Itaú BBA - Relief rally in Brazilian yields

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Relief rally in Brazilian yields

October 19, 2017

The Brazilian curve bull flattened (Jan19x25: -6bps) as the Lower House CCJ voted to drop charges against President Temer.

With information available until 6:30pm Brasilia time


  • The Brazilian curve bull flattened (Jan19x25: -6bps) as the Lower House CCJ voted to drop charges against President Temer (see Macro Backdrop). In DI futures, the Jan-18 fell 2bps to 7.32% and the Jan-21 went down 8bps to 8.83%. 
  • In FX, Andean pairs posted gains (CLP: +0.24% to 625.25/USD; COP: +0.18% to 2,919/USD) as well as the MXN (+0.18% to 18.8237/USD). Meanwhile, the BRL was broadly stable (at 3.1708/USD). 

Macro Backdrop

  • The Lower House Constitutional and Justice Committee (CCJ) voted against putting President Temer on trial. 39 representatives voted in favor of the recommendation by rapporteur Bonifacio de Andrada for the rejection of the charges, whereas 26 lawmakers voted against. The final vote in the Lower House floor will take place on October 25. 
  • Caged formal job creation came in at 34.4k in September, below our estimate (62k) and market expectations (60.5k). According to our seasonal adjustment, 21.6k jobs were closed, taking the 3-month moving average to -12k (from -13k). Job closings have been moderating, in line with a gradual economic recovery. We continue to expect the economic recovery should begin impacting the formal labor market positively in the coming months. 
  • Tax collection came at BRL 105.6 billion in September, above our call (BRL 103.5) and market expectations (BRL 104). Tax collection once again increased sharply in the month (8.7% y/y in real terms). Excluding tax amnesty programs (REFIS/PRT) and repatriation, real revenues increased 4.6% in the 3-mma (6.1% y/y in real terms). The rebound in revenues is becoming widespread among its components. Revenues that depend on consumption (PIS/COFINS, IPI) increased 11.0% (y/y in real terms) and was mostly influenced by higher taxes on fuels that directly increases PIS/COFINS collection; revenues related to profits (IRPJ/CSLL) increased  3.1% (y/y in real terms); revenues related to the wage bill (IRPF and social security) increased 6.6% (y/y in real terms). 
  • Household credit demand continued to strengthen in 3Q17. Demand for consumer credit and mortgages expanded in 3Q17, while supply is less tight, according to the Central Bank’s quarterly survey of credit conditions. On balance, entities saw signs of increasing demand for consumer loans in the third quarter (+29% from +7% in 2Q17; index centered at 0). Meanwhile, demand for mortgages also showed an expansion (29%; from 8% in 2Q17). None of the respondents in these two categories reported a weakening of demand (an improvement from previous survey), hinting at a widespread recovery. There was no notable change in demand from large business and SMEs. Meanwhile, weakening demand from real estate companies persists, but the deterioration moderated to -27% from -73% in 2Q17, whereas construction demand worsened (to -46% from -31%). On the supply side, all segments continue to show more restrictive conditions versus the previous quarter, but there was a widespread moderation. With inflation low and interest rates reduced, the improvement in private sentiment could be favoring the demand for loans, which in turn would aid the expected recovery of the Chilean economy.


  • Monetary policy report: the central bank is likely to hold off on raising the policy rate in the short term, but hikes look likely. In the press conference accompanying the presentation of the report, Governor Federico Sturzenegger recognized the persistence of core inflation but expressed confidence in the disinflation process.  Sturzenegger noted that core item prices increased 1.7% month over month on average in 1Q17 and 2Q17, and it fell only slightly, to 1.6%, in 3Q17. The president of the central bank downplayed the September inflation reading (1.9% for the headline and 1.6% for the core), which showed an acceleration of inflation relative to August. Instead, he insisted that monitoring the evolution of the disinflation process from a broader perspective is the right approach. Sturzenegger argued that monthly inflation showed consistent lower readings in 2017 (on average 2.0%, 1.8% and 1.7%, respectively, in the first three quarters of the year). 
  • All in all, the central bank does not look ready to hike the reference rate soon, but the absence of further progress on disinflation may lead to a new tightening. The central bank keeps the policy rate (center of active and passive 7-day repo rates) at 26.25%, which means an ex-ante real interest rate of around 10% (using inflation expectations for the next three months). We expect the monetary authority to maintain the policy rate at the current level until the end of this year, but there is potential upside due to the challenging inflation outlook, given the stronger growth of credit and activity and the proximity of a new round of hikes in regulated prices. Full Report
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the red as global markets traded with a risk-off tone. US Treasuries narrowed, as the 5-year fell 2bps to 1.97%, and the USD posted losses vis-à-vis DM peers. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed in the session. In energy, oil prices posted losses on profit taking (WTI: -1.36% to 51.55/USD). On the other hand, agriculture commodities posted gains (wheat: +0.64%; sugar: +0.36%). LatAm currencies were mixed in the session. Andean pairs posted gains (CLP: +0.24% to 625.25/USD; COP: +0.18% to 2,919/USD) as well as the MXN (+0.18% to 18.8237/USD). Meanwhile, the BRL was broadly stable (at 3.1708/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) went down, on average. In Brazil, CDS fell further, to 173bps (-2bps). In Mexico, country risk inched down 1bp to 107bps. In Chile and Colombia, spreads were stable at 54bps and 113bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x25: -6bps) as the Lower House CCJ voted against the trial of President Temer (see Macro Backdrop). The Jan-18 fell 2bps to 7.32% and the Jan-21 went down 8bps to 8.83%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrow, tracking US Treasuries. The 5-year decreased 3bps to 7.09%. Breakevens went south 1-3bps (5-year: -2bps to 3.77%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean rates narrowed on the back of stronger COP and CLP and on falling core yields. In Chile, the Camara swaps curve shifted 2-3bps downwards, as the 1-year fell 3pbs to 2.41%. Chile Rates Tracker In Colombia, the belly and long end IBR swaps fell 1-2bps (10-year: -1bp to 6.08%). Colombia Rates Tracker

Friday Events

  • In Brazil, October´s IPCA-15 consumer inflation preview will be released. We forecast a 0.35% monthly rise, with year-over-year inflation increasing to 2.7% from 2.56%. 

  • In Mexico, INEGI will announce September’s unemployment rate. We expect the unemployment rate to post 3.6%. 

  • In Argentina, the fiscal accounts for September will see the light. We expect the government to meet its official target deficit of 4.2% of GDP in 2017. 

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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