Itaú BBA - The Colombian curve bear-flattens as Banrep eyes inflation expectations

Latam FI Strategy Daily

< Back

The Colombian curve bear-flattens as Banrep eyes inflation expectations

January 30, 2017

The Colombian curve flattened substantially, in a late reaction to Banrep’s hawkish tilt.

With information available until 6:30pm Brasilia time

Highlights

  • The Colombian curve flattened substantially, in late reaction to Banrep’s hawkish tilt (see Macro Backdrop). In IBR swaps, the 1-year widened 12bps to 6.47% and the 10-year edged up 3bps to 6.46%.
  • Mexican yields kept narrowing, echoing the MXN solid performance. TIIE swaps curve bull-flattened, as the 2-year narrowed 4bps to 7.29% and the 10-year dropped 7bps to 7.93%. The curve now sees between 133-146bps in rate hikes this year – a tad above our scenario. Breakevens also tightened across the curve: the 5y5y narrowed 9bps to 4.26%.
  • In LatAm FX, the MXN outperformed peers, appreciating 0.54% to 20.77/USD – nearly erasing the year-to-date losses. The BRL followed (0.46% to 3.1265/USD), testing levels last seen in mid-October. The CLP also gained (0.39% to 648.45/USD), whereas the COP stood afloat at 2,932.50/USD, as Banrep’s tougher stance offset the oil rout.

Macro Backdrop

BRAZIL

  • The central government complies with the primary result target set for 2016, but non-recurrent revenues played a major role. The central government posted a BRL 60.1 billion deficit in December, better than market estimates and our call (both at BRL -68 billion). Revenues were BRL 2 billion higher than our forecast, while expenditures were BRL 6 billion lower, mainly due to a lower payment of expenses from previous budgets (“restos a pagar”) in the discretionary expenditure. In 2016, central government registered a BRL 154 billion deficit (-2.5% of GDP), above the BRL 170 billion deficit target (-2.7% of GDP). The BRL 64 billion revenues with the repatriation bill and the hydropower auction contributed to the achievement of 2016 fiscal target. We expect the consolidated primary result for December (including regional governments and state-owned companies), will register a BRL 67.7 billion deficit. With the result, the consolidated primary deficit will likely reach BRL 153 billion (-2.5% of GDP), also above the consolidated target of BRL -164 billion (-2.6% of GDP) for 2016. Full Report Below
  • The market revises down Selic expectations again. According to BCB’s Focus survey, the median of professional forecasters’ expectations for the Selic policy rate stood flat at 9.50% for YE17 and was revised to 9.00% (from 9.38%) for YE18. Inflation expectations for 2017 inched down to 4.70% (-1bp) and remained at 4.5% for 2018 onwards. The market expects a slightly stronger BRL in YE19: 3.58/USD (from: 3.60/USD). GDP growth expectations did not change: the consensus foresees 0.5% growth in 2017, 2.20% next year and 2.50% for 2019. See BCB report
  • Using our seasonal adjustment, supermarket sales (ABRAS) decreased 2.9% m/m in December (previous: +1.6%). Our preliminary forecast for December core retail sales is a decrease of 1.7%. This would offset the 2.0% m/m increase in core sales observed in November (driven by anticipation in year-end purchases due to Black Friday).
  • The BCB allotted USD 700 million (14,000 contracts) in regular FX swaps. After closing, BCB called a FX credit-line auction of up to USD 1 billion on Tuesday. The Central Bank stated that the auction aims at rolling over the credit lines expiring on February 2 (USD 1.8 billion).

CHILE

  • Private consumption-related activity remained firm, albeit weaker than expected. Retail sales increased 4.1% y/y in December (previous: +5.0%), below our 5.8% forecast and the market consensus of 5.3%. Once adjusted for seasonal and calendar effects, retail sales increased by a more modest 2.6% (previous: 5.2%). Strong vehicle sales supported the 7.4% y/y rise in durable goods consumption, while apparel sales (6.4%) led the 3.4% rise in non-vehicle related sales. At the margin, retail sales momentum lifted to 7.6% q/q saar (3Q16: 3.3%), and supermarket sales increased to 11.6% q/q saar, (previous: 0.1%). In 2016, retail sales growth recovered to 4.0% (2015: 2.5%). Looking ahead, retail sales could be favored by falling prices alongside an influx of consumption tourism.
  • Meanwhile, mining and manufacturing stayed weak, but did come in above market expectations. The industrial production index - which aggregates manufacturing, utilities and mining - increased 0.3% y/y in December (previous: -1.3%), above market consensus (-0.7%). The return to positive growth was led by mining (+0.3%) and utilities (+2.6%). Meanwhile, the 0.3% y/y decline in manufacturing (previous: -1.9%) was less intense than our projection (-1.5%) and the consensus’ (-1.2%). Weaker demand, rather than supply shocks seen in previous months (like the drop in salmon and trout populations and mining disruptions), was the main drag on overall manufacturing. At the margin, mining posted a decrease of 4.6% q/q saar (3Q16: +1.6%), while manufacturing dropped 7.5% q/q saar (3Q16: +2.3%). The latest activity data leads us to expect growth of below 1% for the December GDP-proxy.
  • Overall, activity in 4Q16 will most likely be the weakest of the year with growth likely below 1% (3Q16: 1.6%). We expect an activity recovery this year to 2.0% (from 1.5% expected for 2016), as average copper prices improve, inflation declines and interest rates fall. However, uncertainty on both the global and local stage could hamper a notable private sentiment recovery, as well as an investment bounce back. Full Report

COLOMBIA

  • Banrep surprised the market by leaving its policy rate unchanged in the first monetary policy meeting of the year. Following the earlier than expected rate cut in December, the market was near unanimous in its expectation for a 25-bp rate cut. However, the board opted to leave the policy rate at 7.5%. The decision was once more by majority, with a swing from the 4-3 vote in favor of a rate cut last month, to a 4-3 split in favor of staying on hold. The board agrees that there is a need for monetary easing, as the real interest rate is above the historical average since 2005 and activity remains weak. However, there is disagreement on the timing and speed of rate cuts, as the majority appears concerned by inflation expectations. In fact, following the approval of the tax reform and the upside surprise in December inflation, the latest analyst survey showed the 2017 inflation expectation rose to 4.5% (from 4.2%). The board also noted the increased uncertainty on global financial conditions since the previous meeting, supporting a more cautious approach. Be that as it may, the negative output gap and the fading of supply-side inflationary shocks support our call for further easing ahead: we expect the policy rate to reach 5.5% by YE17. Yet, the timing of each rate cut will likely be data-dependent. Full Report

Market Developments

  • GLOBAL MARKETS: Investors were cautious week started, ahead of major central bank meetings (BoJ, Fed, BoE) and the U.S. payrolls report. Equity markets posted widespread losses and volatility gauges rose. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB: -1.12%), dragged by energy and grains. Brent crude fell -0.54% to USD 55.22/bbl, while soybean dropped 2.53%. High-beta currencies predominantly strengthened (EMFX: 0.25%; commodity-FX: 0.05%). In LatAm, the MXN outperformed peers, appreciating 0.54% to 20.77/USD – nearly erasing the year-to-date losses. The BRL followed (0.46% to 3.1265/USD), testing levels last seen in mid-October. The CLP also gained (0.39% to 648.45/USD), whereas the COP stood afloat at 2,932.50/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) inched up all across LatAm. Brazil and Colombia rose 2bps to 248bps and 153bps, respectively. Both Mexican spreads (165bps) and Chilean CDS (83bps) widened 1bp. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long local yields widened across the curve. In DI futures, the Jan-21 rose 6bps to 10.70%. Linkers performed alike, as the NTN-B 2050 widened 4bps to 5.60%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields kept narrowing, echoing the MXN solid performance. TIIE swaps curve bull-flattened, as the 2-year narrowed 4bps to 7.29% and the 10-year dropped 7bps to 7.93%. The curve now sees between 133-146bps in rate hikes this year – a tad above our scenario. Breakevens also tightened across the curve: the 5y5y narrowed 9bps to 4.26%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates had a mixed session. In Camara swaps, the 1-year decreased 2bps to 2.94% and the 10-year widened 2bps to 4.23%. Chile Rates Tracker The Colombian curve flattened substantially, in late reaction to Banrep’s hawkish tilt (see Macro Backdrop). In IBR swaps, the 1-year widened 12bps to 6.47% and the 10-year edged up 3bps to 6.46%. Colombia Rates Tracker

Upcoming Events 

  • In Brazil, December’s industrial production (Wed.), will be on focus. We expect production to expand 3.2% m/m, consistent with the widespread growth observed in the main coincident indicators. The final industrial business confidence reading for January (FGV) will come out (Tue.), for which the preview pointed to a 3.7% m/m seasonally adjusted increase. The nationwide unemployment rate for December will come through as well (Tue.). We forecast the unemployment rate to reach 11.9%, which in seasonally-adjusted terms corresponds to an increase to 12.5%. Moreover, Fenabrave vehicle sales for January will be released (Wed.) - we estimate sales of 153k vehicles. On the external sector, we expect the trade balance (Wed.) to post a surplus of USD 2.0 billion in January. Finally, Congress will return to its activities on Wednesday, one day before the elections for new Lower House and Senate leaders (Thu.). The Lava Jato Operation’s new rapporteur to replace Minister Teori Zavascki may be chosen next week.
  • In Mexico, the first survey that Banxico publishes after the liberalization of gasoline prices will be of note. Banxico will publish January’s expectations survey (Wed.). We expect a significant increase of short-term inflation expectations (especially for 2017), and a moderate increase for medium/long-term tenors. INEGI will announce the flash estimate of Q4’s GDP growth (Tue.). We forecast a growth rate of 2.3% y/y for 4Q16. The statistics institute will also announce November’s gross fixed investment. We expect it to print 0.3% y/y.
  • In Chile, the unemployment rate and BCCh's minutes are on the market's radar. INE will publish the 4Q16 national unemployment rate (Tue.), which we anticipate at 6.2%. BCCh will publish the minutes from the January monetary policy meeting (Fri.). With the market now pricing in more rate cuts than the 50-bp cycle outlined in the 4Q16 Inflation Report, the minutes could provide some indication on the magnitude of the easing cycle.
  • In Colombia, the Inflation Report and export data are on the radar. DANE will publish export data for December (Thu.). We expect to see exports of USD 3.1 billion on the back of higher oil prices. Also important, Banrep will publish the 4Q16 Inflation Report (Fri.).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editor: Eduardo Marza


Macro Reports

BRAZIL: Better central government primary result in December. 2016 deficit was 2.5% of GDP, slightly lower than the target of -2.7% of GDP
 
The central government posted a BRL 60.1 billion deficit in December, much better than market estimates and our call (both at BRL -68 bn). Revenues came 2 BRL bln higher than our forecast, while expenditures were 6 BRL bln lower, mainly due to a lower payment of expenses from previous budgets (the so called “restos a pagar”) in the discretionary expenditure.
 
In 2016, central government had a BRL 154 billion deficit (-2.5% of GDP) , beating its target of BRL -170  billion (-2.7% of GDP). The BRL 64 billion revenues with the repatriation bill and the hydropower auction cleaned the way to the achievement of 2016 fiscal target. In 2017, recurrent tax collection will have a very gradual recovery as economic activity indicators that matter the most for tax collection (real wage bill and retail sales) will continue to underperform GDP. This implies that the central government will need another year with a high amount of extraordinary revenues (around BRL 60 billion in our estimates)  to comply with its 2017’s primary result target of BRL 139 billion deficit or -2.2% of GDP and to start reverting the deterioration in primary results.
 
The consolidated primary result for December (including regional governments and state-owned companies) will come through tomorrow. We expect a BRL 67.7 billion deficit with a 5 BRL bln deficit in regional governments and a 2 BRL bln deficit in state-owned companies. With the result, the consolidated primary deficit should reach BRL 153 bln (-2.5% of GDP), also beating the consolidated target of BRL -164 billion (-2.6% of GDP) for 2016.

Pedro Schneider 



< Back