Itaú BBA - Weekly Fixed Income LatAm Strategy: Front-end of Brazilian local rates continues to imply rate hikes

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Weekly Fixed Income LatAm Strategy: Front-end of Brazilian local rates continues to imply rate hikes

July 10, 2018

We expect the Selic rate to remain stable in upcoming meetings.

BRAZIL: The very front-end of local rates (DI Oct-18 and Jan-19) stopped declining last week, and prices still imply around 40 bps in hikes in the next two Copom meetings, and 120bps in hikes in the next four meetings.

IPCA inflation was high in June, because of the truckers’ strike, but core inflation remains low. Our core inflation measure (core services plus industrial goods) is running slightly below 2% in the last three months (seasonally-adjusted and annualized), which reinforces our view of a stable Selic rate in upcoming meetings.

On the political side, parties from the so-called “big-center”, with around 17% of the time available for TV and radio campaign, are currently discussing whether to build an alliance with the PSDB (Geraldo Alckmin) or the PDT (Ciro Gomes). There will be another meeting with leaders of these parties on Wednesday, so the market will focus on the headlines from that meeting, even if a final decision is not yet expected this week.

COLOMBIA: The minutes of the last Banrep decision to hold the policy rate at 4.25% indicated, in our view, that additional rate cuts are not likely, but there is also no rush to start hiking.

The front-end of local rates has been broadly stable in the last sessions, and prices still imply almost 90bps in hikes in one year. Our position received in 18m IBR rates currently bears a 0.14% loss. We will keep the position, as we see no need to hike rates going forward, because the economy continues to grow below potential and inflation is converging to the 3% target.

PERU: We expect BCRP to keep the policy rate constant at 2.75% on Thursday. The strength of activity and inflation moving closer to the 2% target reduces the need for further monetary easing.

 

 



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