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Short Chilean rates narrow on BCCh minutes

September 1, 2017

The Chilean curve bull steepened (1s10s: +7bps) after the minutes of the August monetary policy meeting

With information available until 6:30pm Brasilia time

Highlights

  • The Chilean curve bull steepened (1s10s: +7bps) after the minutes of the August monetary policy meeting (see Macro Backdrop). In Camara swaps, the 1-year fell 7bps to 2.31%. By YE17, the curve now implies 27bps in rate cuts, falling short of our call of 50bps in further easing (two 25-bp cuts). 
  • LatAm FX appreciated after the lower-than-expected US payroll triggered a risk on mood for EMs. The COP appreciated 0.51% to 2,931/USD and the CLP gained 0.41% to 624.34/USD. By the time of writing, the MXN is trading at 17.8139/USD (+0.41%). At last, the BRL strengthened 0.28% to 3.1404/USD.
Macro Backdrop

BRAZIL
  • Copom cockpit: Signs of change. We expect the Copom to repeat the 100bp-cut in the benchmark Selic rate next week. Such decision would be consistent with stable economic conditions and unchanged estimates regarding the extension of the cycle since the July meeting. Full Report
  • GDP expands 0.2% in 2Q17, underlying growth improves. GDP climbed 0.2% qoq/sa in 2Q17, above our call and the median of market expectations (both at 0.0%). The economy rose 0.3%, marking the first positive reading since 1Q14. Hence, the change accumulated over four quarters improved to -1.4% from -2.3% (as of 1Q17). In our view, underlying growth in 2Q17 was stronger than the headline reading suggests. Simulations indicate that the result will be revised upward when the 3Q17 GDP report comes out. In all, the higher-than-expected result means upside to our 2017 growth forecast (currently at 0.3%). Full Report
  • Exports advance later in the month and trade surplus beats expectations in August. The trade surplus reached USD 5.6 billion in August, above our forecast (5.2 billion) and market consensus (4.8 billion). Exports totaled USD 19.5 billion, advancing 0.8% mom/sa. Meanwhile, imports totaled USD 13.9 billion, rising 1.6% mom/sa. Compared to August 2016, exports climbed 14.7% and imports advanced 8.0%. Over 12 months, the trade surplus increased again to USD 63.5 billion and the year-to-date figure is the highest in the historical series started in 1992. However, the seasonally-adjusted annualized quarterly moving average receded to USD 65 billion, reflecting some moderation of the trade balance at the margin. 
  • Notwithstanding a higher-than-anticipated reading, August figures again showed discrete moderation in the trade surplus at the margin. Exports, which advanced sharply earlier in the year, are now at a lower level, in line with lower international commodity prices. Despite the recovery seen in recent months, imports also remain at low levels, ensuring stronger trade surpluses in 2017 than in 2016. We maintain our expectation of a large trade surplus this year (USD 62 billion), supported by the robust year-to-date result, which already tops the full 2016 figure. Full Report
  • According to Fenabrave, vehicle sales reached 217k in August, rising 1.7% mom/sa. The breakdown shows a 1.8% increase in “passenger cars + light vehicles” and a 1.0% decline in “trucks + buses” (our seasonal adjustment). The decline in trucks and buses is small compared to the 24% gain (YTD/sa), so the trend continues to be a recovery (albeit from a low base). Our forecast for auto production (Anfavea) is 252k in August (up 5.1% mom/sa). 
MEXICO
  • Banxico published August’s expectations survey, featuring an increase of short-term inflation expectations and more optimistic market views on GDP growth. The median expected inflation for year-end 2017 increased to 6.25% (from 6.03% in July’s survey), possibly reflecting the upward CPI surprise recorded in the first half of August (annual inflation is now standing at 6.59% y/y) and growing concerns about the impact of hurricane Harvey on domestic gasoline prices. And the inflation expectations the next 12-months tenor actually decreased (to 3.82%, from 3.92%) perhaps because the market believes the lagged effects of this year’s exchange rate appreciation (14% year-to-date) will exert more downward pressure. In fact, median exchange rate expectations continued adjusting, in the appreciation direction, for both year-end 2017 (18.20, from 18.38) and 2018 (18.11, from 18.19). Regarding activity, median GDP growth expectations showed an across-the-board improvement – for 2017 (to 2.15%, from 2%), 2018 (2.4%, from 2.3%), and the average of the next 10 years (2.8%, from 2.75%). Finally, on monetary policy, median expectations show that most market participants believe Banxico will leave the policy rate at its current level for the rest of 2017 (7%, unchanged) and cut rates in 2018 (to 6.75%, from 6.5%). Tellingly, the market went from expecting two 25bp cuts for 2018 (as per July’s survey) to only one, at the same time that Governors (even the most dovish ones) made clear that Banxico has no appetite for cuts, at least for now.  
CHILE
  • The minutes of the August monetary policy meeting show that the board was once again split in its decision to hold the policy rate at 2.5%. Pablo Garcia opted for a 25-bp rate cut for a second consecutive month, while the rest of the board favored staying on hold. The minutes reveal that the technical staff offered two options for the board to consider: the first of them was to keep the policy rate and the neutral bias unchanged (the preferred option), while the other was a 25-bp rate cut and the adoption of an easing bias (differing from the previous meeting when only staying on-hold was presented as an option). The staff’s argument in favor of this second option was to prevent the fine-tuning of a single cut. Despite several members agreeing both choices were valid, there is no dominating conviction from the discussion that the board will implement additional easing. 
  • We continue to expect further rate cuts to materialize before yearend. We anticipate the revised baseline scenario in the 3Q IPoM to justify additional easing to ensure that inflation remains on a trajectory toward the 3% target. Thus, we see the policy rate being lowered to 2.0% by yearend (through two 25-bp rate cuts), where it would stay for most of next year. We note that recent activity recent data and the discussion in the minutes make a rate cut in September less than a done deal, although the August CPI figure can tilt the balance toward a cut. Full Report
  • In July, the commercial activity index - which aggregates retail activity, wholesale and vehicle sales- grew 3.4% over twelve months (3.0% previously), still boosted by durable sales. This was very close to our 3.5% forecast. The July commercial activity performance, alongside firm industrial production indicators (boosted by recovering mining), leads us to forecast the GDP proxy IMACEC to grow 2.3% year over year in July (1.4% in June). 
  • We expect growth of 1.3% this year, down from the 1.6% in 2016. Low inflation and a loose monetary policy, along with higher copper prices and firming growth in Chile’s trade partners will aid an activity recovery in the second half of this year and throughout 2018. We expect a growth pickup to 2.5% in 2018. Full Report
Market Developments 
  • GLOBAL MARKETS: Markets traded in a risk on tone despite the US payroll coming lower than expected. The Non-Farm Payroll rose 156k in August, below market expectations (180k), but consistent with a continued decline in the labor market slack. Equity markets were on the green and US treasuries widened (5-year: +3bps to 1.74%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices were broadly stable in the session (WTI: +0.13% to USD 48.02/USD). LatAm FX appreciated after the lower-than-expected US payroll triggered a risk on mood for EMs. The COP appreciated 0.51% to 2,931/USD and the CLP gained 0.41% to 624.34/USD. By the time of writing, the MXN is trading at 17.8139/USD (+0.41%). At last, the BRL strengthened 0.28% to 3.1404/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor continued on a downward trend. Brazilian country risk reached 193bps (-3bps) – the lowest level since December 2014. In Colombia and Mexico, CDS fell 2bps to 121bps and 100bps, respectively. In Chile, however, spreads were stable at 58bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields widened in the session. In DI futures, while very short rates fell at the margin (Jan18: -1bp to  7.79%), longer ones widened 4-5bps (Jan19: +4bps to 7.80%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened 2-3bps, in tandem with US treasuries. In TIIE swaps, the 1-year increased 2bps to 7.36%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve bull steepened (1s10s: +7bps) after the minutes of the August monetary policy meeting (see Macro Backdrop). In Camara swaps, the 1-year fell 7bps to 2.31%. By YE17, the curve now implies 27bps in rate cuts, as opposed to our call of 50bps (two 25-bp cuts). Chile Rates Tracker Colombian rates narrowed in the session. In IBR swaps, the 1-year fell 3bps to 4.88%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Copom meeting (Wed.). We expect the committee to cut the policy rate by 100bps, maintaining the easing pace of the previous decision. Then, August’s IPCA consumer inflation will be released (Wed.). We forecast a 0.32% monthly increase, with year-over-year inflation slowing to 2.6% from 2.7%. Moreover, after the approval of the TLP (new Long Term Interest Rate) in the Lower House Floor, the voting on the Senate is expected to happen on Tuesday. The provisional measure expires on Wednesday (September 6). On economic activity, July’s industrial production will be released (Tue.), for which we expect a 0.3% seasonally adjusted monthly increase. In addition, August’s coincident indicator for auto production (Anfavea) will be released (Wed.). 
  • In Mexico, the statistics institute (INEGI) will publish June’s gross fixed investment (Tue.). We forecast that gross fixed investment contracted 1% year-over-year (down from an expansion of 2.3% in May). Then, INEGI will announce August’s CPI inflation (Thu.). We expect a 0.47% month-over-month variation. 
  • In Chile, the BCCh will publish the GDP proxy (Imacec) for the month of July (Tue.). We expect the GDP proxy IMACEC to grow 0.5% from June, leading annual growth of 2.3% (1.4% in June). Moreover, the central bank will also publish the 3Q17 inflation report (Wed.). Regarding the policy rate, we expect the updated baseline scenario to infer a path somewhat below that outlined in various surveys (one additional 25-bp cut). Then, the central bank 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). 
  • In Colombia, DANE will publish export data for the month of July (Mon.). We expect exports to come in at USD 3.1 billion, representing a significant annual growth of 36% (0.8% previously). Moreover, the National Institute of Statistics will release inflation for August (Tue.). We expect consumer prices to gain 0.21% from July (-0.32% in August 2016), taking annual inflation to 3.95% back to the upper bound of the tolerance range.  
  • In Argentina, the central bank will release its monthly survey of economists (Mon.). Then, the car-makers association (ADEFA) will release August data on production, exports and domestic sales to car dealers (Tue.). 

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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