Itaú BBA - We expect Copom to deliver another 100-bp cut in September

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We expect Copom to deliver another 100-bp cut in September

August 1, 2017

After that, the committee is likely to slow down the pace of easing to 50bps per meeting, with the Selic rate ending the year at 7.25%.

With information available until 6:30pm Brasilia time

Highlights

  • The minutes from the BCB’s July meeting confirmed the hint, presented in the statement, that the base case for now is a 100-bp cut in September, provided current economic conditions, namely stabilization of economic activity amidst wide slack, especially in the labor market, remain unchanged. The text also suggests that the debate within the committee, regarding the next policy meeting, remains limited to the 75-100bps range. Barring a shock, the macroeconomic scene is unlikely to change much by early September; we thus reckon the Copom will repeat the 100bps pace. After that, taking into account the stage of the cycle, the committee is likely to slow down the pace of easing to 50bps per meeting, with the Selic rate ending the year at 7.25%. Full Report
  • In rates, the belly of the Brazilian curve narrowed (Jan-19: -6bps to 8.04%). In Chile, the front end narrowed 1-2bps. For the remainder of the year, the Camara swaps curve is now pricing roughly 20bps in rate cuts. 

Macro Backdrop

BRAZIL
  • The trade surplus reached USD 6.3 billion in July, slightly above our forecast (USD 6.0 billion) and in line with market consensus (USD 6.3 billion). Over 12 months, the trade surplus increased again to $62.5 billion and the year-to-date figure is the highest in the historical series started in 1992. However, the seasonally-adjusted annualized quarterly moving average receded to $68 billion, showing moderation of the trade balance at the margin. Exports increased 14.9% yoy, adjusting for the number of working days. Likewise, imports advanced for an eighth consecutive month in year-over-year terms, by 6.1%, led by intermediate goods (6.8% yoy), consumer goods (3.4% yoy), and fuels and lubricants (57.3% yoy). 
  • July figures again showed moderation in the trade surplus at the margin. Exports, which advanced sharply earlier in the year, are now at a somewhat lower level, in line with the lower international commodity prices. Nevertheless, imports remain at low levels, ensuring stronger trade surpluses in 2017 than in 2016. We maintain our expectation of a large trade surplus this year (as in 2016), supported by the robust results achieved so far. Full Report
  • According to Fenabrave, vehicle sales reached 185k in July, falling 2.5% mom/sa after five positive monthly readings. The breakdown shows a 2.7% decline in “passenger cars + light vehicles” and a 1.8% increase in “trucks + buses”, according to our seasonal adjustment. Our forecast for auto production (Anfavea) is 224k in July, -3.4% mom/sa. 
  • Stable industrial production in June tops expectations. Industrial production was stable in June in seasonally-adjusted monthly terms, beating the median of market estimates (-0.3%) and our forecast (-0.2%). Compared to June 2016, industrial output climbed 0.5%. The May figure was revised slightly upward by 0.2%, which explains the greater surprise in the year-over-year comparison: expansion of 0.5% vs. an estimated -0.1%. The breakdown by economic category shows a mixed performance, with small gains for capital goods (0.3%) and intermediate goods (0.1%) and declines for durable consumer goods (-6%) and all other consumer goods (-0.5%). Available coincident indicators (industrial confidence, capacity utilization, weekly foreign trade figures, and power consumption, among others) point to a gain of 0.2% mom/sa in July. Full Report
MEXICO
  • Banxico published July’s expectations survey, showing that inflation expectations are leveling off. The median expected inflation was unchanged for all tenors – 2017 (6%), 2018, (3.8%), next 5-8 years (3.4%) – with the exception of the 12-month measure (3.9%, up from 3.8%). Nevertheless, it is important to highlight that short-term inflation expectations (2017) have stopped increasing, in contrast with the previous surveys, which is consistent with the fact that inflation seems to be stabilizing (seasonally-adjusted 3-month annualized inflation actually fell in June, and annual inflation decreased slightly in the first half of July). Also importantly, the median expected MXN continues moving towards stronger end-of-year levels for 2017 (18.4/USD, from 18.7/USD) and 2018 (18.2/USD, from 18.5/USD). Notably, the more conciliatory tone of US policymakers (boding well for Nafta renegotiation), the positive development on the fiscal front (which led S&P to revise Mexico’s credit rating outlook, to stable from negative) are contributing to diminish the uncertainty surrounding the Mexican economy. On the activity front, median GDP growth forecasts were unchanged for 2017 (2%) and 2018 (2.3%), and revised up for the next 10 years (2.8%, from 2.7%). 
  • Macro Vision: reshaping Nafta. The US is Mexico’s top trading partner, so the escalation of protectionism north of the border poses a substantial risk to the Mexican economy. In our view, incentives are set up in a way such that Mexico is likely to renegotiate Nafta, even if the terms of the new agreement are somewhat worse. In a nutshell, Mexico sees protectionism (even retaliation) as self-defeating, while the US apparently has a neo-mercantilist perspective – focused on eliminating trade deficits – in which trade is at least somewhat similar to a zero-sum game. Full Report

ARGENTINA

  • Tax collection rose by 31.8% yoy in July to ARS 237.3 billion, after growing 29.8% in the previous month. VAT collection rose by a solid 35.2% yoy, marking the fourth consecutive increase in real terms (estimated inflation: 22% YoY). Social-security contributions increased by 28.9%, while income tax collection rose 40.0% yoy. Export duties rose 3.4% yoy, while import duties grew 24% yoy. 

ALL LATAM

  • Market Conditions Index: more expansionary given the improvement in commodities. Financial conditions in the region as a whole advanced to 0.56 (from -0.17 in June). Thus, the three-month moving average reached -0.16 (compared to -0.03 in the previous month). The positive result was widespread among LatAm countries, with positive contributions from Brazil (with an increase in commodities in spite of a drop in financial conditions), Colombia (due to the improvement in oil prices), Mexico (with improvement in most components), Peru (widespread improvement in its components), and Chile (higher copper prices). Full Report

Market Developments 

  • GLOBAL MARKETS: Treasuries narrowed (5-year: -3bps to 1.80%) after solid June US data. Total construction spending fell 1.3% in the month, below the most pessimistic forecast. In year-over-year term, the index increased 1.6% in June, decelerating from 3.8% in May and 7.3% in January. Also, ISM manufacturing PMI showed a still solid headline, but the details came in a bit softer as the employment and new orders components fell. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green in the session (CRB futures: -1.03%). Firstly, oil prices fell (WTI: -2.83% to 48.84/USD) after API indicates US crude inventories have increased last week. In addition, agriculture commodities underperformed, as soybean fell 3.04% and wheat went down 2.79%. Furthermore, metals also posted losses (copper: -0.55%; iron ore: -2.10%). In FX, commodity-linked currencies (-0.51%) posted losses in the session. The CLP depreciated 0.21% to 652.71/USD as copper fell (-0.52%). By the time of writing, the MXN is trading 0.50% weaker to 17.8899/USD and the BRL posted mild losses of 0.04% to 3.1265/USD. On the other hand, the COP outperformed in the region, to 2,969/USD (+0.58%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads continue on a downward trend. For the 5-year tenor, CDS in Chile, Colombia and Mexico all fell 2bps to 64bps, 123bps and 100bps. In Brazil, country risk went down 3bps to 207bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The belly of the Brazilian curve narrowed in the session. In DI futures, the Jan-19 fell 6bps to 8.04% and the Jan-21 went down 1bp to 9.27%. Similarly, real rates fell as the Aug-22 narrowed 5bps to 4.75%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound once again. In TIIE swaps, the 6-month fell 1bp to 7.40% and the 1-year increased 2bps to 7.31%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end narrowed 1-2bps. In Camara swaps, the 1-year fell 2bps to 2.32% and the 5-year went down 1bp to 3.34%. For the remainder of the year, the curve is pricing roughly 20bps in rate cuts. Chile Rates Tracker In Colombia, long rates widened in the session. In IBR swaps, while the 1-year was flat at 5.10%, the 5-year went up 4bps to 5.58%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Lower House is scheduled to vote on charges against President Michel Temer (Wed.). A quorum of 342 lawmakers is required for the vote, same number needed for the charges to be accepted and passed to the Supreme Court. Finally, Anfavea’s auto production will be released (Fri.). 
  • In Mexico, all eyes on activity releases. The statistics institute (INEGI) will publish May’s gross fixed investment (Fri.). We forecast 1.5% year-over-year growth (up from a sharp 8.6% contraction in April). 
  • Activity data is on the market’s radar in Chile. The national statistics agency (INE) will publish the private consumption activity indicators for June (Wed.). We expect the commercial activity index to have increased 4.8% from last year (5.8% previously), resulting in growth of 3.3% in 2Q17 (2.6% in 1Q17). 
  • In Colombia, export data for the month of June (Wed.) will come through. We expect exports to come in at USD 2.8 billion, representing annual growth of 1.3%.
  • In Argentina, the car-makers association (ADEFA) will release July data on production, exports and domestic sales to car dealers (Thu.). Finally, the central bank will release its monthly survey of economists (Wed.). It will be important to monitor the behavior of inflation expectations as guidance for future monetary policy decisions.

Latam Macro Calendar

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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