Itaú BBA - We now expect Banrep to deliver a 25-bp cut next week

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We now expect Banrep to deliver a 25-bp cut next week

November 17, 2017

In Colombia, the front end of the curve narrowed 2-3bps after Banrep Governor Echevarría’s quarterly inflation report presentation.

With information available until 6:30pm Brasilia time


  • In Colombia, the front end of the curve narrowed 2-3bps – further benefiting our call (Receive 18m IBR rates) – after Banrep Governor Echevarría’s quarterly inflation report presentation. According to Bloomberg, he stated that “news on Colombia’s inflation have been positive”, whereas growth is doing “badly”. In IBR swaps, the 1-year fell 2bps to 4.40% and the 18-month went down 3bps to 4.48%. Banrep has a monetary policy meeting next week, for which we expect a 25bps cut to 4.75%. 
  • The Brazilian curve bull flattened once again, due to technical reasons and on a stronger BRL (+0.56% to 3.2593/USD). In DI futures, the Jan-19 fell 5bps to 7.21% and the Jan-25 went down 12bps to 10.47%. 

Macro Backdrop

  • According to the IBGE’s monthly services survey (PMS), services sector real revenue fell 0.3% mom s.a. in September, the third consecutive decline. The year-over-year growth came at -3.2%, below consensus and our forecasts (-2.5% and -2.4%, respectively).  5 out of 12 activities showed positive growth, so the headline came in line with the diffusion of activities. The breakdown shows a rebound in “services offered to families”, rising 5.9% mom/sa and fully offsetting unexpected declines in the previous month. The other components maintain their trends: “Transportation” continues to go up, in line with stronger industrial production and retail sales; “Professional services” and “IT & Telecom” fell further. It is worth mentioning that the survey encompasses approximately 34% of the services GDP, so it should not be seen as an indicator for the whole services sector. 
  • Government reduced the 2017 budget cut by 7.5 BRL billion to 25 BRL billion. The reduction was largely expected and was mostly explained by recent surprises in revenues (both at the recurrent and non-recurrent- coming from oil and hydropower auctions- fronts). Going to the details, recurrent revenues were increased by BRL 3 billion, extraordinary revenues increased BRL 4 billion due to extra judicial payments withdraws (the so-called “Precatorios”; 3 bln) and premium on the oil and hydropower auctions (3 billion) that offset frustration in the REFIS/PERT (2 billion). Also, transfers to states and municipalities were up 2 billion and mandatory spending decreased by 3 billion, mostly due to lower annual bonus and subsidies that have offset higher pension and personnel spending.
  • Even with the reduction in the budget cut, the 2017 primary result should be a little better than the target of a 159 billion deficit (or -2.4% of GDP). Until the end of the year, better recurrent revenues, surprises in the REFIS/PRT and further lower-than-expected mandatory expenses will likely imply a primary deficit around 150-155 billion (or -2.3% of GDP).
  • Chile’s general election will take place on Sunday November 19, and the base case scenario remains that a presidential runoff vote (December 17) will be required to determine Michelle Bachelet’s successor. The average of the latest public opinion surveys, released prior to the November 4 legal limit, shows former president Sebastian Piñera (center-right) holding a commanding first-round advantage (with just above 40% of voting preferences). Alejandro Guillier (whose candidacy is supported by the majority of the parties in the current governing coalition) is comfortably in second place (with close to half of Mr Piñera’s support), while Beatriz Sanchez, from Frente Amplio, is running third. Simulated runoff votes between the most likely contenders show a tighter race. Although Piñera also leads in the polls for second round, turnout and the large number of undecided voters are sources of uncertainty. 
  • Besides choosing their next president, Chileans must vote to renew congress as well as electing regional representatives. Under the new electoral law, the lower house will see its ranks increased from 120 representatives to 155, while a partial renewal of the senate (upper house) will see 23 senators elected, for a gradual increase to 43 (from the current 38, with the 50-person senate target to be reached only in 2022). The new electoral law also replaced a two-coalition friendly system with a more proportional electoral scheme, while redesigning the electoral districts. Hence, the composition of the future congress remains a bigger but highly important unknown, especially considering the role congress will play in the incoming administration’s ability to govern. 


  • Next Friday, November 24, Banrep will hold its monthly monetary policy meeting. Last month, the board opted to surprise the market and cut the policy rate by 25-bp to 5.0% following an improved outlook for inflation. The board was split 5-2, and part of the majority cautioned against signaling the start of a rate cut sequence. This group is weary of the still high current account deficit and uncertainty derived from the Fed’s normalization process. Nevertheless, inflation has continued to surprise to the downside, inflation expectations are near the 3% target, and the 3Q activity pickup was not widespread, factors that could lean some board members to proceed with an easing cycle this month. Additionally, Governor Echavarría recently stated the positive news on inflation and said the GDP growth is doing badly. 
  • All these considered, we now expect the board to cut the policy rate by 25bps to 4.75%. The decision will be a close call and a cut would surprise the results from the central bank’s survey published earlier this week (which showed the next rate cut would come in January). Overall, we expect the easing cycle to take the policy rate to 4.5%, but acknowledge that further easing is a possibility especially considering that Echavarría views a rate cut path unfolding over the next six months. 
  • In October, consumer confidence completed 22 consecutive months in pessimistic territory (below 0), and the low levels could add weight to some central bankers’ calls for more rate cuts. Think-tank Fedesarrollo’s consumer sentiment index came in at -10.6 points, from the -7.4 points one year before and 0.3 points down from the previous month. This is the lowest October recording since the first publication in 2002. Explaining most of the deterioration from October last year is the sub-index that covers actual economic conditions (down to -17.5 points from -1.7 points). Households feel they are economically worse off versus one year and that it is an inopportune time to purchase durable goods. Meanwhile, the other sub-index covering consumer expectations is also more negative (-6.0 vs. -4.2 one year ago), due mainly to a worsening outlook of the economic performance for the respondent over the next 12-months (-29.4 vs. -23.9 in October 2016). We expect economic growth of 1.6% this year, down from 2.0% for 2016. Recovering real wage growth and stronger external demand will aid an activity rebound in 2018 to 2.5%. The disappointing consumer confidence numbers will give the central bank justification to continue with its easing cycle at next week’s monetary policy meeting. 
  • Inflation expectations in the month of November showed some moderation, according to the central bank’s monthly survey. The survey shows that the 2017 yearend inflation expectation dropped to 3.96% (4.07% in the October survey; our call: 3.9%), while the 1-year horizon expectation now sits at 3.46% (3.57% previously). The 2018 inflation expectation dipped to 3.4%, after staying at 3.5% for six month (Itaú: 3.4%). Meanwhile, the 2-year horizon inflation expectation came in at 3.26% (3.22% in October). The core inflation expectation measure (excluding food prices) was stable at 3.4% for a 1-year horizon, while at the 3% target for two-year horizon (3.1% previously). Meanwhile, the next 25-bp rate cut to 4.75% is expected to come in January, and the easing cycle is also still expected to end with the rate at 4.5%, reaching that level in March. 


  • The federal government and the provinces (with the exception of San Luis province) signed an agreement to advance with the fiscal responsibility law framework. The fiscal responsibility bill caps at zero provincial and federal primary expenditures growth in real terms. If any province runs a primary surplus, the cap only applies to its current primary expenditures.
  • The deal includes the agreement to share income tax revenues previously allocated to the so-called Fondo del Conurbano (a special provincial fund). Under the new agreement, the totality of the income tax revenues will be distributed among the provinces under the regular co-participation scheme. In that way, the province of Buenos Aires will receive more revenues, but the Treasury will compensate the rest of the provinces.
  • Finally, the provinces will drop the lawsuit initiated before the Supreme Court for the distribution of co-participation scheme and the federal government will issue a bond (ARS 80 billion at 6% interest maturing in 10 years) to compensate them for the historical debt. Both the federal government and the governors were satisfied with the agreement. The bill will be sent to the congress in the coming days.

Market Developments 

  • GLOBAL MARKETS: The USD weakened (DXY: -0.35%) and US Treasuries narrowed (10-year:  -4bps to 2.34%) on lingering market concerns over the US tax reform. Haven assets outperformed in the session (gold: +1.26%; JPY: +0.88%; CHF: +0.61%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodities, oil prices increased substantially (WTI: +2.49% to USD 56.73/bbl) on market expectations that Saudi Arabia plans to back an extension of Opec’s deal to cut production. Agriculture commodities strengthened as well (corn: +1.93%; soybean: +1.90%). In metals, iron ore fell 0.74% whereas copper increased 0.63%. Once again, LatAm FX (+0.57%) posted gains in the session, boosted by commodities and a weaker dollar. The BRL strengthened 0.56% to 3.2593/USD. The MXN is trading at 18.9275/USD (+0.68%); the CLP posted gains of 0.60% to 626.85/USD; and the COP closed at 3,002/USD (+0.47%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) receded all across LatAm once again. In Brazil and Colombia, CDS fell 3bps to 177bps and 119bps, respectively. In Mexico, country risk decreased 2bps to 110bps and Chilean spreads inched down 1bp to 52bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened once gain as the services sector real revenue came in below expectations (see Macro Backdrop) and on a stronger BRL. In DI futures, the Jan-19 fell 5bps to 7.21% and the Jan-25 went down 12bps to 10.47%. Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican yields narrowed, tracking US Treasuries. In TIIE swaps, the 2-year decreased 6bps to 7.40% and the 10-year went down 3bps to 7.51%. Breakevens also fell (3-year: -2bps to 3.76%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates widened 1-2bps in the session. In Camara swaps, the 1-year went up 2bps to 2.57% and the 5-year also increased by 2bps to 3.58%. Chile Rates Tracker In Colombia, the front end of the curve narrowed 2-3bps after Banrep Governor Echevarría’s quarterly inflation report presentation. According to Bloomberg, he stated that “news on Colombia’s inflation have been positive”, whereas growth is doing “badly”. In IBR swaps, the 1-year fell 2bps to 4.40% and the 18-month went down 3bps to 4.48%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, November´s IPCA-15 consumer inflation preview will be released (Thu). We forecast a 0.37% monthly rise, with year-over-year inflation increasing to 2.82% from 2.71%. On economic activity, October’s CAGED formal job creation may come through. We expect a net creation of 17k jobs (+11k jobs in seasonally adjusted terms). In addition, the BCB will release its monthly activity index (IBC-Br, Mon) for September - we expect a 0.4% increase. Then, FGV will release its industrial business confidence preview for November (Fri.). On fiscal accounts, September’s tax collection could also be released throughout the week, for which we forecast BRL 116.5 billion, or a 9.5% y/y increase in real terms. Furthermore, the balance of payments report will be released (Thu.). We expect a USD 0.8 billion current account deficit in October and direct investment in the country (DIC) to register inflows of USD 7.0 billion. The market will remain focused on the discussions involving the social security reform.
  • In Mexico, the statistics institute (INEGI) will announce September’s retail sales (Thu.). We estimate that retail sales’ growth fell by 1% year-over-year. At the same time, INEGI will publish CPI inflation figures for the first half of November (Thu.). We expect bi-weekly inflation to post 0.70%. Shortly after, Banxico will publish the minutes of the latest monetary policy meeting, held two weeks before (Thu.). Then, INEGI will publish Q3’s GDP growth (Fri.), which we expect to post 1.6% year-over-year. Together with the quarterly data, INEGI will publish September’s monthly GDP proxy (IGAE) (Fri.), whose growth we expect to decelerate to 1.5% year-over-year. Finally, the Central Bank will publish Q3’s current account balance (Fri.). We expect the rolling 4-quarter current account deficit to widen in 3Q17 because of a deterioration of the trade balance.
  • In Chile, the BCCh will publish the National Accounts data for the third quarter of the year (Mon.). We expect activity gained 1.5% from 2Q17 (0.8% previously). The central bank will also publish the 3Q17 current account balance (Mon.). We expect a USD 1.1 billion deficit.
  • In Colombia, think-tank Fedesarrollo will release the October Industrial and Retail confidence indices (Wed.). Then, Banrep will hold its monthly monetary policy meeting (Fri.). We expect the board to cut the policy rate by 25bps to 4.75%.
  • In Argentina, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate (Tue.). We expect no changes in the monetary policy rate for the rest of the year. Moreover, fiscal accounts for October will also see the light (Tue.). We expect the government to meet its official deficit target of 4.2% of GDP in 2017. Then, the INDEC will publish the EMAE (official monthly GDP proxy) for September (Thu.). We expect activity to grow 4.7% year-over-year (0.2% mom/sa). Finally, the trade balance for October will come out (Thu.). We expect a trade deficit of USD 400 million in October.

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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