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Short Andean rates narrow as CPIs undershoot projections

October 6, 2017

The front end of Andean curves tightened as inflation came in below the floor of expectations both in Chile and Colombia

With information available until 6:30pm Brasilia time
 

Highlights

  • The front end of Andean curves tightened as inflation came in below the floor of expectations both in Chile and Colombia (see Macro Backdrop). For the 1-year, the Camara swap fell 6bps to 2.51% and IBR swap went down 1bp to 4.80%.
  • In FX, high-beta pairs posted losses. The CLP was the regional laggard (-0.64% to 632.61/USD) as copper prices fell 0.71%. The COP (-0.43% to 2,940/USD) and the MXN (-0.18% to 18.5304/USD) posted losses on the back of the oil drop (-3.05%). At last, the BRL closed at 3.1555/USD (-0.05%).

Macro Backdrop

BRAZIL
  • The consumer price index IPCA rose 0.16% in September, above our estimate (0.10%) and the median of market expectations (0.09%, the highest at 0.15%). The index had risen 0.19% in the previous month and 0.08% in September 2016. Year-to-date, the IPCA climbed 1.78%, down significantly from 5.51% in the year-earlier period. Meanwhile, the year-over-year change accelerated to 2.54% from 2.46% in August. Breaking down by product groups, the largest upward contribution during the month came from transportation (0.14 p.p.), driven by fuel prices and airfares, with impacts of 0.10 p.p. and 0.07 p.p., respectively. On the other hand, the biggest downward contribution came from food and beverages (-0.10 p.p.), which posted a fifth consecutive month of deflation, thanks to lower prices for milk, tomatoes and beans.
  • Our preliminary estimate for the IPCA in October is a 0.40% increase, pushing the year-over-year change to 2.7%. Housing will give the biggest upward contribution during the month, due to hikes in electricity bills and bottled cooking gas. The food group is likely to post a positive change after five months of deflation. Full Report
  • We published our scenario review for the month of October. We reduced our forecast for inflation to 3.0% from 3.2% in 2017 and to 3.8% from 4.0% in 2018. Hence, well-behaved inflation and the latest central bank communications led us to reduce our estimate for the terminal Selic rate to 6.5% from 7.0%. Also, we lifted our forecast for GDP growth in 2018 to 3.0% from 2.7%, due to even-lower interest rates. Our estimate for 2017 remains at 0.8%. Full Report
MEXICO
  • We published our scenario review for the month of October. Growth surprised to the upside in 1H17, but lingering risks have cast a shadow on the economic outlook. The recent earthquakes could be a (temporary) drag on GDP growth in 2H17, posing downside risk to our 2.3% growth forecast for 2017. Moreover, recent presidential election polls are poiting out to a scenario of potential policy discontinuity, which could put investment decisions on hold, especially in 1H18. Additionally, tensions in the Nafta renegotiation discussions seem to have increased in the last month. We expect growth this year at 2.3%, unchanged from 2016; for 2018, we forecast growth at 2.1%. Full Report
CHILE
  • Consumer prices came in well below market expectations in the month of September, keeping the topic of further monetary easing relevant. Overall, inflation dropped to 1.5% year-over-year (from 1.9% previously), falling further below the lower bound of the central bank’s 2%-4% tolerance range and the lowest rate since May 2013. Both the market consensus and our forecast was 1.9%. Tradable inflation remains the main drag to inflation, posting a zero gain over the last year (from 0.7%), while non-tradable inflation was stable at a comfortable level (3.3%). The BCCh’s baseline scenario sees the policy rate stable at 2.5% for a prolonged period. However, it has highlighted downside risks to inflation in the short-term, which, on materialization, could lead to more easing if the inflation trajectory to 3% comes under threat. In our view, today’s data is indicative these risks can all but be ruled out, and so we cannot discard further cuts in coming months. On the other hand, the fact that inflation slowed due to lower tradable inflation, likely a reaction to the appreciation of the CLP, could lead the board to treat the September CPI surprise as one-off, at least for now.  
  • Overall, inflation for 2017 will likely come in well below our 2.4% forecast, somewhere closer to the 2% lower bound of the central bank’s tolerance range. Inflationary pressures going forward will likely be contained by the performance of the CLP and inertia. On the other hand, an improving outlook for activity, along with a low base of comparison, and well-anchored inflation expectations provide support for a gradual convergence to the 3% in the two-year horizon. Full Report
  • We published our scenario review for the month of October. Activity is showing signs of firming in 3Q17, in line with the expectation of a recovery in the latter part of the year. We now expect growth of 1.7% this year (1.3% previously; 1.6% in 2016), with a pick-up to 2.7% next year (2.5% previously) aided by higher copper prices, the lagged effects of expansionary monetary policy and low inflation. Full Report

COLOMBIA

  • Consumer price inflation surprised to the downside in September. The monthly price gain of 0.04% in September (-0.05% one year before) was below the +0.17% market consensus and our +0.18% forecast. The low print was explained by a retreat in food prices (-0.40%). Annual inflation inched up from 3.87% in August to 3.97%, remaining in the central bank’s 2%-4% tolerance range for the fourth consecutive month. Headline inflation, excluding food prices, came in at 4.71% from 4.81% in August. The latest inflation prints reaffirm the fading of supply shocks to food and tradable goods prices. However, with inflation still close to the upper bound of the central bank’s 2%-4% tolerance range, the board will likely act cautiously and leave the policy rate unchanged at 5.25% in coming months.
  • We forecast yearend inflation of 4.2%, but acknowledge downside risks amid a more favorable behavior of inflation in recent months. We see a stable policy rate for the remainder of this year. However, with inflation expected to resume its trajectory towards the 3% target early next year, we expect rate cuts taking the policy rating to neutral levels in 2018 (as explicitly indicated by general manager Juan Jose Echavarría). We acknowledge the risk that a faster disinflation process could lead to the frontloading of the easing cycle. Full Report
Market Developments 
  • GLOBAL MARKETS: The US non-farm payroll September figures proved to be distorted by the hurricane; payroll declined 33k and the unemployment rate fell to 4.2% (from 4.4%). Still, the US treasury curve went north by 2bps. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices dropped ahead of Tropical Storm Nate (WTI: -3.05% to 49.59/USD). According to Reuters, nearly three-quarters of US Gulf production was offline. In metals, iron ore increased 1.53% while copper fell 0.71%. In FX, high-beta pairs posted losses. The CLP was the regional laggard (-0.64% to 632.61/USD) as copper prices fell 0.71%. The COP (-0.43% to 2,940/USD) and the MXN (-0.18% to 18.5304/USD) posted losses on the back of the oil drop (-3.05%). At last, the BRL closed at 3.1555/USD (-0.05%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor rebounded from recent lows. Brazilian and Chilean credit spreads inched up 1bp to 186bps and 56bps, respectively. CDS in Colombia and Mexico both widened 2bps to 115bps and 107bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened in the session. Long DI futures narrowed substantially (Jan-25: -16bps to 9.90%) while the front end was broadly stable (Jul-18 at 7.10%). Linkers also tightened as the Aug-22 fell 7bps to 4.40%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Once again, the Mexican curve steepened (1s10s: +7bps), on the back of higher US rates. In TIIE swaps, the 1-year fell 2bps to 7.32% and the 10-year widened 10bps to 7.31%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Short Andean rates narrowed as CPI came in below expectations (see Macro Backdrop). For the 1-year, the Camara swap fell 6bps to 2.51% and IBR swap went down 1bp to 4.80% whereas long yields traded range bound. Chile Rates Tracker Colombia Rates Tracker

Upcoming Events

  • In Brazil, the key release for the week will be August’s retail sales (Wed.). We expect a flat reading in core retail sales (month-over-month, seasonally adjusted), and a 0.4% increase in the broad segment. Then, the Systematic Survey of Agricultural Production for September, also from IBGE, will be released (Tue.). Moreover, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for September, two important coincident indicators for industrial production, may be released during the week. Finally, the second round of charges against President Temer will continue to be discussed in the Constitution and Justice Committee (CCJ) as the final report is likely to come out to the committee, although low quorum due to the 12 October Holiday may postpone it. 

  • In Mexico, the statistics institute (INEGI) will announce September’s CPI inflation (Mon.). We expect a 0.39% month-over-month variation. Then, the National Association of Department Stores and Supermarkets (ANTAD) will announce September’s same-store-sales (Mon.). We expect ANTAD sales to slow down to 3% year-over-year (from 4% in August), dragged by the temporary drag of the earthquakes. Moreover, INEGI will publish August’s industrial production (Thu.). We estimate that industrial production fell by 0.6% year-over-year. Furthermore, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). 

  • In Chile, the central bank will publish the trade balance for September (Tue.). We expect a trade surplus of USD 750 million (USD 213 million surplus one year ago), leading to a surplus of USD 1.6 billion in 3Q17 (USD 53 million deficit in 3Q16). 

  • In Colombia, Banrep will publish the minutes of the September monetary policy meeting (Fri.). The minutes will likely express that the real interest rate is now near to neutral and any additional easing would likely come only once inflation resumes a downward trajectory towards the 3% target. 

  • In Argentina, the BCRA will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We do not expect changes in the reference rate this year as the central bank reiterates that it is committed to its ambitious inflation targets. Moreover, the INDEC will publish the National CPI for September (Thu.). According to private estimates, headline inflation decelerated to 1.3% month over month in September, while the core measure stood at 1.4% mom. 

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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