Itaú BBA - We now expect a 100-bp cut in the next Copom meeting

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We now expect a 100-bp cut in the next Copom meeting

March 14, 2017

We expect two cuts of 100bps (in April and May), two cuts of 75bps (in July and September), and one cut of 50bps (in October).

With information available until 6:30pm Brasilia time

Highlights

  • We now foresee acceleration in the easing pace. Given BCB’s signaling of possible intensification in frontloading the easing cycle, the disinflationary scenario and the decline in expectations, we now expect two cuts of 100bps (in April and May), two cuts of 75bps (in July and September), and one cut of 50bps (in October). However, we maintain our call that the benchmark Selic rate will end 2017 and 2018 at 8.25%. Full Report
  • On the eve of the all-important FOMC meeting, the Brazilian curve bear-steepened, hurt by the soured BRL performance. In DI Futures, the Jan-18 went up 4bps to 10.05% and the Jan-21 increased 14bps to 10.07%. In Colombia, IBR swaps traded lower, as activity indicators for January disappointed market expectations (see Macro Backdrop). The 2-year fell 1bp to 5.69% and the 5-year narrowed 4bps to 5.83%.
  • In LatAm FX, all the currencies under our coverage depreciated again. The MXN fell to 19.67/USD (-0.25%). The COP posted losses of 0.44% to 2,997.25/USD. The CLP depreciated 0.34% trading at 669.02/USD. The BRL weakened to 3.1691/USD (-0.51%) on negative domestic news flow on the timing of the Social Security reform voting. Afterwards, Lower House Speaker Maia dismissed this information and the Chief of Staff office reinforced the government’s expectation that the bill will pass the Lower House by late April.

Macro Backdrop

BRAZIL
  • Exports up and imports down in February. Terms of trade were roughly unchanged in February (-0.1% m/m) after a strong increase in January. Exported quantity increased 0.9% m/m in February, also after a strong increase in January, led once again by basic goods (+5.8% m/m). Imported quantity fell 2.3% m/m after two consecutive months of increase. The decline was led by intermediate goods (-6.4%), durable consumer goods (-16.1%). Full Report Below
MEXICO
  • Industrial production began the year on a soft patch. Industrial production contracted 0.1% y/y in January, below our forecast (0.4%), leaving the three-month moving average growth rate at a modest 0.3% y/y (slightly up from nil growth in 4Q16). At the margin, industrial production gained 0.1% from the previous month, with quarter-over-quarter annualized growth standing at 1% (4Q16: 0.9% q/q). We expect stronger manufacturing to lift industrial production in 2017, but the magnitude of falling oil output and weaker construction activity are downside risks. Oil output will likely continue to fall in the short-term, as PEMEX has slashed its capex and it will take time for the energy reform to lift output. On the construction side, fiscal consolidation and softer private investment (hurt by the uncertainty surrounding bilateral relations with the U.S.) are headwinds. Nevertheless, stronger U.S. industrial output and a competitive real exchange rate are already boosting the growth of Mexico’s manufacturing, which we believe will be the main buffer of the economy in 2017. Full Report
COLOMBIA
  • Household durables good sales remain upbeat, but sales of vehicles and related parts dragged total consumption down in January. Retail sales declined 2.2% y/y (December: 6.2%) well below our forecast and consensus (both at 3%). The partial implementation of the increased sales tax unfolding in January could explain weaker activity. On the positive front, durable household goods sales came in at 7.3% (previous: 8.2%), adding 0.7 p.p. to the overall retail sales gain. In the quarter ending in January, retail sales grew 3.4% (4Q16: 3.8%, 3Q16: -2.1%). At the margin, retail sales excluding fuel sales declined 3.4% from December (previous: -0.7%). Employment in private consumption related activity is surprisingly on the up; however, most of the job creation is related to informal vending. This is in line with the deteriorating quality of job creation witnessed in the national labor market statistics, hinting that support for private consumption ahead is reduced. 
  • Lower support from oil refining limits industrial production performance in January. Industrial production fell 0.2% y/y at the start of 2017 (December: +2.7%), in spite of a favorable calendar effect, pulled down by consumption related items. This came in below consensus estimate (+1.8%) and our forecast (+2.3%). The 5.7% drop in beverage processing was the main drag in the month (-0.7 p.p.), meanwhile the slowdown of oil refining to 1.6% from 13.8% previously also played an important role in the weak data point. In the quarter, the industrial production grew 1.5% y/y (4Q16: 1.7%, 3Q16: 2.5%). At the margin, industrial production decelerated to -3.6% q/q (4Q16: +3.8%, 3Q16: +0.2%). Our expectation of a mild activity recovery to 2.3% this year (2016: 2%) contains downside risks. The still restrictive monetary policy stance, a loosening labor market and depressed consumer confidence suggest that an activity recovery is by no means guaranteed. Increased political uncertainty may also dampen an investment rebound. In such a context, the central bank will remain concerned with the materialization of an excessive activity slowdown. With inflation and inflation expectations retreating towards the 2%-4% tolerance range, we expect the central bank to cut the policy rate this month. Moreover, if activity weakness endures, the central bank could turn more aggressive with cuts. Full Report

Market Developments 

  • GLOBAL MARKETS: On the eve of the all-important FOMC meeting, Treasuries tightened and equity markets were on the red. For the 5-year rates decreased 2bps to 2.12% and for the 10-year they fell 3bps to 2.59%. We expect the FOMC to hike and signal 3-4 hikes in 2017 and 4 in 2018. The strength of US labor market indicates to us that 4 hikes are appropriate in 2017 and 2018, but an alternative scenario for 2017 would be 3 hikes and the Fed start reducing its balance sheet. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil reverted earlier losses (Brent: +0.47% to USD 51.59/bbl), after the API reported U.S. crude stockpiles fell last week. In LatAm FX, all the currencies under our coverage depreciated again. The MXN fell to 19.67/USD (-0.25%). The COP posted losses of 0.44% to 2,997.25/USD. The CLP depreciated 0.34% trading at 669.02/USD. The BRL weakened to 3.1691/USD (-0.51%) on negative domestic news flow on the timing of the Social Security reform voting. Afterwards, Lower House Speaker Maia dismissed this information and the Chief of Staff office reinforced the government’s expectation that the bill will pass the Lower House by late April. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor traded slightly higher. Chilean and Mexican spreads both increased 2bps to 76bps and 141bps, respectively. Brazil CDS inched up 1bp to 234bps. Colombian country risk went up 3bps to 141bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Ahead of the FOMC, the Brazilian curve bear-steepened, hurt by the soured BRL performance. In DI Futures, the Jan-18 went up 4bps to 10.05% and the Jan-21 increased 14bps to 10.07%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Most Mexican rates traded higher in the session. In TIIE swaps, short rates (until 1-year) traded range bound (9-month: flat at 7.10%) while long ones increased (5-year: +2bps to 7.49%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates were mixed in the session. In Camara swaps, the 1-year fell 1bp to 2.93% and the 5-year went up 1bp to 3.72%. Chile Rates Tracker In Colombia, IBR swaps traded lower, as activity indicators for January disappointed market expectations (see Macro Backdrop). The 2-year fell 1bp to 5.69% and the 5-year narrowed 4bps to 5.83%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, February’s Industry employment data for the state of Sao Paulo (FIESP) will be in focus (Thu.). In recent months, employment has shown more modest marginal declines. Then, industrial business confidence (CNI) for March will be released (Fri.). In the previous month, confidence increased 6.7%, representing a second relevant gain at the margin. We expect the current upward trend in industrial confidence to continue ahead. 
  • In Chile, the central bank of Chile will hold the March monetary policy meeting (Thu.). We expect the board to cut the policy rate by 25bps to 3.0% and to retain the easing bias. 
  • In Colombia, think-tank Fedesarrollo will release the February consumer confidence (Wed.). In the previous month, consumer confidence reached a historic low following the approval to increase the sales tax rate. Then, the trade balance for the month of January will be published (Fri.). We expect a trade deficit of USD 815 million, smaller than the USD 1.5 billion deficit recorded one year ago. Moreover, the central bank may publish the current account balance for 4Q16. We expect a USD 2.2 billion deficit (4Q15: USD 4.1 billion deficit), as the trade balance of goods improved from one year ago on the back of recovering commodity prices and a weakening domestic demand.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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