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The MXN strengthens on the back of Fed minutes

May 24, 2017

The FOMC minutes indicate a rate hike in June.

With information available until 6:30pm Brasilia time

Highlights

  • The FOMC minutes indicate a rate hike in June. The Fed funds implied probability of a rate hike in June stood at 100% as of Tuesday (May 23). However, members stressed that “it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation”. Hence, US Treasuries narrowed as the 5-year fell 3bps to 1.80%. In addition, the document signals the balance sheet reduction will start at a very gradual pace.
  • Afterwards, the USD lost ground (DXY: -0.31%). The MXN is at its strongest level since wake of US election, trading at 18.44/USD (+1.03%). Andean markets closed before the minutes. The COP was broadly stable at 2,907.94 (+0.02%) and the CLP strengthened 0.27% to 672.42/USD. At last, on the first day after the BCB’s extraordinary FX swap auctions, the BRL (-0.23% to 3.2776/USD) remained volatile amid political uncertainties. 

Macro Backdrop

BRAZIL
  • According to FGV, consumer confidence rose 2.4% mom sa in May. The increase comes after a 3.6% decline in the previous month, and was more influenced by expectations (3.8%) than by the current situation component (-0.4%). The confidence index is 15% up year to date. Intention to purchase durable goods rose 4.8% in the month, reverting the decline in April and standing well above 2016 levels. The percentage of people reporting that jobs are hard to get fell for the fifth time in a row (to 91.9% from 92.4%), although it remains at high levels and is consistent with high unemployment rate for a while. The Survey was collected between May 2 and May 20, so the majority of replies probably came before the recent increase in political uncertainty (since May 17).
  • In a note published on its website, the National Treasury stated that the total net redemption of the extraordinary auctions (May 19, 22, 23) was approximately BRL 2.11 billion. The Treasury added that these extraordinary auctions “fulfilled their goal of providing benchmarks for prices and have contributed to a better functioning of the financial market in recent days”. In the same note, Thursday’s weekly LTN and NTN-F auctions were cancelled. 
  • In the roll over auction, the BCB placed the full offering of 8,000 FX swaps announced on Monday (May 22). After closing, the central bank called for a roll over auction of up to 8,000 contracts on May 25. 
MEXICO
  • CPI fell between the second half of April and the first half of May, as it normally does during this time of the year (because of the seasonality of electricity prices). The CPI posted a -0.34% bi-weekly variation - above our forecast (-0.42%) and market expectations (-0.40%) - with the 23.3% reduction of regulated electricity tariffs by the Federal Electricity Commission (CFE) fully accounting for the sequential deflation (as it subtracted -51bps from the CPI print).Low octane gasoline prices also fell (-0.7%), subtracting 4bps, and they would have fallen more had the government not adjusted (increased) the excise tax to smooth out variations (a practice that is in place since February). The hike of regulated interurban transport fares (“colectivo”), by 3 .9%, stood out as the item with the largest positive contribution to inflation (8bps), almost matching the 9-bp contribution of core goods (proxy for tradables) whose prices increased by 0.3%. Overall, sequential inflation continues consistently exceeding its 5-year median, indicating that the upward pressure remains. Annual headline inflation increased to 6.17% year-over-year (previous: 6.01%). Core inflation only increased a bit, to 4.75% (from: 4.68%) during the same period.
  • We expect annual inflation to decrease to 5.4% by the end of 2017. In our baseline scenario, inflation would move down because of the lagged effects of MXN appreciation (11% year-to-date, compared to the 19% depreciation observed in 2016) and, to a lesser extent, weaker activity. Tighter monetary policy will also be instrumental to prevent the abovementioned second-round effects from spreading out. So far, inflation expectations have been increasing significantly for the short-term, but longer-term measures have shown more stability. Full Report
COLOMBIA
  • In April, the components of business confidence continued to deteriorate. According to think-tank Fedesarrollo, industrial confidence came in at -8.5% (0 is neutral), below the +5.9% recorded one year earlier and the lowest April recording since 2009. Once corrected for seasonal factors, industrial confidence decreased 5.6 p.p. from the previous month, moving deeper into negative territory. This is consistent with the weak activity seen in the national accounts data released recently. All three components of industrial confidence worsened at the margin (on a seasonally adjusted basis), as well as when compared to April 2016. In particular, the volume of goods ordered component worsened to -39% (from -13.8% one year ago), likely reflecting the deteriorating current situation. Although still in optimistic territory, respondents are losing hope with regards to production expectations in the upcoming quarter (dropping to 24%, from 32.7% in April last year). 
  • Meanwhile, retail confidence continues to become less optimistic, declining to 17.8% (the lowest level since August 2015), from the 26.0% one year prior. The decline is driven by the deterioration of current business activity, while longer-term expectation declined by less. Activity in Colombia has underwhelmed, and confidence levels are likely to remain low in the months ahead as a notable recovery is not evident. We expect growth of 1.8% this year, down from 2.0% in 2016.
Market Developments
  • GLOBAL MARKETS: The FOMC minutes revealed consistency with a June hike. The Fed funds implied probability of a rate hike in June stood at 100% as of Tuesday (May 23). However, members stressed that “it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation”. Hence, US Treasuries narrowed as the 5-year fell 3bps to 1.80%. Regarding the balance sheet reduction approach, the minutes showed that “under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceeded the caps would be reinvested each month”. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses in the session. Oil prices marginally fell (WTI: -0.41% to USD 51.26/bbl). Likewise, iron ore prices fell 3.19% and copper decreased 0.21%. In LatAm FX, most currencies under our coverage posted gains. The COP was broadly stable at 2,907.94 (+0.02%) and the CLP strengthened 0.27% to 672.42/USD. The MXN is at its strongest level since wake of US election, trading at 18.44/USD (+1.03%). At last, on the first day after the BCB intervention, the BRL (-0.23% to 3.2776/USD) remained volatile amid political uncertainty. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor narrowed all across LatAm. Chilean spreads stood flat at 70bps. CDS in Colombia fell 1bp to 123bps and in Mexico they decreased 2bps to 112bps. Country risk in Brazil went down 6bps to 235bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened again. In DI futures, the Jan-18 fell 4bps to 9.56% and the Jan-19 went down 23bps to 9.66%. Likewise, real rates narrowed 11bps on average (Aug-24: -11bps to 5.55%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates narrowed 2-4bps in the session. In TIIE swaps, the 1-year fell 3bps to 7.51% and the 5-year went down 4bps to 7.40%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded marginally lower. In Camara swaps, the 9-month fell 1bp to 2.48% while the 5-year stood flat at 3.51%. Chile Rates Tracker In Colombia, short rates widened in the session. In IBR Swaps, the 6-month went up 3bps to 5.49% and the 3-year increased 3bps to 5.06%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, April’s tax collection may be released throughout the week. We forecast BRL 114.6 billion in tax collections, or a decline of 0.7% year-over-year in real terms. Then, the consolidated primary budget balance for April will come through (Fri.). We expect a BRL 9.0 billion surplus, with the central government result (due Thur.) posting a BRL 8.2  billion surplus and regional governments and state-owned companies’ result amounting to a BRL 2.0 billion surplus (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Also to be released are confidence indicators (FGV) for retail (Thu.) and construction (Fri.). 
  • In Mexico, the statistics institute (INEGI) will announce April’s trade balance (Thu.). We expect to come in at USD -1,500 million. 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 (boosted by stronger industrial output in the U.S. and a competitive real exchange rate). Shortly after, the Central Bank will publish Q1’s current account balance (Thu.). We expect the current account deficit at USD 6,795 million in 1Q17, with the 4-quarter rolling deficit narrowing to USD 25.8 billion (2.5% of GDP, according to our calculations) from USD 27.9 billion (2.7% of GDP) in 4Q16. Finally, INEGI will announce April’s unemployment rate (Fri.). We expect the unemployment rate to post 3.3% (below the 3.8% rate recorded in the same month of last year) given that labor market conditions remain tight. 
  • In Colombia, the central bank hosts its monthly monetary policy meeting (Fri.). Last month, a split board surprised the majority of the market by cutting the policy rate by 50bps to 6.50%. We believe that the increased concern with activity will likely lead a majority of the board to favor a second consecutive 50-bp cut to 6.00%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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