Itaú BBA - The Copom delivered a 75-bp cut

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The Copom delivered a 75-bp cut

October 25, 2017

The Copom delivered the expected result, a 75bps rate cut, taking the Selic to 7.5%pa, without a bias.

With information available until 6:30pm Brasilia time

Highlights

  • Loud and clear message. The Copom delivered the expected result, a 75bps rate cut, taking the Selic to 7.5%pa, without a bias. The communication states clearly that the next policy meeting will probably see a “moderate”  reduction in the pace of easing, to 50bps. We are definitely getting near the end of the cycle. We see the Selic ending the year at 7%pa, and a final cut of 50bps, early next year, that will mark the end of the cycle. We´ll learn more about the thinking of the monetary authorities with the release of the meeting minutes next Tuesday, October 31.
  • In FX, the MXN outperformed major currencies (+1.04% to 19.0350/USD) after Banxico announced FX swap auctions of USD 4 billion; the first is USD 1 billion scheduled for Thursday (October 25), followed by weekly auctions of USD 0.5 billion. The BRL appreciated 0.39% to 3.2348/USD and the CLP strengthened 0.39% to 629.83/USD. Bucking the regional trend, the COP depreciated 0.76% to 2,998/USD.

Macro Backdrop

BRAZIL
  • According to FGV’s monthly consumer survey, consumer confidence rose 1.7% mom/sa in October, the same growth pace shown in the previous month. The improvement was driven by the current situation index (3.2%) and by expectations (0.8%). Intention to purchase durable goods fell further. The component of expected inflation fell again, after a mild improvement in the previous month. The percentage of people reporting that jobs are hard to get fell 0.1 p.p. to 92.7%, reinforcing the view that the job market continues to show a sizable slack.
MEXICO
  • Retail sales weakened in August, when inflation peaked (denting real wages). The retail sales monthly indicator fell 0.2% year-over-year in August, below our forecast and median market expectations (expansions of 0.3% and 0.5%, respectively). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was 0.3% year-over-year, with the three-month moving average growth rate decreasing to 0.4% year-over-year (from 1.3% in July). Seasonally-adjusted retail sales gained 0.2% between July and August, posting a quarter-over-quarter annualized contraction of 3.2% (same as in July). Notably, quarterly growth has plunged from the high levels recorded in 2016 (9.4% qoq/saar on average).  
  • Although a further deterioration is likely in September (because the earthquakes disrupted activity in six states which account for one third of the economy), we expect retail sales growth to bottom out in 4Q17. In our view, sequential and year-over-year growth will begin improving in 4Q17, in line with the acceleration of the real wage bill. In fact, annual CPI inflation is already falling (standing at 6.3% in the first half of October, from 6.6% in August), and we expect employment growth to stay robust (as the acceleration of the US economy supports job creation in Mexico). Moreover, consumer confidence showed a meaningful improvement in September (seasonally-adjusted up by 1% month-over-month and 6% year-over-year). An important risk, however, is the uncertainty associated to the presidential elections and the fate of Nafta, which is dragging investment (and could end up affecting the labor market). Full Report

ARGENTINA

  • Economic activity expanded at a solid pace in 3Q17. The EMAE (official monthly GDP proxy) grew by 4.3% yoy in August, following a 4.9% gain in July. The index advanced 0.3% relative to the previous month. Growth in the quarter ending August was 4.5% up from 4.2% in July. At the margin, activity increased 5.2% qoq/saar. The index, in the first eight months of 2017, is 2.4% higher than in the same period one year ago.
  • The strong performance of activity left a significant statistical carry over for 2017. We expect now the economy to grow 2.8% this year, up from 2.5% in our previous scenario. Furthermore, the strong performance of the government in the recent congressional elections will likely contribute to improve sentiment further, leading to a 3.2% growth rate in 2018 (compared with our previous forecast of 2.8%). Full Report
  • The trade deficit widened further in September. The trade deficit reached USD 765 million in September, significantly down from the USD 242 million surplus registered one year before. As a result, the 12-month rolling deficit hit a record of USD 5.1 billion, from USD 4.1 billion in August. At the margin, the three month annualized deficit is even wider, at USD 9.6 billion (seasonally-adjusted) in 3Q17, from USD 8.5 billion in August. Imports rose by a robust 24.7% year-over-year in 3Q17. Also, exports recovered in September due to higher shipments of agricultural products, but still fell 0.4% year-over-year in 3Q17. The latest trade balance data suggests risks of a wider trade and current account deficits than we currently forecast for this year (USD 6.0 billion and 4.3% of GDP, respectively). 

Full Report

Market Developments
  • GLOBAL MARKETS: Ahead of the ECB monetary policy meeting, US Treasury yields widened (10-year: +2bps to 2.44% - highest since March) after a batch of upbeat economic data in the US. Durable goods orders surprised to the upside (actual: 2.2%; consensus: 1.0%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -0.44% to USD 52.44/bbl) from recent highs after the EIA reported crude inventories rose by 856k last week. In metals, iron ore dropped 1.38% and copper went down 0.47%. LatAm FX posted gains in the session (+0.47%). The MXN outperformed major currencies (+1.04% to 19.0350/USD) after Banxico announced FX swap auctions of USD 4 billion; the first is USD 1 billion scheduled for Thursday (October 25), followed by weekly auctions of USD 0.5 billion. The BRL appreciated 0.39% to 3.2348/USD and the CLP strengthened 0.39% to 629.83/USD. Bucking the regional trend, the COP depreciated 0.76% to 2,998/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) widened at margin. In Brazil, Colombia and Mexico, spreads inched up 1bp to 173bps, 113bps and 108bps, respectively. Meanwhile, Chilean CDS was stable at 54bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates narrowed as markets await the Copom decision. In DI futures, the Jan-18 fell 2bps to 7.25% and the Jan-21 went down 5bps to 8.90%. Breakevens went south by 2-3bps (2-year: -2bps to 4.69%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened on rising US Treasuries. Additionally, Banxico Chief Carstens said in an interview that “we need to be very patient , especially in the case of lowering rates, until we have full certainty that the convergence is happening as expected: that is, when inflation is very near the 3% target”. In TIIE swaps, the 6-month inched down 1bp to 7.50% and the 5-year went up 2bps to 7.22%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean yields were also pressured by higher US Treasuries. In Chile, most Camara swaps widened 3-4bps; the 1-year increased 4bps to 2.43%. Chile Rates Tracker In Colombia, rates had a quiet session. In IBR swaps, yields inched up 1-2bps (1-year: +1bp to 4.74%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the central government result for September will come through on (Thu.). We expect a BRL 26.4 billion deficit. Onto the balance of payments report (Thu.), we expect a USD 0.6 billion current account deficit in September. Also, we expect direct investment in the country (DIC) to register inflows of USD 6.5 billion in September.
  • In Mexico, the statistics institute (INEGI) will announce September’s trade balance (Thu.). We expect the trade deficit to narrow.
  • In Colombia, Banrep holds its monthly monetary policy meeting (Fri.). It remains likely that the majority of the board will opt to extend the pause (policy rate at 5.25%) in the easing cycle as it evaluates the inflation trend.

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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