Itaú BBA - Weekly FI LatAm Strategy: Higher premium due to higher uncertainty on pension reform in Brazil

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Weekly FI LatAm Strategy: Higher premium due to higher uncertainty on pension reform in Brazil

February 11, 2019

We stepped out of our receiver at the long-end of real rates last Wednesday with a 29bps gain

ALL LATAM: Brazilian rates were the only ones in LatAm that widened and steepened last week (see charts), as the market reassessed the timing for pension reform. Elsewhere in Latam, rates continued to tighten slightly, still reflecting the dovish shift in the Fed, lower U.S. rates, and benign domestic inflation and activity data.

This week the global focus will be on the U.S. and China trade negotiations, as government officials from both countries (Mnuchin, Lighthizer and Lie He) are set to meet in China on Thursday and Friday. We see a good chance that talks advance and President Trump may set up a meeting with Xi to close the deal (in case of a deal we see 65% chance of no further tariffs, and a 35% chance of removing some of the existing tariffs).

BRAZIL: The nominal rate curve widened and steepened significantly last week, with the belly and the long-end widening as much as 30/35bps, and the front-end (DI Jan 20) 15bps. Real rates also widened by around 20bps at the long end. The market reassessed the timing for the pension reform, as the government indicated they will send an entirely new and ambitious proposal to Congress. This will require that the reform clears all the initial commissions in the Lower House all over again, building an expectation that the reform may see a first vote at the Lower House floor only by the end of the first half or early second half this year. Also important was the hawkish tone from BCB in its first meeting of the year, reducing market expectations of further rate cuts.

We stepped out of our receiver at the long-end of real rates last Wednesday with a 29bps gain (see report), and will remain on the sidelines for now. We believe the market was correct in increasing the premium in local rates given higher uncertainty regarding the timeline for pension reform.

This week keep an eye on the Copom minutes (Tue.), economic activity data and the news flow surrounding the pension reform. The market still awaits for the official reform text, which may be approved by President Bolsonaro and sent to Congress in the coming weeks.

CHILE: Local rates bull-flattened last week on lower-than-expected inflation and activity data. The 1-year nominal rate dropped by 6bps, while 5-year rate declined 8bps. Particularly important was January’s CPI released on Friday. The institute of statistics (INE) presented the first data point utilizing the 2018 CPI basket, revealing lower-than-expected annual headline and core inflation. Despite the 0.1% rise from December being in line with our forecast (0.2% Bloomberg market consensus), the annual variation came in below the central bank’s 2%-4% target range reaching 1.8% (2.6% in December). A similar development unfolded for the core measure and non-tradable prices, reflecting that overall inflationary pressures are subdued and in line with the central bank keeping rates stable for the time being.

This lower CPI trend in Chile had a negative impact on our recommendation to pay in the 1-year local rate in Chile and receive the 1-year rate in Colombia (see report). The trade now posts a 3bps gain, down from 7bps until last Thursday.

 



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