Itaú BBA - Weekly Fixed Income LatAm Strategy: Davos meetings in focus

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Weekly Fixed Income LatAm Strategy: Davos meetings in focus

January 21, 2019

We continue to receive the NTN-B 2050 real rate (now at 4.59%).

All LatAm: Most Latam rates increased last week, in tandem with U.S rates, which widened slightly. Nominal rates widened in Chile and Colombia, and remained virtually stable in Mexico (see charts). Brazil outperformed with some tightening especially at the belly of the curve. The market will continue looking for news regarding the U.S. and China trade deal this week, as reportedly both countries seem to be making progress on negotiations.

Brazil: We continue to receive the NTN-B 2050 real rate (now at 4.59%) with a 21bps gain so far. Nominal rates tightened 10bps at the belly of the curve last week and just about 4bps at the long end, while long-term real rates continued to decline. Approval of the pension reform will be an important trigger for lower long-term rates going forward. In addition, the weakness of economic activity in recent months, particularly in the industrial sector and investment, continues to fuel the debate on the neutral interest rate, which in our view has shifted downwards to around 2.5/3.0%, especially because of the ongoing fiscal adjustment.

This week, keep an eye on Bolsonaro’s speech at the World Economic Forum annual meeting, in Davos. According to local news, the speech may focus on reinforcing the new government’s commitment to the reform agenda, especially the pension reform.

Formal job creation data will also be closely watched. December’s Caged formal job creation will probably come through this week (date not specified) and this is the only piece of hard data which has actually been improving in recent months. Other hard indicators, especially related to the industrial sector, have been weak. We forecast a net destruction of 314k jobs, but the negative result stems from year-end seasonality. Adjusting for seasonality, our forecast implies a 71k formal jobs creation, leaving the 3-month s.a. moving average virtually stable at 73k.


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