Itaú BBA - Selic headed to 7% in December

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Selic headed to 7% in December

September 6, 2017

We changed our year-end call to 7.0%, from 7.25% previously.

With information available until 6:30pm Brasilia time


  • The Copom delivered the widely expected ouctome, a 100bps rate cut to 8.25%, in an unanimous vote. The meeting statement mentions the plan to slow down the pace of easing moderately, which, based on a communication pattern established by this Copom,  we read as a signal that the October move will probably be a 75bps rate cut, that would take the Selic to 7.5%pa. After that, the Copom would end the year with another cut, by 50bps, with the Selic at 7.0%. We thus change our year-end call to 7.0%, from 7.25% previously. For the moment we reckon this is likely to be the terminal rate of this cycle. As usual, the rationale of the Copom meeting will be explained in more detail with the release of the meeting minutes next Tuesday. 
  • Brazilian yields until 2025 are now at 1 digit after IPCA came in below the floor of expectations (see Macro Backdrop). In DI futures, the Jan-25 went down 12bps to 9.89%.  Also, the BRL appreciated 0.55% to 3.1002/USD and CDS receded 3bps to 186bps – a renewed low level. 
Macro Backdrop

  • The Senate approved the bill creating the Long Term interest rate (new BNDES benchmark rate) by 36 votes in favor and 14 against. The text now moves to presidential sanction. 
  • IPCA rises 0.19% in August, below the floor of expectations. The IPCA posted a 0.19% increase in August, below the floor of market expectations (0.20%, median at 0.30%). The largest deviations from our estimate (0.32%) came from regulated prices and food consumed at home. The IPCA posted a variation of 0.24% in the previous month and 0.44% in August 2016. Year-to-date, the index gained 1.62%, well below the 5.42% posted in the same period last year. The year-over-year variation declined to 2.46% (July: 2.71%), the lowest result since February 1999. Breaking down by product groups, the main upward contribution came from transportation (0.27 p.p.), followed by housing (0.09 p.p.). On the other hand, the main downward contribution came from food and beverages (-0.27 p.p.), with highlight to the lower prices for beans, milk, meats, sugar and fresh fruits and vegetables.
  • Our preliminary estimate for the IPCA in September shows a 0.25% change, leading the year-over-year rate to 2.6%, from 2.5% in August. The main upward contribution in the month will come from transportation, with highlight to the pressures from fuels and airfare. On the other hand, we anticipate the food group posting another negative variation, its fifth consecutive decline. Full Report
  • According to Anfavea, auto production reached 260k in August, above our forecasts (252k) and up 7.1% mom/sa (our estimates). Despite the increase, the 3-month seasonally adjusted moving average is down 0.2%, as the strong result offsets declines in both June and July. The production breakdown shows the growth was driven by light vehicles (3.4%), while trucks and buses shrank (-2.7%). Also, both exports and domestic sales rose in August (1.0% and 3.0% respectively). The positive year-over-year figures for exports (61.7%) and domestic sales (17.8%) highlight the improvement since 2016, yet the sector activity level remains well below 2011-2013. Still, inventories (relative to sales) fell slightly (1.7%), but are in line with the historical average. Finally, employment in the auto sector rose further to 126.2k from 125.2k in July (and 120.9k in April, lowest level in the last 3 years).
  • The Serasa Experian Index for Retail Activity fell 0.4% mom/sa in August (our seasonal adjustment), following three consecutive months showing positive growth. The index shows a gradual increase year-to-date, following stable figures through 2016 and a steep decline in 2015. The breakdown shows declines in supermarkets (-1.0%), and gains in “vehicles & auto parts” (0.9%), apparel (1.1%) and construction material (0.4%).  The 3-month seasonally adjusted moving average is up 0.15%. Moreover, IBGE will release retail sales for July on September 12 – we forecast core retail sales rising 0.1% mo/sa and broad retail sales falling 0.2% mom/sa. Combining with other indicators, our preliminary forecasts for August core and broad retail sales stand at -0.4% and 0.3% mom/sa, respectively. 
  • The national accounts have not disclosed the demand-side breakdown of GDP yet, but the monthly proxy for private consumption indicates that consumption was robust in 2Q17. The monthly proxy for private consumption grew 3.6% year-over-year in June, which implies an expansion of 3.4% year-over-year in 2Q17 (slightly below the 3.5% recorded in 1Q17). However, according to calendar-adjusted data reported by the statistics institute, which takes into account the large (and negative) calendar effect of the Easter holidays, growth in 2Q17 was actually 4.2% year-over-year (up from 3% in 1Q17). 
  • Private consumption improved sequentially in 2Q17, but we do not expect a further improvement in the second half of the year, considering that the fall of inflation at the margin will likely be offset by the weakening of other fundamentals. In fact, higher domestic interest rates are already affecting consumer credit more visibly, and remittances converted into pesos have slowed down substantially. Consumer confidence, nevertheless, has been recovering on a sustained basis, after hitting an all-time low at the beginning of 2017. Full Report
  • The BCCh has agreed to lower the number of Monetary Policy decisions per year to 8 meetings from 12. Starting in 2018, the central bank will meet in January, March, May, June, August, September, October and December of every year. 
  • The BCCh’s 3Q17 inflation report (IPoM) differs little from the previous edition in that the board sees no need for further easing in the baseline scenario, and a normalization process is not on the near horizon. The central bank implemented a 100-bp easing cycle (to 2.5%) in the first five months of the year as the economy weakened, while inflation remained under control. Since the previous edition of the IPoM, inflation for this year has evolved below expectations, meanwhile, activity has not deteriorated further. The baseline trajectory for the policy rate considered by the central bank would depart from various surveys in the lead up to the publication of the report (including one 25-bps rate cut before yearend) and our expectation of two additional rate cuts before yearend. Additionally, in presenting the IPoM to the Senate, Governor Mario Marcel acknowledged that if these risks materialize, convergence to the target could be jeopardized and, hence, additional easing would be required. 
  • In our view, the report shows that in the most likely scenario, the central bank sees the easing cycle over. Nevertheless, the comments from Mr. Marcel show that future development hinge largely on whether the downside risks to inflation materialize, so we still see easing is on the cards. Monetary policy changes will depend on incoming inflation data. Full Report


  • As expected, inflation picked up in August from the previous month. The 0.14% monthly price gain (-0.32% one year before) came in between our +0.21% forecast and the +0.12% market consensus. Annual inflation accelerated to 3.87%, after reaching a multi-month minimum of 3.40% in July, but remained below the 3.99% recorded in June. Headline inflation, excluding food prices, came in at 4.81% (4.79% in July) as regulated prices (particularly, gas and water) picked up. While headline inflation close to the upper bound of the 2%-4% tolerance range would motivate the central bank to leave the policy rate unchanged at 5.25% at this month’s meeting, favorable dynamics mean that the door to further easing in coming months is not completely closed.
  • As inflation continues to accelerate towards yearend, we see the Banrep staying on hold for the remainder of the year. We expect inflation to end the year at 4.2%, but below the 5.8% recorded in 2016. A widening output gap and an only-moderate COP depreciation expected for next year will likely bring inflation down to 3.8% by the end of 2018. Our base case scenario sees further rate cuts next year, taking the policy rate to neutral levels near 4.5%, but favorable dynamics this year could mean the easing cycle is frontloaded. Full Report
  • Global Monetary Policy Monitor: More easing ahead in LatAm. In August, there were monetary policy decisions in 17 of the 33 countries we monitor, with interest rate cuts in four countries and one central bank raising interest rates. In September, we expect both the ECB and the Fed to maintain the monetary stimulus in place. In Latin America, well-behaved exchange rates and spare capacity leave room for additional monetary easing in most countries. Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasuries widened (5-year: +4bps to 1.68%) after the US government reached a deal to provide a short-term increase in the debt ceiling, in a temporary measure. Importantly, according to Financial Times, top Democrats in the House and Senate said they had reached a deal to ward off a government shutdown, avoid a debt ceiling default and also provide Hurricane Harvey-related aid. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains (CRB futures: +0.36%) on the back of oil and agriculture. In soft commodities, sugar increased 1.85%, wheat +0.62% and corn +0.70%. Oil prices (WTI: +0.83% to USD 49.55/USD) strengthened to a 3-week high. Agriculture commodities posted widespread gains (soybean: +2.00%; sugar: +2.04%). LatAm FX (+0.59%) outperformed EM pairs in the session. Oil-linked currencies strengthened as crude increased 0.83% (COP: +0.72% to 2,913/USD; MXN: +0.79% to 17.7608/USD). As copper posted gains of 0.27%, the CLP appreciated 0.54% to 618.52/USD – the strongest level since May 2015. The BRL traded at the 3.10/USD handle, closing at 3.1021/USD (+0.49%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Once again, LatAm credit spreads for the 5-year tenor narrowed. Brazilian country risk receded 3bps to 186bps – a renewed recent low. In Colombia, spreads fell 2bps to 116bps. In Chile and Mexico, CDS inched down 1bp to 56bps and 98bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields until 2025 are now at 1 digit after IPCA came in below the floor of expectations (see Macro Backdrop). In DI futures, the Jan19 fell 17bps to 7.62% and the Jan-25 went down 12bps to 9.89%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican rates went down 3-4bps in the session. In TIIE swaps, while the front end of the curve was broadly stable, the 5-year went down 4bps to 6.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the curve widened substantially after the 3Q17 IPoM (see Macro Backdrop). In Camara swaps, the 1-year widened 13bps to 2.41%. By YE17, the curve now implies 17bps in rate cuts from 32bps as of Tuesday. Chile Rates Tracker In Colombia, long yields narrowed 1-3bps in the session. In IBR swaps, the 5-year went down 3bps to 5.43%. Colombia Rates Tracker

Upcoming Events

  • In Mexico, the statistics institute (INEGI) will announce August’s CPI inflation (Thu.). We expect a 0.47% month-over-month variation. 
  • In Chile, the BCCh will release the trade balance figures for August (Thu.). We forecast a USD 250 million surplus (USD 235 million deficit in August 2016). Still, the National Institute of Statistics (INE) will publish nominal wage growth for July (Thu.). Finally, the National Institute of Statistics will publish inflation for the month of August (Fri.). We expect prices to increase 0.2% from July (0% in August 2016). 

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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