Itaú BBA - The CLP outperforms EMFX on the solid Chinese PMI

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The CLP outperforms EMFX on the solid Chinese PMI

July 3, 2017

The pair appreciated 0.26% to 662.20/USD.

With information available until 6:30pm Brasilia time


  • In LatAm FX, the CLP outperformed (+0.26% to 662.20/USD) on better than expected Caixin PMI data. The MXN was again the regional laggard (-0.59% to 18.23/USD). At last, on the back of stronger trade balance data (see Macro Backdrop), the BRL appreciated 0.19% to 3.3018/USD. 
  • The belly of the Mexican curve rose (5-year: +4bps to 6.84%) after the US ISM manufacturing PMI came in higher than expected. In Brazil, the curve bull flattened as IPCA expectations for 2017 receded once again and Selic expectations for YE18 fell to 8.25% after staying flat at 8.50% for 14 uninterrupted weeks. In DI futures, the Jan-18 dropped 10bps to 8.84%.

Macro Backdrop

  • Inflation expectations for 2020 fall to 4.00% from 4.25%. IPCA expectations for 2017 dropped to 3.46% (-2 bps), and to 4.25% (-5 bps) by YE18. GDP growth expectations remained stable for 2017, at 0.39%, and inched down to 2.00% (from 2.10%) for 2018. Year-end Selic expectations stood flat at 8.50% for 2017 and 2019, while it has receded to 8.25% (-25bps) for 2018. See BCB Report
  • In our view, the National Monetary Council (CMN) decision to set a lower inflation target for 2019 (4.25%) and 2020 (4.00%) has no significant implications for the monetary-policy stance, given that inflation expectations already incorporated a lower target. However, the new target helps anchoring long term inflation expectations and signals an eventual convergence for even lower inflation levels over time.
  • All-time high trade surplus in 1H17. Trade surplus reached USD 7.2 billion in June, above our forecast (USD 6.8 billion) and the market consensus (USD 7.0 billion). Over 12 months, the trade surplus increased again, to USD 60.3 billion. The seasonally-adjusted annualized three-month moving average declined to USD 71 billion, showing slight moderation in the trade surplus. The year-to-date trade surplus for the first half of the year is the highest in the historical record started in 1992. Exports totaled USD 19.8 billion, increasing 0.8% mom/sa. Meanwhile, imports totaled USD 12.6 billion, climbing 2.0% mom/sa. Compared to July 2016, exports climbed 23.9% and imports advanced 3.3%. 
  • The June figures show some moderation in the trade balance at the margin, albeit small. Exports, which strongly advanced at the beginning of the year, are currently at a slightly lower level, in line with the recent decline in commodity prices. Nevertheless, imports remain at a low level, ensuring stronger trade surpluses in 2017 than during 2016. We maintain our expectation of a large trade surplus this year (as in 2016), with an upward bias, supported by the strong results achieved in the first half of this year. Full Report
  • We published our scenario review for the month of July. We forecast GDP growth of 0.3% in 2017 and 2.7% in 2018, in line with a gradual recovery and slower advance of reforms. Also, we reduced our inflation estimates to 3.3% from 3.7% in 2017 and to 4.0% from 4.1% in 2018. Lower inflation paves the way for a longer cycle of interest-rate cuts. Our forecast for the Selic benchmark rate in 2017 remained at 8.00%, but the estimate for 2018 was revised downward to 7.50%. Full Report
  • Fiscal accounts improved significantly in May, even after netting out the windfall effects of the Central Bank’s dividend which has provided room of maneuver for the government. Resulting from MXN gains on international reserves during the previous year, the Central Bank’s dividend has recorded two consecutive historical highs in 2016 (MXN 239 billion, 1.2% of GDP) and 2017 (MXN 322 billion, 1.5% of GDP), with the latest print representing more than a tenfold increase compared to the dividend recorded in 2015 (MXN 31 billion, 0.2% of GDP). Of course this has provided a lot of fiscal oxygen for the government, allowing it to implement its fiscal consolidation plan without the concern of having to slash spending enough to offset the effect of falling revenues (in order to meet given fiscal targets). Actually, revenues have grown strongly in 2017, mainly because of the dividend. Nevertheless, we note that fiscal accounts are improving beyond this windfall effect. In fact, excluding 70% of the amount of the dividends (as the rest is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary balance reached a MXN 91 billion surplus (0.4% of GDP) in May, from a MXN 22 billion deficit in April. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 420 billion (2% of GDP), from MXN 539 billion in April, and the public sector borrowing requirements (broadest deficit indicator) narrowed to MXN 599 billion (2.9% of GDP), from MXN 623 billion previously.
  • Even though the improvement of the fiscal accounts observed in 2017 has reduced the odds of a sovereign downgrade, providing support to the valuation of Mexican financial assets, we believe that further improvement in coming months will be hindered by the recent decrease of oil prices. The Itaú macro team has revised the average Brent oil forecasts for 2017 (to USD/bbl 49.9, from 53.7) and 2018 (to USD/bbl 47, from 52.4). Given these assumptions, we now expect wider nominal fiscal deficits in Mexico for 2017 (-2.2% of GDP, 2.1% previously) and 2018 (-2.4% of GDP, -2.1% previously). An important fact is that during 2017 the exposure of fiscal accounts to lower international oil prices is being mitigated by the fact that the government is increasing the excise tax on fuels (IEPS) to smooth out the variation of gasoline prices (whose reference price is decreasing because of a stronger MXN and lower international oil prices). However, the government will probably lose this ability by the end of 2017, when maximum regional prices are scheduled to be eliminated in the whole country, and gasoline prices become fully market-determined. Full Report
  • The Central Bank published June’s expectations survey, with expectations of a stronger MXN as the main highlight. The median expected exchange rates for year-end 2017 and 2018 were revised by -4% (to 18.7, from 19.5) and -5% (to 18.5, from 19.4), respectively. Importantly, the MXN has appreciated 12% year-to-date (more than half-way of erasing the 19% depreciation observed in 2016). In our view, the main reason that has led to this appreciation is the more constructive dialogue between U.S. and Mexico policymakers on trade negotiations, but there have also been other factors that have exerted appreciation pressure, such as: Banxico’s new FX intervention tool (FX swaps), announced in February; the moderation of the twin deficits (current account and fiscal), reducing the odds of a sovereign downgrade; the widening of the interest rate differential with the U.S. (Banxico hiked 400bps since December 2015 vis-à-vis 100bps by the Fed); and the recent market-friendly outcome of the regional elections. Paradoxically, median inflation expectations continued increasing for year-end 2017 (to 6%, from 5.9%), and inflation expectations for longer-term tenors (2018 and average of next 5-8 years) did not decrease meaningfully (only a few bps). Persistently higher non-core inflation (agricultural inflation is now running at 8% year-over-year, from negative levels in 1Q17) and rising diffusion indexes (share of CPI basket with annual inflation higher or equal than 4% year-over-year) might explain why the market is reluctant to revise down inflation forecasts. On the activity front, the changes in GDP growth expectations were negligible. The market expects a slowdown in 2017 (to 2%, from annual growth of 2.3% in 2016) and then a moderate pick-up in 2018 (to 2.3%) and average GDP growth of 2.7% over the next 10 years.
  • The minutes from the central bank’s June monetary policy meeting recap the 2Q17 Inflation Report’s (IPoM) baseline scenario outlined only a few days prior to the meeting. In the IPoM, the central bank confirmed that the easing cycle has concluded (following 100bps of easing in the first five months of the year), while a normalization process is not on the near horizon. Hence, the technical staff viewed staying on hold as the only relevant option to be considered at this meeting and the board of the central bank unanimously agreed to keep the policy rate at 2.5% with a neutral bias. 
  • Our baseline scenario does not have the central bank implementing further easing this year, while the start of a normalization process is only anticipated towards the end of next year. We see an economic recovery through the remainder of the year and 2018, aided by higher average copper prices (vs. 2016), expansionary monetary policy and the benefits of low inflation. However, there remains a meaningful risk that activity weakens significantly further, leading to even lower inflation and likely dragging inflation expectations down, which would call for additional rate cuts. Full Report
  • Commercial activity improved in May. The commercial activity index -which aggregates retail activity, wholesale and vehicle sales- grew 5.8% from May 2016, pulled up by a recovery in wholesale activity. Meanwhile, vehicle sales continued to pull up durable consumption. In the quarter ending in May, the commercial activity index saw a pickup to 3.6% year over year (2.6% in 1Q17 and 3.0% in 4Q16), favored by the 12.7% increase in the vehicle and parts component (9.5% in 1Q17). The firm commercial activity showing, alongside positive industrial production in the month, leads us to expect the GDP proxy IMACEC (to be published on July 5) to grow 1.5% year over year in May. 
  • In spite of the rising unemployment and the deterioration in the composition of job growth, private consumption has surpassed expectations. Low inflation and the expansionary monetary policy could be favoring sales. Looking ahead, as the benefits from the tourism season diminish and the labor market loosens further, private consumption activity is likely to evolve at low levels. We expect GDP growth of 1.6% this year, stable from 2016. Full Report
  • The July 2 primary election came broadly within the latest available polls. Sebastián Piñera (president from 2010 to 2014) will take a third bid for the presidency, Beatriz Sánchez emerged victorious over her sole contender. These two candidates will face a large pool in the November 19 general election, when Chileans will choose not only a new president, but will also select all members of the lower chamber of congress, and part of the Senate. With most voting precincts accounted for, over 1.7 million votes have been tallied, surpassing preliminary estimates for this electoral process. With the governing coalition opting not to take part of this election, participation was estimated to be close to 1 million votes. The favorable vote for the participating coalitions likely means the winning candidates could fare well in the November general election. The last polls conducted prior to Sunday’s primaries put Sebastián Piñera at the head of the lot, followed by Alejandro Guillier, with Beatriz Sánchez a distant third. 
  • According to Adimark’s June public opinion survey, Sebastian Piñera extended his lead over his nearest arrivals for the Chilean presidency (to be held November 19). The survey was concluded prior to Sunday’s primary election, but was only released following the victory the former president had in the Chile Vamos in the July 2nd electoral process (over Felipe Kast and Manuel José Ossandón). Overall, Piñera’s lead over Alejandro Guillier (from the governing coalition) widened to 16 percentage points (from 4 points in May). Piñera holds 31% of voting intentions (25% in May), while Guillier dropped 6 points to 15% and is now closer to Frente Amplio’s Beatriz Sánchez (up 2 points to 13%). Sebastian Piñera is now viewed by 59% of respondents as the likely successor to Michelle Bachelet (55% previously). Meanwhile, only 17% believe Guillier will have a successful campaign (down from 21% previously). Undecided voters dropped to 23%, from 26% in the previous month. A possible explanation for the slump in support for Guillier could be his absence from major media platforms over the last month as his skipped the primary election. The ruling Nueva Mayoría coalition decided to go directly to the November 19 first round presidential vote with Guillier (representing the majority of the coalition’s parties) and Carolina Goic (from the Christian Democratic Party) as candidates. Hence, the lack of media exposure for Guillier amid the busy campaign schedule of Piñera’s center right coalition and Sanchez’s left partnership could only have harmed the viewership of the Nueva Mayoría’s candidates. Going forward it will be important to see Guillier’s ability to recover ground as his competitors’ campaigns quiet down. Clarity on the political agenda after the presidential elections is key for a meaningful and sustained rebound of confidence and investment in Chile.


  • Retail sales fell 1.4% yoy in June according to the retail chamber, marking the sixteenth consecutive drop. The main sectors affected were tires (-3.7% yoy), textile (-3.3%) and shoes (-3.0%). Sales accumulated a 3.0% drop during 1H17. According to our seasonal adjustment, sales edged up 0.1% mom in June after falling 0.3% in the previous month. In 2Q17, sales fell 1.3% qoq/sa, up from -3.4% qoq/sa in the quarter ending in May, suggesting a slow recovery in consumption. 
  • Tax collection rose by 29.8% yoy in June, marking a significant recovery in real terms compared to an estimated inflation of 22% for that month. VAT collection increased 29.8% yoy signaling an improvement in consumption. Income tax also edged up 26.9% yoy. Finally, contributions to social security gained 26.3% yoy, in line with the recovery in employment. During 1H17, tax collection grew 30.7% yoy, helped by the collection of penalties related to the tax amnesty program. Excluding these extraordinary revenues, tax collection increased 25%. 
Market Developments 
  • GLOBAL MARKETS: Risk-on day ahead of the independence holiday in the US. Equity markets were strong on the green as the ISM manufacturing PMI came in higher than expected. The headline index advanced almost three points to 57.8 in June, its highest reading since August 2017. Conversely, US treasuries widened (5-year: +4bps to 1.93%), the dollar posted gains vis-à-vis G10 (+0.60%) and the JPY depreciated 0.88%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains (CRB futures: +0.79%). Oil prices increased (WTI: +2.19% to 47.05/bbl), marking its eight successive advance, the longest winning streak in five years. Also, soybean prices went up 2.72%. In LatAm FX, the CLP outperformed (+0.26% to 662.20/USD) on better than expected Caixin PMI Chinese data. The MXN was again the regional laggard (-0.59% to 18.23/USD). At last, on the back of stronger trade balance data (see Macro Backdrop), the BRL appreciated 0.19% to 3.3018/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads traded range bound in the session. In the 5-year sector, the Brazilian risk premium inched down 1bp to 241bps. Elsewhere, spreads stood flat (Chile at 66bps, Mexico at 113bps and Colombia at 136bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrowed as the market as IPCA expectations for 2017 receded once again (see Macro Backdrop). In DI futures, the Jan-18 dropped 10bps to 8.84% and the Jan-21 fell 9bps to 9.99%. Likewise, real rates fell as the Aug-22 went down 6bps to 5.57%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates widened after the US ISM manufacturing came in higher than expected. In TIIE swaps, the belly increased the most as the 3-year widened 3bps to 6.77% and the 5-year went up 4bps to 6.84%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Long Chilean yields widened in the session. In Camara swaps, the 5-year increased 3bps to 3.50% and the 10-year went up to 4.17% (+5bps). Chile Rates Tracker In Colombia, markets were closed due to a national holiday.

Upcoming Events

  • In Brazil, markets will remain focused on political developments this week. One of the main events is the choice of the rapporteur responsible for President Temer’s accusation in the Lower House Constitution and Justice Committee. The Senate could vote petition “urgency” to labor reform this Tuesday. On activity, the key release will be May’s industrial production (Tue.), for which we expect a 0.7% seasonally-adjusted monthly increase. Anfavea’s auto production wil, be released (Thu.). We forecast June’s IPCA (Fri.) to register a 0.15% monthly decrease. 
  • In Mexico, central bank will publish the minutes of June’s monetary policy meeting on (Thu.). Banxico surprised the market by signaling the end of the tightening cycle in its latest monetary policy meeting. However, the statement didn’t close the door completely to additional rate hikes, so the minutes could hint what would be potential triggers for further tightening. INEGI will announce June’s CPI inflation (Fri.), for which we expect a 0.20% month-over-month print. The statistics institute (INEGI) will publish April’s gross fixed investment (Wed.). We forecast a 6% year-over-year contraction, given the deterioration in coincident indicators and a negative calendar effect. 
  • In Chile, a busy week brings key activity and inflation releases. The central bank will publish the Imacec GDP proxy (Wed.) for the month of May. We expect mining activity to support a 0.5% expansion from April, resulting in an annual increase of 1.0%. On Thursday, the National Institute of Statistics (INE) will publish nominal wage growth for May. In April, nominal wage growth was stable at 4.3% year-over-year (4.9% in December 2016). Wage inflation is likely to stay low and possibly moderate further amid a loose labor market and low headline inflation. The INE will publish inflation for the month of June (Fri.). We expect prices to fall 0.1% from May. As a result, annual inflation would dip to 2.0% reaching the lower bound of the 2%-4% tolerance range.Finally, the central bank will release the trade balance figures for June (Fri.). We forecast a USD 100 million surplus.
  • In Colombia, external data and inflation are on the spotlight. The DANE will publish export data for May (Wed.). We expect exports to come in at USD 3.4 billion, representing annual growth of 23.3%, led by mining (coal, ferronickel and oil). The national institute of statistics will release inflation for June (Wed.). We expect consumer prices to gain 0.19% from May, taking annual inflation down to 4.07%.
  • In Argentina, the central bank will release its monthly survey of economists (Tue.). It will be important to monitor the behavior of inflation expectations for this year, for 2018 for the next 12 months as guidance for future monetary policy decisions. In the latest survey, inflation expectations for 2017 and 2018 were revised upward while the next 12-month expected inflation fell. The inflation target range for this year is 12%-17%. Moreover, the car-makers association (ADEFA) will release June data on production, exports and domestic sales to car dealers (Wed.). In May, auto production rose by 13.8% year over year, exports grew 9.7% year over year, and domestic sales expanded by 31.7% year over year in the same period.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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