Itaú BBA - Weekly Fixed Income LatAm Strategy: Banrep to stay on hold

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Weekly Fixed Income LatAm Strategy: Banrep to stay on hold

September 24, 2018

We expect Banrep to keep the policy rate stable at 4.25%.

All LatAm: We expect a hawkish hike by the Fed (Wed.), with median dots consolidating at 4+3 hikes in 2018 and 2019 and longer-run median dot up to 3%. Recent economic data in the U.S. provides evidence of continued +3% GDP growth and wage growth rising to 3%, while core PCE deflator remains around 2%.

On trade-war risks, US-China second round of tariffs (US: 10% on $200bn | China: 5-10% on $60bn) will be made effective today.

COLOMBIA: We expect Banrep to keep the policy rate stable at 4.25%, as inflation has remained close to the 3% target, and the output gap remains wide. Recent communication from a number of board members is in line with our view that the board is in no haste to change the monetary policy stance.

The curve prices in close to no hike in the short term, but 20bps in hikes in six months and 74bps in one year. We keep our receiver. Last week, local rates were broadly unchanged, as well as our gain on the 1-year IBR receiver (currently +15bps).

BRAZIL: BRL appreciated and rates tightened considerably last week. BCB kept rates stable as expected, continued to state that the economic juncture calls for monetary stimulus, but added that stimulus may need to be “gradually” withdrawn if the inflation outlook and/or the balance of risks around it worsen. Inflation came in again below expected in September’s IPCA-15 preview.

The local rates curve still prices in a substantial tightening cycle after elections, with almost 100bps in hikes already in the two meetings before year-end. We have no position in Brazilian local rates today, but we acknowledge that a continuity of the reform agenda post-election would cause rates throughout the curve to tighten substantially.

This week, keep an eye on the Copom minutes (Tue.) and electoral polls. Recent voting intention polls show Jair Bolsonaro (PSL) leading the race and a significant increase in Fernando Haddad’s (PT) voting intentions. There will be two Ibope polls, one on Monday and the other one on Wednesday, as well as a Datafolha poll on Friday. Two presidential debates will also be held, one on Wednesday (SBT) and another one on Sunday (TV Record).

MEXICO: MXN was roughly stable last week, but rates widened somewhat, causing losses to our FX-hedged 5y TIIE receiver (now with a 36bps loss, from -31bps one week ago). One reason for the poor performance of local rates may be that positioning is too crowded on the receiver side. Nevertheless, we continue to believe rates are too high given current FX levels, and see the recent pickup in inflation as temporary.



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