Itaú BBA - The BRL remains under pressure; Nafta jitters weigh on the MXN

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The BRL remains under pressure; Nafta jitters weigh on the MXN

April 26, 2017

Lingering market concerns over the Social Security voting are still hurting the BRL; new market conjectures over North American trade relations hit the MXN.

With information available until 6:30pm Brasilia time

Highlights

  • For the second consecutive session, all currencies under our coverage were deep in the red. The CLP posted losses of 0.48% to 665.09/USD. The COP weakened 0.96% to 2,930.69/USD. Lingering market concerns over the Social Security reform voting are still hurting the BRL, which tested the 3.20/USD handle during intraday highs, closing at 3.1743/USD (-0.85%). Finally, fresh new market conjectures over North American trade relations took a hit on the MXN (-1.71% to 19.19/USD).
  • In yields, long DI futures widened, tracking a weaker BRL. The Jan-21 went up 2bps to 10.08% and the Jan-25 increased 4bps to 10.54%. Likewise, Mexican yields traded higher, consistent with the MXN selloff. In TIIE swaps, the 1-year increased 6bps to 7.30% and the 10-year wet up 8bps to 7.58%. 

Macro Backdrop

BRAZIL
  • Tax collection came at BRL 99.0 billion in March, in line with our call (BRL 99.5 billion) and market expectations (BRL 100.0 billion). Despite the decline in real terms (-1.2% y/y) in the month, tax collection was black inked in the 1Q (0.1% y/y), especially due to the past two months’ positive results (February: 0.4% y/y; January: 0.8% y/y). As the Federal Revenue Service reported, taxes more linked to economic activity keep a slow recovery, while higher profits, tax rises on capital gains and higher royalties revenues that influenced positively the tax collection in the last months, had a payback this time. 
  • Tax collection will have a very gradual recovery in 2017 as the economic activity indicators that matter the most for tax collection (real wage bill and retail sales) will continue to underperform GDP. As so, to deal with a challenging primary result target of a BRL 143 billion deficit (-2.2% of GDP), the government needs a combination of non-recurrent revenues, tax hikes and discretionary expenditure cuts. The central government primary result from March will be released Thursday. We expect a BRL 8.6 billion deficit.
  • The Brazilian Central Bank released the credit figures for March. The daily average of new non-earmarked loans expanded 3.6% m/m in real terms, while new earmarked loans declined 10.9% (February: +7.9%). Overall delinquency went up somewhat to 3.8%, while overall interest rates and average spreads receded. The performance of the daily average of new non-earmarked loans was driven by increases of 2.0% in loans for non-financial corporations and 4.8% for households, adjusted for inflation and seasonality. In the earmarked segment, new loans fell 14.0% for non-financial corporations and 8.5% for households. Total outstanding loans decreased, in real terms, 6.9% y/y in March (February: -7.9%). The drop in non-earmarked outstanding loans moderated to -7.8% from -8.9% y/y. Likewise, the slide in earmarked outstanding loans eased to -6.0% from -6.9% in February. Interest rates charged on non-earmarked loans dropped to 52.5% from 53.4%, decreasing for non-financial corporations and households alike. Average spreads in these transactions also narrowed for both segments. Meanwhile, average interest rates charged on earmarked loans increased to 10.5% from 9.9%, rising for non-financial corporations and households as well. Average spreads in these transactions widened for non-financial corporations, but declined for households. Full Report
  • Consumer confidence (FGV) fell 3.6% m/m in April. This decline comes after a cumulative increase of 16.7% since December 2016, and was more influenced by expectations (-4.8%) than the current situation component (-1.0%). Intention to purchase durable goods decreased by 4.5% in the month, reverting part of the increase in recent months. The percentage of people reporting that jobs are hard to get fell for the fourth time in a row (to 92.4%; from 94.8%), although it remains at high levels. 
  • Confidence in the construction sector (FGV) rose 1.9% in April, maintaining an upward trend since 2Q16. The increase was more influenced by the current situation component (+ 4.6%) than expectations (-0.2%). Seasonally adjusted capacity utilization in the sector has receded somewhat and suggests that production of typical construction inputs will remain stable in March-April.
  • BCB placed the full offering of 16,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 15,785 contracts on April 27. 
MEXICO
  • Retail sales showed further signs of deceleration in February. Retail sales grew 3.6% y/y (7.6% in calendar-adjusted terms, due to the leap-year effect) – above market expectations (3.0%) – pulling down the 3-month moving average growth rate to 6.1% y/y (January: 8.4%). At the margin, momentum is weaker. Seasonally-adjusted retail sales gained 2.4% from the previous month, rebounding from a low level (December 2016 and January 2017 featured the steepest monthly contractions in three years). In fact, quarter-over-quarter annualized growth has fallen to negative terrain in February (-0.2% q/q; January: 3%) for the first time in 34 months.
  • We expect consumption, and hence retail sales, to show lower growth rates in coming months, amid a deteriorating of fundamentals that supported consumers in the past years. The rise of inflation, running at 5.6% y/y in the first half of April, is outstripping the growth of nominal wages (March: 4.5% y/y), so real wages are actually falling. Formal employment, nevertheless, accelerated a bit in March (to 4.6% y/y). But this hasn’t been enough to prevent the real wage bill’s growth to moderate. Consumer confidence has recovered somewhat, but it is still close to the depressed levels of the Lehman crisis. The impulse from remittances is also getting smaller, with less growth of remittances (in USD terms) and a stronger MXN (which decreases remittances converted into Pesos). Finally, consumer credit is still growing at a solid pace (February: 11.8% y/y), though rising NPL’s and higher domestic interest rates suggest moderation ahead. Full Report
Market Developments 
  • GLOBAL MARKETS: Major equity markets were mixed amid skepticism over the US tax reform guidelines. Among other proposals, the plan seeks to reduce the corporate tax rate to 15% from the current federal statutory rate of 35%. However, the absence of a border-adjustment tax raised uncertainty about from where will come the revenue to finance the tax plan. Long US Treasuries narrowed 2bps (10-year: -2bps to 2.31%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil fell (Brent: -1.09% to USD 51.53/bbl) and copper prices increased 0.44%. In FX, all currencies under our coverage depreciated. The CLP posted losses of 0.48% to 665.09/USD. The COP weakened 0.96% to 2,930.69/USD. Also, lingering market concerns over the Social Security voting timing are still hurting the BRL. The Real tested the 3.20/USD handle during intraday highs, closing at 3.1743/USD (-0.85%). Finally, fresh new market conjectures over North American trade relations took a hit on the MXN (-1.71% to 19.19/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened all across LatAm. CDS in Chile inched up 2bps to 74bps. Colombian spreads went to 130bps (+3bps). Mexican and Brazilian country risk increased 4bps to 125bps and 222bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian widened in the session tracking a weaker BRL. In DI futures, the Jan-21 went up 2bps to 10.08% and the Jan-25 increased 4bps to 10.54%. Real rates widened 2-7bps past the 2026s (May-55: +7bps to 5.30%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded higher consistent with the MXN selloff. In TIIE swaps, the 1-year increased 6bps to 7.30% and the 10-year wet up 8bps to 7.58%. Accordingly, breakevens widened substantially as the 5-year increased 13bps to 3.82%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long rates widened. In Camara swaps, while the 1-year inched up 1bp to 2.51%, the 10-year went up 5bps to 4.04%. Chile Rates Tracker In Colombia, the curve shifted 5-6bps upwards, on average. In IBR Swaps, the 18-month increased 6bps to 5.39% and the 5-year widened 5bps to 5.26%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, FGV’s industrial business final industrial business confidence reading by FGV will also be released (Fri.). Then, the nationwide unemployment rate will also hit the wires (Fri.). We expect the rate to reach 13.5% in the quarter ended in March, standing still at 13.1% in seasonally adjusted terms. On fiscal accounts, March’s tax collection will be released throughout the week. We forecast BRL 99.5 billion in tax collections. Moreover, the consolidated primary budget balance for March will come through (Fri.). We expect a BRL 11.8 billion deficit, with the central government result (due Thur.) posting a BRL 8.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.0 billion deficit (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). 
  • In Mexico, the statistics institute (INEGI) will announce the growth rate of February´s retail sales (Wed.). In January, retail sales fell 1.1% from December, posting two consecutive declines, bringing quarter-over-quarter annualized growth down to 2.2% (December: 7.0% q/q). Moreover, INEGI will publish trade balance for March (Thu.). We expect the trade deficit to continue narrowing on the back of higher U.S. growth, a competitive real exchange rate and a deceleration of internal demand. Still, INEGI will release the GDP figures for 1Q17 (Fri.). We have recently revised our GDP growth forecast for 2017 to 1.8% (from: 1.6%). Still, higher inflation, tighter macro policies and remaining uncertainties over trade relations with the U.S. are consistent with a slowdown from 2016. Finally, the Ministry of Finance will announce the fiscal balance for March (Fri.). We expect that a whopping dividend from the central bank will likely allow the government to surpass the fiscal targets set for 2017, reducing the odds of a sovereign rating downgrade.
  • In Chile, INE will publish the national unemployment rate for 1Q17 (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.6%, from 6.3% in the equivalent period last year, and decelerating job creation. Recent data has shown that employment growth is exclusively sustained by low quality jobs as salaried jobs are being shed, a reflection of an even weaker labor market. Then, the national statistics agency (INE) will publish the industrial activity indicators for the month of March (Fri.). We expect manufacturing production to contract 1.5% from last year (February: -1.0%), negatively affected by metal related manufacturing.
  • In Colombia, the highlight of the week in Colombia will be central bank’s monthly monetary policy meeting (Fri.). We expect another 25-bp rate cut this month, taking the policy rate to 6.75%, as the central bank remains cautious. Looking ahead, we cannot rule out the possibility of more aggressive moves. Then, Fedesarrollo will publish the March retail and industrial confidence levels (Thu.). With the economy continuing to show signs of weakness, we expect confidence levels to remain at low levels. Moreover, the national unemployment rate for the month of March will be released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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