading was better than the USD 4 billion deficit recorded in July 2016. Over 12 months the current account deficit receded to $13.8 billion or 0.7% of GDP. Year-to-date, the current account posted a USD 2.7 billion deficit, the smallest since 2007. The seasonally-adjusted annualized three-month moving average moderated at the margin, reversing from a USD 1 billion surplus in June to a USD 9 billion deficit in July. We still expect large trade surpluses this year, but a rebound in domestic demand and lower commodity prices tend to produce slightly weaker readings in the next months. We believe the July figures already point in that direction. 
  • In the financial account, direct investment in the country (DIC) added up to USD 4.1 billion in July, below our estimate (USD 5.5 billion) and market consensus (USD 5.0 billion). Equity capital transactions accounted for 64% of total DIC. DIC accumulated over 12 months has been in the USD 80-85 billion range throughout the whole year. Preliminary data published by the Central Bank show DIC inflows remain strong in August (USD 4.7 billion as of August 21). Although DIC printed below expectations in July, it remains resilient and thus reduces Brazil’s reliance on volatile capital flows. However, portfolio flows (stocks and fixed income) are still negative over 12 months. Full Report
  • The TLP (new BNDES benchmark rate) was approved in the joint commission (Lower House and Senate) built to discuss this topic by 17 votes in favor and 6 against. The proposal is pending on the approval of both houses of Congress. The provisional measure that creates the TLP expires on September 6. 
  • Retail sales surprised to the downside in June, amid lower real wages, slower consumer credit, and less impulse from remittances converted into pesos (due to MXN appreciation). Retail sales grew a modest 0.4% year-over-year in June, significantly below median market expectations (2.8%) and our own forecast (2.5%). According to calendar-adjusted data reported by the statistics institute (INEGI), retail sales’ growth was also 0.4% year-over-year in June, with the growth rate for 2Q17 decreasing to 2.7% year-over-year (from 5.3% in 1Q17). 
  • We expect a sequential recovery of retail sales, beginning in 4Q17. Retail sales growth in 3Q17 will likely be low, given the unfavorable carry-over from June’s data. Even though the year-over-year growth rate of the real wage bill has continued to slow down - as the fall of real wages has more than offset the strength of formal employment - we note that the real wage bill has already begun to rebound sequentially. We believe inflation will show a more significant decrease in coming months, driven by the lagged effects of MXN appreciation. Moreover, the benefits of solid US economic growth, amid lower uncertainties over trade relations, will probably support employment. Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasuries narrowed (10-year: -4bps to 2.17%) and the USD weakened against G-10 pairs (-0.38%) as US high frequency data came in on the soft side of expectations. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Energy stock moved higher as oil prices (WTI: +1.59% to USD 48.59/USD) increased after the DOE report showed US stockpiles of crude and refined products fell last week. In LatAm FX, the BRL (+0.68% to 3.1415/USD) outperformed within high-beta pairs on election-related headlines. Andean pairs posted some gains (COP: +0.10% to 2,982/USD; CLP: +0.03% to 17.6831/USD). The MXN was the regional laggard, trading at 17.6831/USD (-0.13%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor traded range bound in LatAm. In Chile and Mexico, CDS was stable at 62bps and 107bps, respectively. In Colombia, spreads fell 1bp to 128bps and in Brazil they narrowed to 200bps (-3bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed after the TLP report was approved in the joint commission and on lower than expected IPCA-15 print (see Macro Backdrop). In DI futures, the Jan-18 fell 5bps to 7.98% and the Jan-21 narrowed 11bps to 9.38%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened marginally. The 5-year TIIE swap inched up 1bp to 6.87% and the 10-year increased 2bps to 7.11%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 1-3bps upwards in the session. In Camara swaps, the 1-year widened 1bp to 2.36% and the 5-year increased 2bps to 3.34%. Chile Rates Tracker In Colombia, yields traded marginally lower. In IBR swaps, the 6-month narrowed 1bp to 5.07% and the 5-year went down 2bps to 5.57%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, retail and consumer monthly surveys for August (FGV) will be released (Fri.). Moreover, July’s tax collection may also be released next week, for which we forecast BRL 108.3 billion.
  • In Mexico, INEGI will publish CPI inflation figures for the first half of August (Thu.). We expect bi-weekly inflation at 0.25%. Then, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). Finally, INEGI will announce July’s unemployment rate (Fri.). We expect the unemployment rate to post 3.4%. Shortly after, Banxico will publish 2Q’s current account balance. We expect the current account deficit to come in at USD 3,800 million. 
  • In Colombia, think-tank Fedesarrollo will release the July Industrial and Retail confidence (Thu.). We expect confidence levels to remain low in the months ahead as an activity recovery is not imminent. 
  • In Argentina, the INDEC will publish the EMAE (official monthly GDP proxy) for June (Thu.). We expect activity to grow 3.6% year over year in June (+0.6% mom/sa). Then, the IGA (GDP proxy published by OJF consulting firm) for July will see the light (Thu.). Furthermore, the trade balance for July will also come out (Thu.). We expect a trade deficit of USD 50 million.  Finally, Universidad Di Tella will publish its consumer confidence report for August (Thu.). 

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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