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USD boosted by strong data and optimism over fiscal impulse

September 27, 2017

US Treasury yields and the USD were lifted on increased market expectations that the US government will be able to push fiscal stimuli.

With information available until 6:30pm Brasilia time

Highlights

  • US Treasury yields and the USD were lifted on increased market expectations that the US government will be able to push fiscal stimuli and after US capital goods orders rose more than expected. Hence, LatAm FX (-0.91%) weakened in the session. The MXN underperformed LatAm peers, trading at 18.2049/USD (-1.37%). The BRL closed at 3.1932/USD (-0.85%). Finally, Andean pairs also depreciated (COP: -0.48% to 2,938/USD; CLP: -0.34% to 637.54/USD). 
  • In Colombia, the short end of the curve narrowed after Finance Minister Cardenas’ comments of a wide output gap. In a conference, he said that under “normal” conditions, the economy should grow about 4.0%. In IBR swaps, the 9-month fell 2bps to 4.83%. 
Macro Backdrop

BRAZIL

  • New loans decline in August. The daily average of new non-earmarked loans receded 3.9% mom/sa in real terms, while new earmarked loans fell 6.3%. Overall seasonally-adjusted delinquency was virtually unchanged at 3.7%. Overall interest rates and average spreads declined. The performance of the daily average of new non-earmarked loans was driven by an increase of 1.3% in loans for non-financial corporations and a 7.7% slide in loans for households, adjusted for inflation and seasonality. In the earmarked segment, new loans dropped 16.3% for non-financial corporations, but expanded 1.5% for households. Full Report
  • Confidence in the retail sector rises steeply in September. Confidence in the retail sector (FGV) rose 8.3% mom/sa in September to 89.2, fully offsetting the decline between May-August. The increase was driven by both the current situation component (8.4%) and by expectations (7.9%). 
  • BCB placed the full offering of 12,000 FX swaps. After closing, the central bank announced another rollover auction of up to 12,000 contracts (USD 600 million) on September 28. 
MEXICO
  • Trade deficit widened in August, as a larger energy deficit offset a growing non-energy surplus. The trade balance posted a USD 2.7 billion deficit in August, surprising median market expectations (USD 1.5 billion) to the downside. As a result, the 12-month rolling trade deficit widened (to USD 9.5 billion, from USD 8.7 billion in July). Using the same measure (12-month rolling), we note that a larger energy deficit (USD 16.6 billion, from USD 15.4 billion previously) exerted negative pressure, wiping out the positive effects of the growing non-energy surplus (USD 7 billion, from USD 6.7 billion previously) which is currently standing at an all-time high. 
  • We expect the 12-month trade deficit to resume a narrowing trend, reaching USD 7 billion in 2017. In our view, the driver will be stronger growth for manufacturing exports, attributable to a dynamic US economy (the ISM manufacturing index continued climbing in August, and is now standing at the highest level in more than six years). On the negative side, the risk to our forecast is the widening of the energy deficit. We highlight that the energy deficit was particularly large in August because of the stoppage of PEMEX's largest refinery which closed temporarily, causing oil imports to spike (15.6% month-over-month, seasonally adjusted). This refinery was also affected by the earthquakes in September, so the energy deficit will likely remain bulky in that month. Nevertheless, we also stress that - according to industrial production data - oil & gas output seems to be stabilizing (barely falling by 1.5% qoq/saar in July; from average contractions of 6.5% qoq/saar in 1H17 and 9.3% qoq/saar in 2016). This improvement in oil & gas production dynamics reduces the risk of a further deterioration in the energy balance. Full Report
COLOMBIA
  • Industrial and retail confidence remained below last year’s level in August. According to think-tank Fedesarrollo, industrial confidence came in at -1.9% (0 is neutral), below the +7.9% recorded one year earlier. Two of the three components of industrial confidence – the volume of goods ordered and expectations for the next quarter – retreated, while inventories ticked up. Corrected for seasonal factors, industrial confidence remains in negative territory but inched up from July with all components adding to the improvement. Meanwhile, retail confidence remains in optimistic territory, but is worse than one year ago (17.5% from 30.1% one year ago). The decline is mainly due to the worsening of the current performance, but falling expectations for the next six months added to the decline as well. The lack of a significant recovery in confidence is in line our out expectation of a mild recovery in 2H16.  We expect growth of 1.6% this year, down from 2.0% in 2016.

ARGENTINA

  • The current account deficit continued to widen in 2Q17, registering USD 6.0 billion in 2Q17, significantly higher than the USD 2.8 billion deficit posted one year ago. The result was in line with market expectations (-USD 6.1 billion). As a result, the rolling four-quarter deficit increased to USD 19.7 billion (3.4% of GDP) - the widest level since the year 2000 - from USD 16.5 billion (2.9% of GDP) in 1Q17. 
  • The sharp widening of the trade deficit in July and August anticipates further deterioration of the current account ahead. The latest data, combined with a similar trend in the travel account, suggests risks of a wider current account deficit than we currently forecast for this year (4% of GDP). In all, the recovery of internal demand and a strong exchange rate are deteriorating the external accounts, which are financed mostly by debt issuance in foreign currency. While the size of current account deficit is concerning, the low level of foreign indebtedness is still a mitigating factor. Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasury yields (10-year: +7bps to 2.30%) and the USD were lifted on increased market expectations that the US government will be able to push pro-growth policies. Additionally, US capital goods orders (ex-aircraft) rose more than expected in August. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities, oil prices increased at the margin (WTI: +0.21% to 52.30/USD). In agriculture, wheat surged 1.71% while sugar dropped 0.98%. LatAm FX (-0.91%) weakened as the USD posted gains against most currencies (DXY: +0.51% to 93.4 – highest in 4 weeks). The MXN underperformed LatAm peers, trading at 18.2049/USD (-1.37%). The BRL depreciated 0.85% to 3.1932/USD. Andean pairs also posted losses (COP: -0.48% to 2,938/USD; CLP: -0.34% to 637.54/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) traded range bound in the session. In Brazil, Mexico and Colombia, CDS was stable at 204bps, 114bps and 128bps, respectively. However, Chilean country risk narrowed 1bp to 61bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened as core yields rose and the BRL weakened. In DI futures, while very short rates were stable (Jan-18 at 7.53%), long yields widened (Jan-21: +7bps to 8.83%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened, tracking US treasuries. In TIIE swaps, the 1-year increased 5bps to 7.27% and the 10-year went to 7.05% (+10bps). Likewise, breakevens widened as the 5-year went up 5bps to 3.62%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve steepened on the back of rising US treasuries. In Camara swaps, the 2-year increased 4bps to 2.76%. Chile Rates Tracker In Colombia, the short end of the curve narrowed after Finance Minister Cardenas’ comments of a wide output gap. In a conference, he said that under “normal” conditions, the economy should grow about 4.0%. In IBR swaps, the 9-month fell 2bps to 4.83%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the National Monetary Council is scheduled to meet to decide on the TJLP long term interest rate (Thu.). We expect the National Monetary Council to cut TJLP to 6.5% from 7.0%. Moreover, the nationwide unemployment rate for August will come out (Fri.) - we expect it to be unchanged at 12.7% (according to our seasonal adjustment). In addition, FGV’s business confidence surveys for September on industry, services, retail and construction will be released through the week. Also, the economic uncertainty indicator for September, also from FGV, will be released (Thu.). On fiscal accounts, the consolidated primary budget balance for August will come through (Fri.). We expect a BRL 14.9 billion deficit, with the central government result (due Thur.) posting a BRL 13 billion deficit. Finally, lawmakers in the Lower House Constitution and Justice Committee may choose a rapporteur for the second round of charges against President Temer. 
  • In Mexico, Banxico will hold its monetary policy meeting (Thu.). We expect the Board to maintain the reference rate at 7%.  Finally, the Ministry of Finance (Hacienda) will announce August’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of August (Fri.). We expect manufacturing production to expand 1.1% from last year (+2.6% in July). Also, INE will release the national unemployment rate for the quarter ending in August (Fri.). With job growth dynamics expected to endure, we see the unemployment rate reaching 6.9%, stable from one year ago. 
  • In Colombia, the institute of statistics (DANE) will release the August unemployment rate (Fri.). We expect the urban unemployment rate to rise to 10.7% in August from 9.9% recorded in the same month last year. Still, DANE will publish exports for the month of August (Fri.). We expect exports to come in at USD 3.1 billion, a 1% annual expansion, amid a higher base of comparison following the end of the transportation strike one year before. The highlight will be the BCCh’s monthly monetary policy meeting (Fri.). We expect the central bank board to leave the policy rate unchanged at 5.25%. In early 2018, as inflation eases, further easing is likely. 
  • In Argentina, the INDEC will publish the manufacturing and construction data for August (Thu.). Finally, the INDEC will publish the wage index for July (Thu.). 

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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