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The CLP appreciates alone on copper gains

January 24, 2017

Mexican yields rose 2-3bps past the 5-year; breakevens widened as well, echoing the above expected CPI print.

With information available until 6:30pm Brasilia time

Highlights

  • In a bad day for LatAm FX, the CLP strengthened alone (0.27% to 651.89/USD) on the back of the copper rally. The commodity rose 2.30%, on increased concerns that workers at a large mine in Chile could enter in a strike. Elsewhere, the BRL (-0.19% to 3.1705/USD) and the MXN (-0.23% to 21.44/USD) paid back to Monday’s gains, while the COP (-0.09% to 2,930.75/USD) was flattish.
  • In rates, Mexican yields rose 2-3bps past the 5-year. Breakevens widened as well, echoing the above expected CPI print (see Macro Backdrop). The 5-year rose 6bps to 4.89%, as the 4y1y widened 12bps to 4.55%.

Macro Backdrop

BRAZIL
 

  • Industrial business confidence (FGV, preview) for January points to a 3.7% increase in confidence m/m seasonally adjusted, above our expectations (+2.0%). Both the current situation and expectations components registered increases in the month (3.5% and 3.9%, respectively). Confidence shows signs of stabilization on the margin, though at levels significantly higher than the ones seen in 2016. The preview also indicates an increase in capacity utilization of 0.9 percentage points. We expect confidence to improve over the coming months. The final industrial business confidence number (FGV) will come on Jannuary 31.
  • The current account deficit narrowed to USD 23.5 billion (1.3% of GDP) in 2016 - the narrowest since 2007. The current account deficit totaled USD 5.9 billion in December, wider than our estimate (USD -4.8 billion) and market consensus (USD -4.5 billion). Over 12 months, the current-account deficit advanced for the first time since 2014 (to USD 22.5 billion or 1.3% of GDP). The current account deficit in 2016 shrank 60% y/y (USD -23.5 billion vs. USD -$58.9 billion), the smallest value since 2007. The USD 45 billion trade surplus in 2016 (2015: USD 18 billion) was the main positive contribution. For the coming years, a stronger exchange rate (in real terms) and a rebound in domestic activity will produce larger current account deficits, but without compromising external sustainability.
  • Direct investment in the country (DIC) increased last year and fully covers the current account deficit, reducing Brazil’s dependence on volatile capital flows (such as portfolio investments). DIC surprised again by reaching USD 15.4 billion in December, above our estimate (USD 9.0 billion) and the consensus’ (USD 7.2 billion). Intercompany loans posted a noteworthy increase during the month, with transactions in the pet coke, refined oil and biofuels industry adding up to USD 7.4 billion. In 2016, outflows from local capital markets totaled USD 15.8 billion - the largest amount since the beginning of the historical series in 1995, due to the many domestic and international uncertainties in 2016. Nevertheless, DIC last year totaled USD 78.9 billion (4.4% of GDP), and fully covered the current-account deficit. Full Report

  • The BCB allotted USD 750 million in regular FX swaps. After closing, the BCB called a rollover auction of up the same size on January 26 (BM&F exchange will be closed on January 25 due to a regional holiday).

MEXICO
 

  • Mexico’s CPI increased 1.51% between the second half of December and the first half of January, significantly exceeding market expectations (1.27%) and our own forecast (1.25%). Given that the government is moving to liberalize the fuel market, the greatest contributions came from gasoline (+93bps) and gas (+28bps) prices. Annual inflation reached 4.78% (previous: 3.24%), above the 4% upper bound for the first time since December 2014. Non-core inflation accelerated to 8.02% y/y in the same period (previous: 2.71%) due to a 16.53% y/y increase in energy prices. Core inflation also increased, reaching 3.72% (previous: 3.42%), with inflation for goods at 4.54% (previous: 4.14%) and services at 3.02% (previous: 2.81%). We currently expect inflation to end this year at 4.6% before moderating to the tolerance range in 2018 once the shocks affecting prices this year (exchange-rate weakening and higher energy prices) fade. The CPI figure for the first half of January is consistent with our view that Banxico will hike the policy rate by 50bps at its February meeting. Afterwards, we see three 25-bp increases, matching each of the Fed’s moves that we expect for this year.
  • Monthly proxy for GDP suggests the economy was growing at a solid pace going into the U.S. elections. The IGAE gained 3.7% y/y in November (previous: 1.3%), surprising market consensus and our own forecast (2.5%). Adjusted for working days, IGAE expanded 2.5% y/y (previous: 2.2%), mostly because the small and volatile primary activities expanded by 12% y/y (previous: 2.9%). The service sector grew 3.4% y/y (also working-day adjusted), while the industrial sector has performed poorly (+0.3%) due to declining oil output. Looking ahead, we expect a slowdown, as the uncertainty over protectionism weighs on investment in tradable sectors, while tighter fiscal/monetary policies and higher inflation are likely to reduce consumption and investment in non-tradable sectors. As long as protectionism doesn’t materialize, manufacturing exports will be a buffer because of a more dynamic U.S. economy. In fact, the most recent trade balance figures already show manufacturing exports gaining momentum, in line with higher U.S. industrial production. Full Report

COLOMBIA

  • Trade deficit continued to shrink in November. The trade deficit came in at USD 1.3 billion in November, above market consensus of a USD 1.1 billion deficit. As a result, the 12-month rolling trade deficit narrowed to USD 12.7 billion (2015: USD -15.9 billion). At the margin, the trade deficit is also decreasing, with the annualized trade deficit (using our seasonal adjustment) reaching USD 10.4 billion in the quarter ended in November (3Q16: USD -11.6 billion). With the expectation of higher average oil prices this year and still-weak internal demand, Colombia’s current account deficit will likely continue to narrow. We expect the current-account deficit to reach 3.6% of GDP this year, following an estimated 4.4% of GDP in 2016. Full Report
  • Business confidence ended 2016 with a deterioration from 12 months earlier, continuing to hint at weakening activity ahead as the economy undergoes the adjustment to the terms-of-trade shock. According to think-tank Fedesarrollo, industrial confidence came in at -1.2% in December, below the +1.3% recorded one year before. It also completed a full quarter in below the 0 neutral level - the first time since 4Q13. Additionally, retail confidence dropped to 20.3%, from the 23.5% recorded in at the close of 2015. Business confidence, in particular the industrial component, is likely responding to a slowing economy, with growth coming in at 1.2% in 3Q16, and high frequency indicators for 4Q16 remaining weak. We expect growth came in at of 1.8% last year (2015: 3.1%), and expect a mild recovery to 2.3% this year, although risks remain tilted to the downside.

Market Developments

  • GLOBAL MARKETS: U.S. Treasuries widened 5-6bps past the 2-year, owing to strong survey data (PMI, Richmond Fed). The market implied odds of a FOMC hike in 1Q17 rose to 33% from 29% as of Monday. Global Markets Tracker

  • CURRENCIES & COMMODITIES: Commodities traded higher (CRB: 0.26%), led by metals and energy. Copper rose 2.30%, on increased concerns that workers at a large mine in Chile could enter in strike. Oil also traded higher, as WTI gained 0.63% to USD 53.08/bbl. In FX, the BRL (-0.19% to 3.1705/USD) and the MXN (-0.23% to 21.44/USD) paid back to Monday’s gains, while the COP (-0.09% to 2,930.75/USD) was flattish. The CLP bucked the regional trend, strengthening 0.27% to 651.89/USD on the back of the rise in copper. FX & Commodities Tracker

  • CDS SPREADS & EXTERNAL BONDS: Most LatAm credit spreads traded sideways. Brazil (253bps), Mexico (172bps) and Colombia (152bps) inched up 1bp, while Chile stood afloat at 82bps. External Bonds and CDS Tracker

  • LOCAL RATES – Brazil: Yields traded range bound. In DI futures, the Jan-19 fell 1bp to 10.42% and the Jan-21 edged up 1bp to 10.62%. NTN-Bs widened past the 2030s: the 2045 rose 3bps to 5.51%. Brazil Rates Tracker

  • LOCAL RATES - Mexico: Mexican yields widened 2-3bps past the 5-year. In TIIE swaps, the 10-year increased 3bps to 8.12%. Breakevens widened as well, echoing the above expected CPI print (see Macro Backdrop). The 5-year rose 6bps to 4.89%, as the 4y1y widened 12bps to 4.55%. Mexico Rates Tracker

  • LOCAL RATES – Chile and Colombia: Chilean rates widened 2-3bps across the curve. In Camara swaps, the 5-year increased 4bps to 3.59%. Chile Rates Tracker In contrast, Colombian rates narrowed 4bps in average in the belly and 5bps in the long end. In IBR swaps, the 10-year fell 4bps to 6.41%. Colombia Rates Tracker

Upcoming Events 

  • In Brazil, December’s tax collection may be released sometime during the week. We forecast BRL 125 billion figure.
  • In Mexico, INEGI will announce the growth rate of November’s retail sales (Wed.), which we forecast at 7.9% y/y. What's more, December’s trade balance (Thu.) will also come through.
  • In Colombia, Banrep will hold its first monetary policy meeting of 2017 (Fri.). Following the surprise rate cut in December, we expect Banrep to implement 25-bp a cut, taking the rate to 7.25%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editor: Eduardo Marza


The Week Ahead in Latam

Brazil

Industrial business confidence (FGV, preview) for January will be released on Tuesday. We expect a 2.0% seasonally-adjusted increase, based on the already-released CNI confidence reading (+5.0% mom, using our seasonal adjustment).

The Central Bank’s balance of payments report will hit the wires on Tuesday. We expect the current account to post a deficit of USD 4.8 billion in December, above the USD 2.4 billion observed in December last year when a strong trade surplus was fueled by an oil rig export. Year-over-year, the services and income deficits are also likely to increase. In 2016 as a whole, the current account deficit is expected to reach USD 22.6 billion, down from USD 59 billion in 2015. The strong adjustment in the external accounts last year was mainly due to slower economic activity. For the next few years, we forecast a growing current account deficit, though without compromising external sustainability. Direct investment in the country (DIC) is expected to total USD 9.0 billion in December. If this result is confirmed, DIC will amount to USD 73 billion in 2016 (slightly below USD 75 billion in 2015).

December’s tax collection may be released sometime during the week. We forecast BRL 125 billion in tax collections, which translates to a 2.9% increase in real terms (+0.1% in November). Despite the increase in the month, tax collection declined around 6.0% in real terms in 2016, impacted by weakness in economic activity, especially in household consumption and the labor market, where Brazil’s tax burden is concentrated.

Colombia

On Tuesday, DANE will publish the November trade balance. The trade deficit continues to narrow, lowering Colombia’s vulnerability to external shocks. As of October, the 12-month rolling trade deficit narrowed to USD 13.2 billion from USD 15.9 billion in 2015. The improvement is explained by a fast shrinking of the non-energy balance deficit, reflecting the internal demand slowdown. We expect a trade deficit of USD 1090 million, smaller than the USD 1.7 billion deficit recorded one year ago.

Fedesarrollo will publish the December retail and industrial confidence levels onTuesday. In November, business confidence remained divided with retail sentiment still in positive territory, while industrial confidence stayed pessimistic. Industrial confidence came in at -4.0% (0 = neutral) in November, below the -3.3% recorded on year before. On the other hand, retail confidence picked-up to 22.3%, from the 18.7% recorded in November 2015. Business confidence, in particular the industrial component, is likely responding to a slowing economy.

The central bank will hold its first monetary policy meeting of 2017 on Friday. Following the surprise rate cut in December, we expect the central bank to continue to lower the interest rate by 25 basis points to 7.25%. Colombia’s vulnerability to external shocks has diminished (lower current account deficit) and inflation continues to moderate in spite of the above-expectations reading in December. So, we anticipate the majority of the board will view recent developments as sufficient to continue to reduce the historically high real interest rate amid diminishing demand-side inflationary pressures.

Mexico

Starting the week, INEGI (the statistics institute) will publish CPI inflation figures for the first half of January. We expect inflation to spike 1.25% in the first half of January, driven by the 15% average increase of gasoline prices (“gasolinazo”) and peso depreciation. We also highlight the significant price increases of LPG and electricity; a 10% hike in the minimum wage; and higher local taxes in 14 of the 31 states of Mexico. The rise of the tortilla price (an important staple) will probably impact inflation in the second half of January. Assuming our forecast is correct, headline inflation would post 4.51% year-over-year in the first half of January (up from 3.36% in December).  

At the same time, INEGI will announce November’s monthly GDP proxy (IGAE). Based on coincident data – such as the rebound of industrial production recorded in November (1.3% year-over-year, -1.2% previously) and robust fundamentals for service sectors (mainly formal employment, remittances, and consumer credit) – we forecast IGAE’s growth at 2.5% year-over-year (up from 1.2% in October). A positive calendar effect also helped growth in November. 

Also on Tuesday, the National Association of Department Stores and Supermarkets (ANTAD) will publish December’s same-store-sales. In spite of higher inflation (which eroded real wages) and higher domestic interest rates, we believe ANTAD sales expanded 7% year-over-year in December (up from 5.9% in November). Formal employment accelerated in the last month of the year, and remittances from the U.S. have picked up significantly (probably out of concerns of future restrictions from the new U.S. administration).  

INEGI will announce the growth rate of November’s retail sales on Wednesday, which we forecast at 7.9% year-over-year (down from 9.3% in October). Overall, coincident indicators for private consumption – such as formal employment, consumer credit, and remittances – remained firm in November. Remittances actually picked up significantly.

Finally, INEGI will publish December’s trade balance on Thursday. We expect the trade deficit to continue narrowing at the margin, driven by an improvement in the non-energy balance which is explained by firmer manufacturing exports and softer non-energy imports (hit by the weak exchange rate). 

Itaú BBA Macro Team



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