Itaú BBA - The all-Brazil rally goes on

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The all-Brazil rally goes on

July 20, 2017

Brazilian rates narrowed for the fifth straight session after another downward IPCA-15 surprise.

With information available until 6:30pm Brasilia time

Highlights

  • Brazilian rates narrowed for the fifth straight session after another downward IPCA-15 surprise (see Macro Backdrop). In DI futures, the Jan-18 fell 7bps to 8.53% and the Jan-19 went down 8bps to 8.34%. Conversely, real yields narrowed as the Aug-20 went down 11bps to 4.63%. Also, Brazilian CDS fell once again (-4bps to 212bps) consistent with government efforts in complying with the primary balance target set for 2017. 
  • LatAm currencies (+0.59%) were boosted by the weaker dollar (DXY: -0.55%). The MXN is trading at 17.4900/USD (+0.37%). The CLP appreciated 0.30% to 651.76/USD. Finally, the BRL outperformed high-beta peers, closing at 3.1213/USD (+0.88%). 
  • Colombian markets were closed due to the Independence holiday. 

Macro Backdrop

BRAZIL
  • IPCA-15 fell 0.18%, matching the lowest of market estimates. The result in July printed below our estimate (-0.08%) and the median of market expectations (-0.10%). The index had risen 0.16% in the previous month and 0.54% in July 2016. Hence, the IPCA-15 is up by 1.44% year-to-date (down substantially from 5.19% in the year-earlier period). The year-over-year change decelerated to 2.78% (from 3.52% in June), the lowest reading under this metric since March 1999. Breaking down by product groups, the largest downward contributions during the month came from food and beverages (-0.14 p.p.) and transportation (-0.11 p.p.). On the other hand, the largest upward contributions came from housing (0.04 p.p.) and personal expenses (0.03 p.p.). Full Report
  • The Finance Ministry announced fuel tax hikes. The PIS/Cofins taxes will be increased for gasoline, diesel and ethanol. According to the note published in the Ministry’s website, these taxes will boost revenues by BRL 10.4 billion this year. This measure has a strong impact on this year’s inflation, of between 55 and 60bps, according to our calculation. There was room on the inflation side for this measure, because 12-month inflation is already below the lower bound of the BCB’s tolerance range. In addition, this year’s budget freeze will be increased by BRL 5.9 billion. The complete Bimonthly Revaluation Report will be published on Friday (July 21). 
  • The preview for July’s business confidence in the industrial sector (FGV) increased 1.2 p.p. to 90.7. The indicator remains below the level perceived as neutral (100), but recovered some of June’s losses (-2.8 p.p.). The break down shows an increase of 1.4 p.p. in the current situation component and +1.2 p.p. from the expectations component. Capacity utilization (NUCI) went up in the month (+0.7 p.p.) to 74.9%, which offset the 0.5 p.p. fall in June, yet remaining well below the historical average. The final reading will come through next Thursday (July 27).
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 21. 
Market Developments 
  • GLOBAL MARKETS: In the ECB meeting, the board left rates on hold and maintained its current pace of bond purchases. In the Q&A session, President Draghi said the bank’s governing council will discuss changing monetary policy parameters in the fall, but refrained to single out a specific meeting. In fact, he said the GC was unanimous in setting no precise date for when to discuss changes to the QE parameters. Also in the Q&A, the President said the recent EUR rally has received “some attention” in the monetary policy discussion and that financial conditions remain “broadly supportive” to secure a sustained return of inflation to the target. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices went down in the session (WTI: -0.82% to USD 46.93/bbl). Most agriculture commodities posted gains (soybeans: +1.35%; corn: +2.22%) while metals were pressured by the 2.52% fall in iron ore prices. In FX, the EUR appreciated 1.00% after the ECB meeting. LatAm currencies (+0.59%) were boosted by the weaker dollar (DXY: -0.55%). The MXN is trading at 17.4900/USD (+0.37%). The CLP appreciated 0.30% to 651.76/USD. Finally, the BRL outperformed high-beta peers, closing at 3.1213/USD (+0.88%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed all across LatAm. In Mexico, Chile and Colombia, spreads went down 1bp to 105bps, 65bps and 132bps, respectively. In Brazil, CDS fell once again (-4bps to 212bps) consistent with government efforts in complying with the primary balance target set for 2017. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed after another downward inflation surprise (see Macro Backdrop). In DI futures, the Jan-18 fell 7bps to 8.53% and the Jan-19 went down 8bps to 8.34%. Conversely, real yields narrowed as the Aug-20 went down 11bps to 4.63%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed, tracking US treasuries. In TIIE swaps, the 1-year inched down 1bp to 7.32% and the 5-year fell 2bps to 6.82%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, short yields widened in the session. In Camara swaps, the 1-year went up 4bps to 2.45% and the 5-year inched up 1bp to 3.44%. Chile Rates Tracker In Colombia, markets were closed due to the Independence holiday.

Upcoming Events

  • In Brazil, the balance of payments will be released. We expect a USD 1.3 billion current account surplus in June, topping last year’s deficit of USD 2.5 billion for the same month. We also expect direct investment in the country (DIC) to register inflows of USD 2.3 billion in June. Moreover, the government will release its bimonthly revaluation report, where it will update its forecasts for the 2017 primary result. 
  • In Mexico, the Statistics Institute (INEGI) will announce June’s unemployment rate. We expect the unemployment rate to post 3.5% (below the 3.9% level recorded in June 2016) indicating that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment has consistently grown above 4% year-over-year throughout the first six months of 2017. 
  • In Colombia, coincident activity indicator (ISE) for the month of May will be released. The April indicator continued to reflect activity weakness as the seasonally adjusted series fell from the previous month for the fifth consecutive time. Annual year-to-date stands at 0.6% (2.7% in the 2016 equivalent period). 

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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